Getting into note investment can be intimidating for first-time investors. This is why your host Dan Deppen is going to answer some of your most common questions about note investment. Join Dan as he goes over five important steps and lessons that investors need to understand going in. Learn how to buy property, the risks of buying vacant properties, performing and underperforming notes, and much more. Also, get a few tips and tricks that helped Dan enter into the note space. Listen through as the episode wraps up with a special coupon code. Get a discount on the Note Launchpad online training course today.
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How To Get Starting In Note Investing
The reason I put together this webinar is I get a lot of questions on note investing and I get a lot of the same questions at the same time. The ones I get the most are, “How do I get started? Where do I go? What should I know? What should I start to do?” I wanted to create this webinar to provide a pointer for those folks that it’s become increasingly difficult to do one of the phone calls and things like that. Not that I don’t do them, but they can be a little bit of a challenge.
I’m a very active note investor. I have been for several years now. One of the things I enjoy is teaching other note investors. I’ve made a number of online training courses and it follows how I’ve done things in other fields that I’ve spent a lot of time on like in business school and grad school, I was a teaching assistant. I used to play a lot of poker back in the day and I did coaching for that. I wrote a book and different things. If you want to learn something and get better at it, if you sit down and write a book on it or create a course or teach other people how to do it, whether you’re blogging about what you’re doing on a day-to-day basis or creating YouTube videos, I find that doing this makes me a better note investor.
I have a background in mechanical engineering and the aerospace industry. I got an MBA, and active as a product manager. I’ve been investing for a long time, whether it’s been stocks, real estate, or other things. I have two girls and have a pretty decent size note portfolio. I also play a lot of competitive golf, so if you ever want to talk off, I’m always happy to do that. You’re in the right spot for the webinar if you’re interested in how to get started in note investing and some of the basics that you need to know going in. One of the challenges, when they’re starting out, is you don’t know what you don’t know. I always like this Donald Rumsfeld quote where he talked about there are things you know that you know, there are things you know that you don’t know, but what can get you are the things that you don’t know.
One of the things that I’m trying to do with this is, if you’re brand new to this, expose some of these things to you so we can help get you pointed in the right direction. However, it’s not for you if you’re interested in what I call the rah-rah notes version of this. A lot of people, not just in the note industry, but other forms of real estate or other industries are cheerleaders for it. I am in that way. One of the things I always try to do is try to inform people on the reality of a notes business. It’s awesome. You can get very good returns and it’s less competitive than other areas of note investing, but there are also pitfalls and problems.
If you look at any investment that has the potential for higher returns, it generally carries some risks with it. I don’t want to paint the picture of note investing as this nirvana where everything is happy and wonderful. Part of being a note investor is you’re going to have bad days. I try to be upfront about that. For this webinar, I’m going to ask that you to remove distractions and be ready to take notes and ask questions. You can put questions in the chat and I will try to get to those at the end and there will also be one little surprise at the end.
When buying notes, you're not buying the property itself. Click To TweetInvestor Mistakes When Getting Started
As I mentioned as I start off, the most common question that I get is, “How do I get started in notes?” It’s a big question, it’s nebulous. It’s the question that requires a longer phone conversation, not just a one-line, “Here’s the answer, go do X.” I’m going to start with seven essential lessons if you’re starting out. This is by no means comprehensive, but these seven things can help somebody get pointed in the right direction and start getting a little more oriented on note investing. When you’re doing note investing, you’re buying debt. That’s fundamentally different than buying property. One of the things that folks get confused on sometimes, especially if they’re experienced in other forms of real estate investing, they sometimes think that they’re buying the property or they have some rights to the property.
When you’re buying debt, you’re buying paper, a loan, this piece of paper that says, “Whoever holds this paper, the borrower’s going to pay them a certain amount of money every month for a certain number of months.” Along with that is that note is going to be collateralized by a piece of property. As you’re the debt holder, you have the right to collect these payments. If the borrower doesn’t make the payments, you have the right to go through the foreclosure process and eventually take the house back, which is the collateral.
