BiggerPockets Real Estate Podcast - 17: Finding Mentors, Facing Retirement, and Note Investing with Jeff Brown

Episode Date: May 9, 2013

Real estate investing is about more than just making money in the here and now – it’s also about setting up your future for a solid retirement with minimal hassle and maximum wealth. However, planning for that time in your life is not always the most easy-to-understand task. To help, we sit down with investment specialist Jeff Brown, a very common face around the BiggerPockets Blog, to discuss some of the best ways to find mentors, what you can do to start preparing for retirement right now, and how to invest in notes using cash or your self directed IRA or 401K. This show is filled with a lot of really actionable, in-depth content so be sure to have your notepad ready – you’re going to need it! In This Show, We Cover: How to find mentors to help train and teach Why real estate brokers make the best mentors What CCIM is and why you should consider it How much do you need to quit your job and go “Full Time?” Why $1 million might not be enough for you for retirement 3 paths to maximize after-tax income. Why “cash flow” might be overrated when beginning Why you should STOP investing in your 401K and IRAs – even with a “company match” Investing in notes vs. property … why one is better than the other How to find good notes to invest in 3 Case studies – what should a 25 year old do, a 45 year old do, or a 60 year old do for retirement? and more Books Mentioned in the Show: The E-Myth Revisited by Michael Gerber The Basic Steps in Real Estate Exchanging by Royce Ringsdorf. Links from the Show: The BiggerPockets FilePlace CCIM Training Tweetable Topics “The best mentoring you can get is often at the 19th hole around a plate of fries.” (Tweet This!) “Don’t leave money on the table just because you want the pleasure of being able to drive by your investment.” (Tweet This!) “When you retire, the one with the most options wins” (Tweet This!) “I want to retire yesterday afternoon around 4:30!” (Tweet This!) Learn More about Jeff Jeff’s BiggerPockets Account Jeff’s BiggerPockets’ Blog Posts Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 17. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing without all the height, you're in the right place. And be sure to join the millions of others who have benefited from Bigger Pockets for Real Estate investing online. Hey, everybody. This is Josh Dorkin, the Bigger Pockets podcast here with my co-host, Brandon Turner. Are you waiting for something, Brandon?

I thought you were to say like, what's up, Brandon, or how's it going, Brandon? Instead, you just left it hanging. I did. How are you doing, Josh? I'm doing good, man. I'm doing good. I actually just got back yesterday from North Carolina, of all places. Nice.

Yes, it's actually remarkably gorgeous out there. I was at a wedding down by Duke and explored, looked at some of the neighborhoods and just kind of checking out the real estate. a little bit. It's a fantastic part of the country. If you've never been there, I'd definitely recommend taking a little road trip or something and checking it out. I have not been there. I think I drove through it once on my way to Disney World or something, but that's about it. Yeah. So I'm back, and here we are with the show. So we should probably move on and actually get into it. What do you think? I would concur. I would concur. Good. Well, before moving forward, we probably should start with the quick tip.

Today's quick tip on the Bigger Pockets podcast. The Fileplace, BiggerPockets Fileplace is a, it's an entire file vault full of ebooks, documents, spreadsheets, and hundreds of other forms and other things that you can actually download for free. To access it, just head over to BiggerPockets.com slash files. Of course, you'll need a free BiggerPockets account. and you can start downloading useful, helpful information for your own use.

So check out the file place. With that, I think we should get to the show. Do it. Do it. On today's show, we are going to talk with one of the more familiar faces on the Bigger Pockets blog, a man who has written more than 170 posts over the past three years, Jeff Brown. Jeff is the owner of Brown and Brown Investments in San Diego,

Sunny San Diego, California. Jeff has a firm grasp on how you can use real estate investing to fund your retirement sooner and more securely than most people think. Who needs the stock market, the bond market, you got real estate and you've got Jeff Brown. That was a pretty good commercial, wasn't it? That was awesome. But as Jeff Brown's real estate profile states, he has invested in owned

and flip pretty much every class of real estate there is. So we're certainly looking forward to lots of interesting information to come, in particular, some great information on the subject of retirement and note. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need.

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Hey, my pleasure. Glad to be here. Hey, Jeff. You know, I've been reading your stuff on Bigger Pockets for years. So this is an honor to have you on the show. Hey, my pleasure. And it's nice to talk to somebody under 30 who understands real estate investing. Yes. He's good at pretending. No, I'm just kidding. Great. Well, let's jump right in. So, you know, you've definitely been at this for a while. How did you get started investing in real estate? Well, it all started on a lonely trip down Freeway 5 in Southern California to my dad's house from moms. No, I moved to live with my dad back in 67 when I was almost 16 and he owned his own real estate firm. and the natural course took hold.

You hear about real estate at dinner and all the other stuff as you get older in high school and I decided that I wanted to try my hand at it and that's how I got started. Gotcha, gotcha. So you got interested from the folks and your dad was in the business, correct? My dad was in the business since 1959. He opened up his own firm. actually this month in 1964. Wow. Okay.

Okay. And so you just took a keen interest into it and decided you would hop in and get on board. How did that come about and tell us, tell us kind of about your actual entry into the investing space? Well, I started out in Holmes. When I was 18, I actually hit the office on a a Saturday morning, almost literally 60 days after I turned 18 in my bell bottoms and boots. I had my Frankie Avalon hairdo. Nice. Long since gone.

Oh, yeah, way gone. I stayed in houses for seven years. I do want to make it a matter of record that in my first day on the day, the job, I did list a for sale by owner. Nice. It wasn't worth the paper it was written on, but I did get the listing. I did it for seven years and decided one day that if one more wife told me that the color in the kitchen was wrong and that's why they weren't going to get the house, I was going

to be on the 11 o'clock news. So my wife at the time said, honey, you've got to figure out something. you can do, you're good with numbers. I've always thought you should have been in investments anyway. Why don't you take a look at it? Okay. Okay. So you started, let me just clarify really quick. So you started on the brokerage side then. I started as an agent. Okay. And then I got my broker's license seven years after I started, which was 1977 was my first business opening, Brown and Brown, with that. Nice. Okay. And then the path into the investment space specifically, how did that transition actually take place?

Obviously, you talked about the story with your wife, but what did that mean? What does that look like to us? I wanted to talk to and learn from and attend as many seminars involving investment real estate. I had a title company guy who was a real catalyst. His name was Ron Pennock. He's still around San Diego, I think. He took me up to a North County, San Diego, what they call Exchange Club, where it was invitation only.

And it was 20 guys. You had to die. Somebody had to die for a new member to get in. Tire or whatever. And he brought me in because one guy was sick. And I remember they asked one of the members to explain what his client wanted. The guy didn't take a breath for like a 30 second sentence. And Ron said, did you get that?

I said, well, he's speaking English, but I didn't understand a word he said. And he said, welcome to investment real estate. From then on, I just went to all, I went, I learned how to talk with to people by attending Chuck Chatham's seminar up in Pasadena. I learned exchanging from Royce Ringsdorf. There's four or five other people that are literally iconic that were conducting seminars in the 70s in Southern California. I was so fortunate. So by the time 1980 had come along

between the seminars and the local people here that had taken me under their wing because I refused to say anything, but I didn't know that, in which they liked. I was able to get at least as far to understand that CCIM was class as I should attend. And at that point, I took the CCIM in 1980, took all 200 hours in about a little under nine months, and found out that I actually did like investment real estate.

Okay. Did you, did you, then you were selling real estate for investors then and listing property? or were you buying at that point anything? No, I, well, I bought my first property in 1976, first part of 77. And then I didn't buy another property until probably the about 1983 or so, 1982. Because the bottom hit in October of 1979 after our first run-up. So the 80s in the first run-up, I actually missed as an investor because I was still learning my trade. And every day I would figure out something I had no clue about the day before.

Okay. Yeah, I know that's pretty common even for me still. I mean, every day I seem to learn one new thing that I had no idea about before. And I think a lot of newbies actually get stuck with that. And they think I can't jump in because I don't know enough yet. But, I mean, the fact is you can never know enough. You can never actually know everything there is to know. So anyway, yeah, so we were talking about mentors.

You talked about those guys that took you under their wings. And I know you've talked a lot about that on the blog recently. I guess what can you tell us about that about finding them? How do you find people that will take you under their wing and train you and help you out? Pure luck. That's very actionable, Jeff. Well, my father was never an environment. investments. He did some development because one of his best friends, he was a retired minister,

and one of his retired minister friends was his best friend, and they built some apartments and houses, but that was the extent of his stuff. But he mentored me in business and the broker's part of business, which was completely and utterly invaluable. His friends, however, many of them were investments. And I had kind of an NCIS relationship. They were all Gibbs. If I opened my mouth at the wrong time during a mentoring session, I'd get it in the back of the head. I was in my 20s and here was the deal. If I was able to get off in the afternoon and they were done golfing and I mean that literally,