There is a piece of property attached to this deal and the value and the condition of that property is super important, but you’re not buying the property itself. I’ve gotten questions like, “If I buy the note, can I pay it off and take the property?” It’s like, “No.” Sometimes people ask me questions around, “If I buy the note, can I do something and grab the property?” The answer is no. If the borrower defaults and you go through a foreclosure, you might be able to get at the property. If the borrower wants to leave, you might be able to come to an agreement for what’s called a deed in lieu or cash for keys, but that’s never certain when you buy the property.
I’ve gone into deals where I know I’m going to end up with the property, but when you’re buying a debt, that’s fundamentally different. We need a little bit of a mindset shift versus what we do in other areas of real estate investing. The second one is that we’re still going to do due diligence on the property. I’ll explain how you’re not buying the property, but we are going to need to do due diligence on the property itself. One of the other things that cause confusion is most experienced real estate investors go, “If I’m going to a real estate deal, I’m going to inspect a property and I’m sure I’m going to inspect the inside. I want to know everything about this.”
When you’re buying a loan, there’s a borrower in the property, that’s their property. You don’t have the right to go inside and inspect it. What you’re going to need to do is get eyes on the property and take photos of the outside. You can’t go on the property, but you can take photos of it. From that, you’re going to have to make an assessment of the value. I might say, “How can I assess the value if I can’t go inside?” The answer is, it’s a major risk. Most times, the outside of the property is going to give you a lot of indications of the condition of the inside, typically they map. If you see a bunch of junk in the yard, I guarantee you it’s not gaining any better on the inside. However, I’ve had two cases in particular where I was surprised where the outside looked good and then when I did end up taking the property back, the inside was a complete horror show.
That’s one of these risks with note investing. That’s one of the reasons why you can get a higher return. It’s one of those risks if you’re going to be involved in note investing. You have to understand that it goes with the territory. Likewise, you can’t go talk to the borrower. It is illegal for you to go on and talk to the borrower if you don’t own that loan. One of the other points of confusion that sometimes new note investors have is they confuse buying an existing loan with stay when Bank of America originates a new loan. You could be doing seller financing and creating a loan, that’s a different thing. What I’m talking about here is buying existing notes.
If you’re buying an existing note, you have to make that determination of whether or not you want to buy it, how much you’re willing to pay based on the status of the loan as it is. When you’re buying a loan, you’re not picking a borrower and you can’t talk to the borrower. In my experience, the loan performance tends to speak for itself. I don’t worry too much about what the borrower has going on these days personally. Honestly, I’m not savvy enough to judge by someone’s Facebook page whether or not they’re going to reinstate a loan or not. These are some key differences between other forms of investing.
Doing Due Diligence
When we are doing due diligence on the loan, what are some of the things that are important and that we need to look at? There are a lot, but number one is verifying that the title is clear and the loan is enforceable. One of the negative aspects of the business, where I mentioned, it’s not all rainbows and unicorns, there are people out there who will try to sell you a loan that has a fatal title defect or some other problem with the loan. Let’s say the statute of limitations has run out and you can’t foreclose. People will go out and try to sell these and present them as enforceable. Verifying the title and whether the loan is going to be enforceable is key because if not, you can lose 100% of your investment potentially and you run into problems there.
One of the other things that you’re going to want to know, too, is what other lien holders are involved in this? Are there other liens? These could include mechanic’s liens if you’re buying a second mortgage. I only buy first, but if you’re buying second, there might be a first in front of you, that’s important to understand. If you’re looking at nonperforming loans in particular, and even a lot of performing loans, they often have delinquent taxes. If it’s been a problem property, the city code enforcement may have levied fines, there could be water bills, there could be all sorts of other things that if you foreclose on that property and take it back and sell it, you could ultimately be on the hook force.
You need to understand all the other liabilities associated with the property. You’re also going to want to understand if the property’s occupied or not. Whether you want the property to be occupied, it’s going to depend on your business model. In most cases, you’re going to want the property occupied. If you’re buying a performing loan, if the borrower’s living there, they got a much bigger incentive to pay. If you’re buying a nonperforming loan with the intention of working with the borrower to get the loan reinstated, that can be a lot easier if the borrower is still there.