they would call me up and say, get down here and buy some fries for us. were in a talking mood. And I would sit at the table at the 19th hole, and sometime between their first gin and tonic or whatever, and when they got tired of talking with me, the school was open. And they would start usually with asking me about my day. Okay, so they would just basically talk about what they had going on

and that kind of thing. And basically they just taught you the ropes, it sounds like, yeah? Absolutely. They would ask me about my day. If I didn't, if I started being very general, I'd get the gibbs slap and they said, look, you're wasting our time. Gotcha. Okay. So, I mean, obviously, you know, you say there's, there's some luck, but, but, you know, certainly there's also a bit of skill that comes in finding somebody who's going to mentor you. You know, there's, there's a lot of options for people out there, right? You know, there's the, you know, $45,000 a year mentorship guys. And then there's the local investor who, you know, you know, being very successful who, you know, is happy to take somebody under their wing and help them out. And, you know, I guess it's always helpful for folks, you know, to know that they have more than one option, right? They don't have to go direct to that $45,000 guy and

they can find successful local people to help them out. Do you have any advice on identifying those people or who they are and how to, you know, kind of get in with them? potentially? Absolutely. I've come to believe over the years, and this is through my own experience, that it's more difficult to find, sometimes anyway, to find an investor in your local market, not only who is willing to talk with you, but actually has the experience that you want to talk to you. What you may want to start looking for is a broker, in your area, a real estate broker that specializes in investments, because this is something that's his living. And that's where I found my guys. I never had a mentor who wasn't a licensee.

And so I would learn all the strategies. I would learn why you would do one move one time and not do the same move the next time, even though it appeared to be applicable. I would look for for the guy in your community who has been in the real estate investment business for a very, very long time and just goes about his business. Generally, they're going to be old school and they're not going to charge you. I don't say anything bad about the mentors that charge. I'm sure many of them offer tremendous value. I'm old school and my mentors told me when I asked them how could I possibly pay them back because their advice has literally been, worth millions. And they told me, Jeff, you can't pay us back. You have to pay it forward.

Yeah. Yeah. No, that's, you know, a lot of people believe that. And that's that those are the, those are the guys I think that people really need to to look for. And I think it's just a matter of time. I think it's going out and talking to people and seeing who's got that mentality, right? who wants to be helpful, who's learned, and wants to give back, and, you know, just talk to people and, you know, and chat with local investors at your group or on bigger pockets or somewhere else, and, you know, find out who's willing to jump in. Yeah, one thing I found is that I feel like older investors, I mean, I'm a young guy, and so older investors seem like they really like talking to me generally because I'm enthused,

I'm excited, I want to learn, and I have that, like, you know, drive to learn from them, and I respect them, and I think that goes a long way. So if you're a young person and you're a newbie at this, I mean, I think older seasoned investors have just as much desire to teach and train as you probably do to learn just because it's passed down on legacy and all that. But you've got to make it easy on them and just really build that friendship. And I would add that when I was taught old school, they didn't keep it conceptual like so many people do now.

What they end up doing is giving me step by step on how to get a certain activity done the right way. Rent surveys is a perfect example. They would say everybody relies on looking at the quote book, the real estate investment book that had all the listings or whatever. And they said, no, you've got to take a clipboard. You've got to go out and into the neighborhood. You've got to talk to the people. And so what I would do is learn that.

And every time I went out, I found out something accidentally or I found out something new about a neighborhood that I had literally grown up almost on top of that I never knew. And so it's that type of learning that old school teaches you. They take you almost like the military where they say, this is your rifle. And by the time they're done, you can take it apart, put it back together in your sleep in the dark. Yeah. Yeah, for sure. Well, that's great. Yeah, that's, I mean, that's the kind of training I think that people need.

And so that's awesome. Hey, so you had mentioned CCIM. for those people who don't know what it is, you know, you're going to give us like 30 seconds on what it is and the value that at least you got from it. And I know you and I have talked about this and you've said that you think that it's invaluable for folks.

Maybe you can explain a little more about the organization. It's sorry, NAR, National Association of Realtors, but it's one of the few things that they offer as a learning tool that actually is worth anything. And the reason why is because first it's 200 hours, not 200 minutes. And it is so complex and actual steak and eggs teaching that the failure rate with an open book test for the first week, 40-hour course, has roughly remained about 50% the last 30, 40 years that they've had it. Wow.

That's insane. It's, and it's taught by people that not only have done it, but generally speaking are still doing it in their market from all over the country. They tag team you, so there's usually at least two teachers every day, and when they get tired, the other one takes over. It has absolutely been the key. catalyst in my career. Got it.

And is it commercial primarily, or is there any residential stuff in there as well? Or how does that work? No residential whatever. The acronym stands for a certified commercial investment member, which means nothing, really. But that does tell you to do. Gotcha. Nice. All right.

Well, that's good. I think those people who haven't yet heard of it can now go and do some homework. and we'll put a link to CCIM in the show notes, which you could find at biggerpockets.com slash show 17. All right, Jeff, so let's touch briefly on a subject that I know that a lot of our listeners care about. And the question is, when is the right time to jump into real estate investing full-time? Do you have any kind of advice on that?

Well, if you listen to a lot of people, you don't need anything except for way too much courage. I disagree being old school. I think this no down stuff is for the birds, but I do understand where they're coming from, and many people have succeeded wildly with that kind of a start. So I never really put it down. I just say it's not for me, and I've never been a part of it. As far as getting started with some skin in the game,

what I tell people is you're making enough money, money to save money, keep doing it, save until you have enough for a down payment on whatever market you can get into and make sure you have cash reserves. And before you have that, I always tell people, don't even think about getting started. No, that's great, Jeff. I think it's really important thing that you touched on there is to be sure that you have cash reserves so that you don't have to 100% rely on the income that's coming in. I mean, I'm sure most of our listeners have heard all that age-old advice that when you start a business, you should blend or not taking any income for two years.

And I really think that's potential real estate investors should definitely consider themselves part of that club. I mean, if you make money right away, great, but I wouldn't quit a job until you have the money already there. I've been there and done that, actually. I know when I started out, I quit my job to be a flipper. And when the market turns sour, I actually had to get a miserable desk job at a bank. So that wasn't very fun. So anyway, good advice. Definitely, definitely, man.

Well, listen, let's just switch gears a little bit, talk about something that I know that you're really passionate about retirement. And, of course, it'd be great if I could be passionate about retirement. Maybe one of these days I will get there as well. But for those of us who are out there who maybe aren't full-time investors but have a day job and are getting close to the end of their working days, I guess what kind of advice do you have for them? Actually, why don't we just, why don't we start with a basic question, okay? How much money does a person really need to retire? Is it like $1 million, $3 million, $10 million, or does that really depend on the person?

Well, the answer is all the above. I will tell you this. Most people think that it would be Nirvana if they got, say, a million bucks into their 401k or IRA. The problem is that the people that are financial advisors and their money, very accurate about this, they tell you that you should never count on more than 4% yield. Well, it took you 30, 40 years to get the million bucks and now you're going to get 40,000 a year before taxes. I don't think the average American investor envisioned 40,000 before taxes when they sacrificed

for 35 years to get a million bucks. So what I tell them is it's not so much the net worth you create. it's all about after tax income and retirement. So now you've got a different equation you're looking at. One of the things that I tell them is that go back to somebody in your family who was, say, 30 years old in 1965, and you told them they had two choices. They can get five times what they're making, and they were making around $7,000 a year back then,

which was median income for the country. and that in the year 2000, they could retire with 35,000 a year before tax, 50,000 in the bank and a free and clear home, or they can start by buying that duplex around the corner, which at that time was $10,000 or $15,000. Well, human nature, if you bring that into today in 2013, and they're making $50,000 a year, which is about the median, if you told them they're going to make $250,000 before taxes,

they're going to take that and just mail it in. The problem is, let's go back to 1965, and the guy retires with 35 before taxes in the year 2000, and he lives in San Diego. How do you think he's doing about now? Yeah. Yep. Gotcha.

So income is the way to go. The actual, your net worth is fairly worthless unless you're producing some sort of income is what I'm gathering your philosophy is focused on then, yeah? After tax income. After tax income. Okay. So then let's get to that.

How do we maximize after tax income? Is there, you know, you talked about 401Ks. You know, what are some of the paths that people can take to go about doing that? I generally use three paths, Josh. The first one, of course, is real estate, which is generally speaking, going to be the foundation. So you're young, you've obviously are getting enough cash flow that you have extra to invest. So cash flow is not your problem. So if you're your age or if you're a whippersnapper like Brandon,

he called you a whippersnapper. Hey, I'm 61. I get to do that. It's okay. So what happens is you have enough income, guys, because you have enough to invest and you've made enough to get that money. So what you want to do is build your capital because all cash flow is in the end is a yield on a pile of gold. So the guy with the biggest pile of gold or the most piles of gold wins. Because if you've got $5 million in retirement and the other guy's got $500,000, you're both getting the same. same four, five, six, eight percent, whatever it is. It's just that in terms of dollars, you'd rather

be the $5 million guy. So when you're young, forget cash flow. Now, do you want cash flow for your investments, of course? But the idea is you just want it to pay for itself with a little extra and you want to acquire as much real estate as you can safely and prudently with cash reserves so that you're building that capital for when you retire. And at that point, as you approach retirement, you start to convert to cash flow. Now, there's a lot more to that. And I'll leave you to ask me the questions. But that's the general concept.