Some people have models where they’re buying a nonperforming note as a low-cost property acquisition. They want to buy the property and foreclose in it and don’t want the foreclosure to be contested, or better yet, they’re hoping the borrower will sign off on a deed in lieu and sign the property over. In that case, if the property is vacant, that’s going to be better. I’ve only dabbled in notes on vacant properties a couple of times and I got scorched both times. I have a saying that, nothing good happens when a property is vacant.
The outside of a property can give you enough information about the conditions inside. Click To TweetUnderstanding that occupied status is important because the other thing that can happen is when someone who’s selling loans sends out a list of loans for sales known as the tapering, usually, it’s a spreadsheet of data on each loan, sometimes they have a column where they list whether the property is occupied or not. I can’t count how many times I’ve looked at a tape of assets, made offers, gotten them accepted, and then when I got photos of the property, the seller said it was occupied and you find out it’s not. That’s something that’s important to check.
The fourth thing is understanding the performance of the loan. In other words, is it a performing loan where the borrower’s making payments every month and the loan is current, or is it nonperforming, meaning they’re behind? When you get into the nonperforming space, it’s not two buckets. In reality, there are a million shades of gray when you’re talking about the spectrum between performing and nonperforming loans. For example, I’ve own loans where the borrower’s making payments every month, but at some point in the past, they got behind and never got caught up. They might be making payments every month, it’s cash flowing beautifully, but the borrower is 4 or 5 months behind. You have other ones where the borrower is not paying but the property is occupied and they’ve made 1 or 2 payments in the last year. You’ve got properties where it’s vacant, the borrower hasn’t made a payment in six years and the property is dilapidated. When you’re looking at judging the performance of loans or the types of loans, it’s not a black and white thing. I like to think of it as a big spectrum.
Performing And Non-Performing Loan
For pricing, another question I get a lot is, “How much should I pay for a performing loan and a nonperforming loan?” Unfortunately, I can’t give you great rules of thumb because pricing is not one size fits all at all. For performing notes, one of the things that I do is I’ll assume the loan is going to continue to perform and come up with a price based on a yield. That yield that I target is going to change based on how risky I think the loan is. That’s another thing that depends. For example, you have a note where there’s a lot of equity, properties in a great neighborhood, the borrower’s performed great for years, that’s going to be pretty low risk. I’ll be willing to accept a lower yield because it’s a lower risk. Likewise, you might have a loan that it’s paying but the borrower’s a little bit upside down on the equity, or maybe they were nonperforming before they had some bankruptcy in the past, or the neighborhoods sketch. All things being equal, I’m going to want a higher yield on that loan before I buy it. A nonperforming category comes down to what kind of nonperforming are we talking about.
There’s nonperforming where the borrower’s there, it’s cash flowing, but they’re behind. I can get those back on track, usually about 70% of the time. If it’s another one where it’s vacant, nonperforming for a long time, I know I’m going to end up with the property, and it’s in an area that I don’t want to work in, I’m going to be paying a lot less for that. The third bucket comes down to your business strategy as well. Are you trying to buy notes for cashflow or property acquisition? What is it you’re trying to get at? If you’re trying to buy cash flowing notes in a self-directed IRA account and you’re trying to beat the yields that you’re getting on corporate bonds or treasuries, you might go ahead and target some high-quality properties that smaller yields are going to be doing a lot better than your bonds. However, if you’re a fix and flipper and you want to use this as a lower-cost way to acquire properties, that’s going to have its own pricing model as well.
In the last category, a lot of this comes down to your personal risk tolerance. Mine is probably higher than most and I have some scars from that, so you have some big wins and big losses for other people, it’s much smaller, and that’s cool. There’s nothing wrong with that. One of the fun things about notes is you can tailor the deals you do to your business strategy and your personal risk tolerance and you can decide how much risk you want to bite off on these things or not. Go into these deals with open eyes. I have seen note investors were going in, they’ll say, “I have a high-risk tolerance. I’m a real gambler. I understand how this works, I can handle it.” The first time they hit a hiccup in a deal, not even necessarily a real problem, but something got a little weird, they lose their minds. Understand what your risk tolerance is at the beginning.