Well, I think that's a really good point. Something that changed in my life recently is I used to be all about cash flow. I mean, my theory before was if I can get $100 per door and I needed, you know, 100,000, or let's say I needed $10,000 a month to live, I just need 100 units. And that was it. I mean, that's how I simplified it. And I mean, obviously that math works out. But now I'm kind of thinking bigger picture. And so rather than living off my cash flow, now I'm reinvesting all my cash flow. I'm saving that cash flow. I'm just trying to build up capital. And I think you have a lot of part in that just from reading your post on bigger pockets. I think I started to kind of change my

style a little bit to how can I recycle that cash flow. So definitely. So you said A was real estate was the first way to save. So what would be the second and third? Well, if they're 20s and 30s like you guys, I would strongly recommend getting an EIUL, which is an equity index universal life insurance policy. I'm not an insurance guy. I've got what I've always called. He always bridles when I say this.

An in-house expert for EIUL's David Schaefer. who writes on bigger pockets now. The guy is wicked smart. I don't even know why he talks to me sometimes. But what it does is it creates a completely standalone and separate tax-free income source. So if you're in your 20s and 30s and spend 20 or 30 years paying a monthly premium, what ends up happening is when you retire, whenever you plan that to happen, you've got a second source beside your real estate for tax-free income,

generally speaking, the way it's structured for the rest of your life. So you may retire with 50, 100, $150,000 a year from real estate, but if you've put X dollars a month and indexed that premium to inflation for 20, 30, 35 years, I've got clients, in fact, one in your area, Josh, who's about 27, 28 years old, and he just got finished structuring his with David Schaefer. He's already invested in several properties, and we're now establishing this. When his EIUL payments are over, he'll be 68 years old and 67, and it'll be over 200,000. thousand dollars a year tax-free until he croaks. Yeah, I think that just demonstrates the power of starting young no matter where you are.

I think way too many people wait until their 30s, 40s, 50s to start investing. But yeah, if you can just start sooner, it's awesome. But okay, so cool. That was two. What's number three then? Number three is where I tell people to stop contributing number one to their IRAs and 401. funds, people fall in love with them. And I understand because they've been sold that since they were kids and they've watched their parents maybe do it. What always surprises me is that they've

watched their parents get into their 50s and 60s. And after everything they've done, they're lucky if they have half a million dollars in their employers 401K. And they realize right away, that's just not going to get the job done. So I tell them to stop contributing to that. and then I tell them what they want to do with that money is shifted over to the EIUL I just talked about. Then when they're able, I say, look, you have two choices. You can completely gut your IRA or 401K and pay the taxes and sometimes the penalty. Or you can roll it over if it's rollable, not everyone is, and roll it over into a newly formed 401K that's known as a solo 401K.

Now that was created for small business owners. Anybody can start their own small business. They don't even have to be in business necessarily. But the bottom line is they're now in control of this 401 because it's self-administered. They then would invest in discounted notes until it's time to retire. Okay. What if their company matches the money they're putting in? I mean, you would seem like you get the power of amplification by getting that matching.

Do you not see the benefit of that? You know, on the surface, that's an excellent point. When you actually do the analysis, you find out that all that was, that match is nothing but the second worm on the hook for bait. virtually everyone that arrives at age 65 for retirement, Josh, had a match of some sort, and they're just as disappointed as the people that didn't have a match. Yeah, no, that's true. That's very true. Yeah, for sure, for sure.

Okay, so now we're at the self-administered IRA. Is that any different than a self-directed IRA? It's nomenclature. My house expert, in-house expert on 401's and I were self-directed, John Park. He handles that for my clients. I'm obviously, clearly not the expert on that. And they swear by him. But I would tell you that it's just a nomenclature.

The solo 401K actually offers a couple of things that normal, IRAs and 401Ks don't. And that is the ability to be traditional and Roth simultaneously if you need it. So people can actually roll their 401K from a previous employer into a solo on the traditional side. And then when they decide to do it, they can roll it from the traditional side to the Roth side, pay the taxes, and then start investing in discounted notes, which would then spit out at retirement tax-free. income. And so with these IRAs, they can buy notes, they can buy, continue to buy stocks, bonds,

funds, but the the real perk of these IRAs is that you can actually get into real estate as well, correct? Yes, you can get into real estate. And by the way, the solo 401K does not come in IRA form just so there's no confusion. The solo 401K is, to me, the gold standard for what they want to use as a vehicle. Yeah, they can invest. in real estate, I don't recommend it. I think investing in real estate in your self-directed plan is way better than most everything else other than the discounted notes. The reason I say that is when you buy, say, a $100,000 house that's going to rent, the lender is going to give you a non-recourse loan because by law, no lender can have recourse on a qualified plans purchase.

that's going to be leveraged. So it's a non-recourse loan. They say that they require 30 to 40% down. I've yet to see any market that they require less than 40%. I know there's going to be some people that say they've done it, and I know some who have too, but it's 40% down. The rates are higher. The amortization times are shorter. So if you actually have the same amount of money that you're using for down and closing inside your self-administered plan in your own name with that money, you could have bought two of those properties. All right. So you're saying instead, if you had $100,000 in a 401k from work, you could transfer that. I mean, I know nothing about this. So correct me where I'm wrong, but you have $100,000 in a 401k. You can transfer that to a 401k solo. Is that right?

Yes. And then you can use that to invest in, like you get, you have to pay the tax. is on at that point, correct, to turn it into a Roth version, right? Right, but let me back up a second. Okay. If it's with a current employer, the chances are virtually nil that you'll be allowed to make that transfer. Okay. So it has to be a past employer.

A past employer. Maybe previously you rolled something over from a past employer to a self-directed IRA. The only thing that's, there's two things that are generally speaking, not rollable to a solo. A Roth IRA, for reasons I've yet to. figure out and your current employers 401. Okay. So then you would recommend, let's say I had that $100,000 from a past employer, and I

want to take that invest in real estate. It's not a good idea to take that and go put that as a down payment on a property. It's better to use to go into note investing then. That's your, I guess, suggestion? That's exactly right. And there's two reasons. of all, you can buy 50 to 100% more real estate with the same amount of money in your own name outside of the plan because of the financing stats I just quoted.

The other reason is it's just a relative return. You're buying notes at 30 to 35% or more discount to begin with. You're generally not going to do that in your 401k with real estate, and if you did, they may start declaring that a business saying you're flipping and they get kind of tense when you're operating a business inside of a 401k. Yeah, that makes sense. New Year, Clean Slate, and maybe a vacancy that needs to get filled fast. That's where a veil comes in. With Avail, rental listings can be published to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, Apartments.com, Redfin, and more. No copying and pasting,

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So where do you find these discounted notes? And what exactly is that? Well, the short answer is twofold. Path A is you can find notes everywhere. They don't hide. You can go online. there's all kinds of specialty websites that have notes. The thing is you then have to have the skill and experience to be able to do the due diligence and analysis to make sure you're not getting the pig in the poke.

And that doesn't mean you can't get great notes on those sites because I know you can. It's just that you're looking at a needle in the haystack, in my opinion. And some of those people that operate those sites are just slam, dunk, no-brainer experts. They really know what they're doing. I've talked to a few of them and they're wicked smart. But they will tell you the same thing. You've really got to look. It's just like everything in real life.

You know, people go to those sites thinking they can find a good note. It's no different than going to the MLS. You wouldn't buy most properties. Yeah, yeah, for sure. But the path B is just you've got to know an expert in notes that does it for a living. That way you know that whatever note they bring you, it's probably a note they're not ashamed of showing you. Well, and there's not just one kind of note here, though, right? I mean, there's there's various grades of notes and then within that, you know, they kind of all serve a purpose from the investment standpoint, right?

I mean, a lot of investors are looking for the A paper, the performing notes that are going to bring you a nice return. But there's another strategy altogether where you can go out and buy lower grade paper, assuming that the borrower's not going to be paying you, and you're going to take back the property. So it's kind of a means to an end, correct? Absolutely. You're just taking a somewhat circuitous route. I've always wanted to use that word. Good word. To buying property at a pretty handsome discount.

I've only done that once, and it was by accident. My dad made fun of me for five years afterwards. And I think it's an absolutely appropriate way to buy notes and get into property. It's not something I prefer. It's definitely not something that I, advise people to do inside their solo 401s or their IRAs or anything else, unless they're really, really expert at notes because you know you're buying a problem. And that's why you're going to make so much money.