Lesson five is once you’ve got your head oriented around here, you want to get in there and buy something at some point. One of the big mistakes a lot of people make is they get interested in notes and start immersing themselves in listening to podcasts, watching videos, talking to people, and they do that forever and they never buy anything. The other mistake sometimes people make is they fire from the hip like, “I’m going to learn by doing this.” They may fall victim to one of these people trying to sell a bad note or they make some mistake that they’re not aware of. It’s a balancing act. You want to have a bias toward action that’s generally going to benefit you, just don’t go over the deep end.
One of the things I always recommend to people is once you’ve got some basic understanding and knowledge, start by buying a performing note. When you buy a performing note, you go through the process of a note transaction. It’s a little different than a regular real estate transaction. You go through a due diligence process. Because it’s a performing note, it’s going to be a lower risk. If you make a little bit of a mistake, it’s not the end of the world. The first note I ever bought was a performing note and I paid too much for it but I still own that note in my IRA, it’s worked out fine. That activity of going through the first process of buying a note opened up the flood gates to not buying a lot more notes but turning it into a real business.
The sixth one is everybody wants to make money in notes and that’s cool, but don’t think of this as trying to score one home run. Notes in general, tend to have higher returns than most other forms of investing. One of the cool things about notes is a lot of your processes can be repetitive. Think about this, once you figure out how to do due diligence, you can do it again. Once you get a pricing process down for performing notes or nonperforming notes, you can repeat it once again. Once you’ve developed some good sources for notes, you can see a steady supply. The magic in notes is not so much what some people do, spend hours looking at thousands of notes, buying one, and making sure that one deal was the best possible deal, but where you can make money is by doing volume over time and getting to scale.
If you’re going to scale at some point, you’re going to need outside funding and I’m going to touch on that. That’s not a focus of this show. I have other references where I talk about how to do outside funding in the correct way. For me, finding funding is the easiest part of note investing. I know that’s counterintuitive, but it’s true, especially right now in 2021. There are lots of cash that are looking for deals and having a hard time finding deals. If you can learn how to buy and operate notes and learn to scale, the funding will be there when you need it.
The seventh is let’s do something to add value once you buy a note, especially on nonperformers. There are some people who teach a model where, “All I got to do is hire a bunch of vendors and they’re going to do everything. I got a loan servicer, they’re going to collect the payments. If foreclose, I have to hand it over to the attorney and I’m going to have a property manager and hire these vendors to do everything for me. I’m going to sit back and collect a lot of money.” While that should happen in theory, if all of those vendors did exactly what they’ve signed up to do, that it’d be true, but the reality is it’s never the case. One of the things that is so important in being a successful note investor is following up with your vendors and staying on top of your vendors. A lot of that involves having systems, like I use Pipedrive for my CRM. I have a lot of reminders in there and I have other resources where I talk about how they do that.
The other thing is when it comes on nonperforming notes, if you don’t handle working out a nonperforming note, it means getting it resolved either through working with the borrower to come up with a deal so that they can begin paying again or foreclosing. If you get good at working out nonperforming notes, you can make a lot of money. Those returns can get very juicy. Unfortunately, it’s not quite as simple as having your servicer do all of it for you like magic. It’s supposed to work that way when you talk to servicers and they’re trying to sell you one opening and account, they will tell you that, but it’s never quite worked out that way, at least it hasn’t for me.
Nothing good happens when a property is vacant. Click To TweetConcrete Steps To Getting Started In Note Investing
What are some good ways to get started? I’m going to give you some concrete steps to get going. Step number one is getting familiarized with the note world. Maybe you found this webinar through the process of doing. That involves things like listening to podcasts. There’s the Good Deeds Note Investing Podcast from Chris Seveney. There are some good Facebook groups out there, BiggerPockets has some sharp folks on there who have been at this for a long time. YouTube can be a little bit more hit and miss, but there’s some good stuff out there, too. I also suggest you subscribe to the Fusion Notes YouTube channel if you haven’t already. One word of caution, if you’re spending more than a few months doing this though, then you’re taking too long.
This familiarization process shouldn’t take too long. I know people who’ve been doing this for literally years. That’s not necessarily helpful. Get familiarized first and move along. Before you start buying stuff, you are going to want to have some kind of training. There are too many nuances in notes. It’s hard to do it all yourself and put it together. It’s theoretically possible, but it’s difficult. You’ll run into that problem that I talked about where you don’t know what you don’t know.