Yeah. Yeah. And what is, you know, what's a note return? You know, how much money if I put that 100K into a note, 50,000, 20, whatever it is? You know, am I going to see, you know, 2%, 5%, 12%, 12%, 20, what are we going to look at? That's a great question. My first note I did, Ford was in office, and it was a fourth trust deed in San Diego,

and the return on it was 18%. The notes that we're looking at now are running, give or take, 14 to 18, sometimes over 20%. I just haven't seen that big of a change over time, Josh, in all the years I've done it. The big change I've seen in the market is the same change you see with real estate. The return on real estate really hasn't changed all that much from the 70s and the 60s to now. It's how you're doing it. How you're doing it changes based on the business cycle you're in, right? Yeah.

Or even the market you're in. Yeah. Well, very different buying a house when rates are 3.5% than when they were 17.5, right? Well, not only that, but buying real estate in San Diego as an investment, for instance, was fantastic from the 60s on through the early 2000s. And yet, and people are always surprised when I say this, the next property, that's a single family residence or a condo or a townhome that I sell to an investor. And that is, San Diego real estate, will be the first because house rentals in that market are terrible.

Because the rent just does not justify the price. It never has. And yet you go to other markets, kind of the best thing since sliced bread. Yeah. Yeah. All right. So 14 to 18 percent. That sounds pretty sexy compared to the zero point, whatever the bank's going to give you.

Is there a minimum for, you know, somebody wants to buy a note? I mean, I guess what's the minimum that somebody can potentially even use? And can you buy a part of a note? I mean, for somebody who's like, hey, I've got, you know, 25 grand in my account, you know, should they even be thinking about this stuff? Or should they wait until they've got more money? Well, typically, $25,000 will probably find you a bit short in what I'm looking at. that. Not much short though, but you're close. A lot of times I tell people I get I get

young investors call me up and they have exactly that amount of money. They've got a little bit of cash reserves. And I said, look, talk to your brother or sister, talk to your parents, go in together with them and get started and you'll be able to get a bigger note, one that's actually available on the market that that I would recommend. And then they get their start, their foot's in the water, and when it gets paid off, they don't need the partner anymore. Or sometimes that partnership turns out to be very advantageous. Now, is that 14 to 18 percent? Is that paid out over a 30-year span, or how long are those notes good for usually?

It's all over the map. The notes that I'm seeing are generally speaking first trustee notes that are in the Midwest. They're 30-year amortized with no balloon paint. and generally the interest on them are 10% are pretty close. People always wonder why anybody would sell that for a 30, 35% discount. I've been asking that question since I was 25. It's part of their business model many times. A lot of them, they're fixers.

They bought properties for pennies on the dollar for cash. In some places around the country, you and I both know, they went in. It's like into the house store and they bought six for cash. They fixed them up for cash and they made so much profit on them that they, but they had to carry the paper themselves. They carried back these notes knowing that they'd have to sell them for a discount, also knowing that even though they sold it for a discount, they would still be making the profit that was okay with them.

But you got older people that have a huge portfolio of notes. and they just need money for whatever and they sell it. There's as many reasons as there are note sellers. All I know is in all the years that I've been buying and selling notes, they've sold at a pretty handsome discount, and they've generally given a 12 to an 18% return. Does that return include the discount that you're speaking about? So if you take the discount into effect,

that's where you get that extra percent on percentage on top of the 10 percent that the interest payment is. Oh, sure. The cash on cash on an example I'll give you, somebody buys $100,000 note for $65 grand. It's 10% interest amortized for 30 years. They're making a little over 16% cash on cash. Then the yield will go up depending on how much sooner. than 30 years if it's paid off sooner than 30 years. All right. So yeah, somebody pays it off. They pay off a $100,000 loan or a note and you only have 65 into it. They pay it off one year later.