There are a lot of ways to get training. There are some mastermind groups out there and live trainings. They tend to be pretty pricey. Some of them are good and some are not. There are some folks who will offer private mentoring. I personally don’t do that. I don’t have the time or the bandwidth to, but some folks will. There are also online courses. I’ve created a few of these. I’ll talk about one of them at the end of this. I like online courses because the reference material is already there. These usually involve a series of videos, downloads, and the ability to ask questions. They tend to be a lot more affordable than some of the live options. Step three is to get in there and buy your first note. A lot of times, you’re going to want to buy your first note faster than some people think. It’s not super scary if you’ve done your homework, gotten familiarized, and gotten some training. If you’re going out trying to buy a high-quality performing note, you should be able to know enough to make that happen.
Once you get there and realize you’re going to be head and shoulders above most of the people that head down this rabbit hole. Most people don’t make it to the point of buying a note, which is unfortunate and sad, but once you get that first note, it can open up the flood gates to some financial goodness for you. You’re also going to want to build out your network, that’s huge. I’m trying to talk about the importance of building a network these days, but I’ll talk specifically about what it can do for you as a note investor.
Number one, and I do this all the time, it gives you a bench of experts you can go in and ask questions and share experiences with. I have private phone calls with experienced folks all the time and I’m always learning things. The other thing you’ll find is no matter how much you know about notes, you’ll always run into these weird one-off scenarios or new things. I am forever learning new things about notes. Nobody ever gets to the point where they know it all. Some of this is because laws changed or just because there are so many different ways these deals can go.
At the beginning of February of 2020, right before COVID hit, I was at the IMN conference in Fort Lauderdale, I was talking to some folks who are in some pretty large hedge funds that had run into some brand-new things that they hadn’t seen before. You’re always going to have a new experience. No matter what training you’ll get, you’re always going to need a network of folks to be able to bounce ideas and questions off of as they come up. Your network can also provide excellent sourcing for notes. Sourcing is the number one people struggle with.
It’s one of the hardest aspects of note investing and one of the things I get asked the most about. Especially over the last six months or so, most of the notes I’ve bought have been from other individuals that I’m friends with that do the same thing that I do, where they wanted to sell some notes to free up cash to deploy it into some other investment, or they had an investor that was looking to cash out. Those deals are nice. Once you develop that reputation as somebody who is very specific about what they want and they know that you’ll close on certain assets, a lot of the sources will find their way to you.
I’ve also sold notes to my network. When you do get in those situations where you have an investor that wants to cash out or you need money for something else, having a trusted network of folks can be helpful when it comes to exiting selling notes as well. Finally, as a little further down the road, I advocate leading towards eventually scaling and building systems to build a larger business. I started to talk about notes can be very rinse and repeat, particularly performing notes. Once you’ve built your systems as you add more notes, you’re adding more cashflow and more dollars to your bank account, but you need systems to make that happen.
If you’re doing 1 or 2 notes and your IRA is less than 5, you can keep everything in your head, but once you start going above that, especially when you start getting into tens of notes, those systems become critical because you cannot rely on your vendors to do everything they’re supposed to do. When you start getting 50 notes and a vendor drops the ball on something, you’re not necessarily going to notice. I know it because it’s happened to me. That’s why I say that. Part of that scale, too, is being able to bring outside funding so you can keep going.
Note Launchpad Online Training
What can I do to jumpstart this process? I mentioned my online courses. I have the Note Launchpad. What the Note Launchpad is, is an online course with five phases to it. It’s got videos, lifetime access, spreadsheets, and templates that you can download, everything’s always there. The first phase is learning the foundations like the notes 101, the building blocks of learning how to be a note investor. In step two is to get out there and start buying notes. This is doing things like sourcing, filtering assets, due diligence, and pricing. In phase three, we talk about how to add value.
How do those loss mitigations work? What are some of the templates that I use for doing that and for staying on top of vendors? The fourth phase is learning how to scale, building systems and processes, and give you all of these systems. I had done some note training when I started out, and one of the things I was frustrated with was a lot of the information was an overview and it was up to me to figure out all of the details. In this, I give you all the details. I don’t tell you, “Here’s a method for pricing.” I teach you how and why the pricing method works and then give you the spreadsheet.
In phase five, we talk about how to do funding and how to do that the right way, the different ways to fund out deals where you’re talking about loan hypothecation, partials, or joint ventures. There are a lot of nuances around doing that appropriately, not legally but ethically. If you’ve been around real estate, you’ve probably seen lots of people get into trouble or get into some bad behavior doing that. There’s a review from someone who’s taken this course. It isn’t a 40,000-foot view of the note industry. It’s not an overview or a survey, I provide that in my show. It’s an in-depth step-by-step firsthand account of what the note industry is and how you can play a part. The whole point of this is to be deliberate and step-by-step. The idea is to give you a checklist that you can follow, you do step 1, step 2, step 3, onto the end, you’ll be able to get there and be an active note investor.
One of the fun things about notes is you can tailor the deals you do to your business strategy and risk tolerance. Click To TweetSome of the things included on here, there is Note Ninja’s private Facebook group. Even though it’s an online course, you are going to have questions and you are going to need help. It’s not a full-blown mentorship, but you do have that ability to ask me questions any time. The Note Foundations Program, which is the basics of note investing also covers things like how to set up your business. It’s note investing for newbies. I also talk a lot about marketing and how to do that. I know marketing scares the pants off of most people, but it’s very easy and will juice up the results of your business. There’s sourcing which is the number one thing that people struggle with. In the course, I go over how to find sources, how to cultivate sources, how to build a network, but also give you a list of where you can go and buy things. While I teach you how to fish and you learn all that information, you can do this on your own. I’ll also give you the cheat sheet for how to do it.
The Fast Filtering Method is when you’re going to go through and figure out what your business model is. Do you understand which assets that you want to bid? You can get overwhelmed by the number of assets that are for sale. Being able to understand your business model and very quickly filter through a tape is going to save you a ton of time. You need to go through price. Pricing is very different whether you’re talking about performing or nonperforming notes. I go into great detail on how to do pricing and give you the spreadsheets so that you can use them.
Loss mitigation is one of the most important pieces of my secret sauce. This is learning how to connect with borrowers and get the nonperformers flipped over into performers. The systems and processes savvy, this is where we get all the templates and cheat sheets and the step-by-step of how to set up your systems that you can scale your business. I also talk about outside funding, it’s a creative financing tool kit, we’re going to things like partials, JBs, hypothecated loans, and how to do those appropriately. There are also the funding formulas where we talk about not necessarily the specifics of how you implement a joint venture or loan hypothecation, but how to build a network of capital partners where you can have unlimited capital for your note deals.
I’ve had a line of investors for the last several years. I’ve always had more investors than note deals available. If you do it the right way, it’s pretty straightforward and make that happen. If you add up the value of all of those, it would be $12,500, that’s not what this is, it’s not some of the live trainings. The way that Note Launchpad works is so you can sign up for it for twelve monthly payments of $200, so $2,400 total over the year or $1,997 if you opt-in for the full pay. I designed the pricing so that if you bought one note, you would see an ROI back from that right away. This is designed to get you buying notes within 30 days at a price point that’s small enough that if you’re buying one note, it will pay for itself. I didn’t want to have some of these $50,000 plus programs I’ve seen that are out there where it only makes sense if you have millions of dollars of capital to deploy. This was meant for somebody that even if they did one note, they would be ahead of the game.
There’s also a money-back guarantee. I’ve always had this on all of my courses. If you sign up for the course and you decide it’s not for you, or you didn’t think it wasn’t as advertised, if you let me know within 30 days, I’m happy to refund. I’ve only had one person take me up on this and they decided they didn’t have time for note investing and they never logged in to the class. Know you have that as a fallback. The special bonus, as an appreciation for attending the webinar, if you sign up and use the code WEBINAR, we’ll take 25% off, so it becomes one $150 a month for 12 months or $1,497 for the full pay. The way to get started, you can go to NoteLaunchpad.com, join, and you’ll get an email that’ll help you get started. We’ll see if you have any questions. Let me know. With that, I will let everyone get back onto their evenings. Thanks so much again for joining. I appreciate and enjoy doing these things. I’ll talk to you next time.
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