You just made a ton of money in one year versus 30 years. That's what you're saying, right? Right. If it's in one year, they got a little over 10,500 in payments. They got about 995 in the payoff. Yeah. They only spent 65 a year ago. Yeah, they did pretty well. Yeah, that's not bad. So, Jeff, would you advise then if I had a hundred, let's go back to that $100,000, if I had $100,000 to invest, would you advise to put that in notes or go buy like a duplex in Texas or in the Midwest or something? And why? Well, my first question is, how many candles are going to be on your next birthday cake? 28. 28. Okay, so you're still wet behind the ears. here's the thing. I would tell you to buy real estate. I would tell you to take whatever IRA

that you have and start that also. But I would tell you to take a lot of that. I'm going to assume that some of that is going to be cash reserves, so I wouldn't tell you to spend all of it for sure. And I would have you get your portfolio started. It should be in the market in which you're very comfortable. That's going to pay for itself plus a little cash flow. And if that market is your own market, make sure that you're not buying there just so you can drive by. Don't leave money on the table just because you want the pleasure of being able to drive by it. Yeah, I know that's a big problem. A lot of people email me about a lot of times is I live in San Diego or I live in L.A.

I live in New York, Seattle, whatever. And I can't buy a $400,000 house here. You just can't do it. And they say they can't invest in real estate because of that. But that's one thing I've taken from you is that would you rather, I think you said that once, would you rather drive by your property or drive to the bank and make money or something like that? And I thought that was great. Absolutely.

Listen, I can give you examples. I've got a young couple in Southern California. Neither one of them is 30 yet, but they're relatively high earners. Between them, they own a couple of investment rental properties. in another state, they're about to buy two more, and they still don't own a home. Interesting. Yeah, I don't necessarily think that's a bad thing. I actually, a couple years ago, I sold a house that I was living in, and I went and rented for a while because it just, it worked out best for me at that time, and then I couldn't find anything good to buy,

and I bought a couple investment properties during that time, but it was nothing that I actually wanted to live in, so I don't think that's a terrible idea. Look, if your capital is invested, the idea is that you want to have the most options possible when you retire. Because when you retire, the one with the most options wins. That makes sense. All right. So, you know, why don't we jump to, we'd written a couple hypotheticals. You talked about Brandon here, the wet behind the ears, you know, mayor of the munchkins or something.

What, what, that's an inside joke for anyone who listened to previous shows. That sticks too. What, what, so we've got to, we wrote like three scenarios here and would be curious on your advice for all three of these scenarios. Scenario A is a guy in the mid-20s, Brandon, you know, a guy in his mid-20s making 50K a year with zero investments. He's got nothing. He's got no investments. but he's making 50 grand a year. What does he do?

The first thing I would ask him is how much he's saving. Save up around $10,000 or $15,000 and go find a property that either A, you can afford to live in, that's a single family or a small condo or whatever, or do what many people do is go out and get one of the very many low-down. payment loans and buy a duplex. Yeah. And end up with the same or lower payments than you would with the condo or anything else. And now your foot's in the water.

In five years, you spend all the money you can on paying down the loan, including maybe some of the payment you get from your renter. And even if the property doesn't rise in value in five years, I've demonstrated even in San Diego and L.A. out here in California that in five years you can you can actually create 80 to $100,000 in equity without a dime of appreciation. So it's just a matter of what you can do with what you can do and are you willing to execute it and show the discipline. Yeah, I think that's a great piece of advice. The buying a multifamily and living in it in order to build a principle is fantastic.

So I got it, got it. All right. Situation B, we've got, we've got somebody in their early 40s. They're making about 80 grand a year, and they've got that 401K with about 100K in it. Is the 401K previous employer? Let's assume it is.

Okay. This is almost the profile of maybe a third of my clients. So what I tell is they take... It's 10 o'clock. Yeah, you can't shut her up. So what I would tell him is he's got $100,000 in his 401k, and I asked him how much he's saved. And he says, look, I've got another $100,000 in the bank.

And I say, all right, what I want you to do is I've got some brand new duplexes over in this state that I like better than where you're living. And I tell him all the reasons why I like that market better than the one he's in. They then agree. And what we do is we have him buy one of those properties. Now, that's going to cost him these days anywhere from 60 to 75,000 down payment and closing costs, loan fees out the door. And he's kept anywhere from 25 to 35,000.

$35,000 for cash reserves. At that point, I tell him as far as real estate investing, just live his life. Take the cash flow and then take whatever it is out of your $80,000 that allows you to remain in your personal family budget comfort zone, add it to that cash flow and begin paying off that loan early. Because I always tell people, assume that that property will never rise a penny in value. you and that your net operating income will never go up a penny. Because it goes up, nobody's ever unhappy.

It's the icing on the cake. Yeah, absolutely. Don't ever do a spreadsheet thinking you're going to have X amount more cash flow in year 10 or whatever. It's just foolish. So then I would tell them to take the $100,000 from the 401K from the previous, put it into the new solo 401k. He just established,

roll it over into the Roth part of it. He's going to end up, depending on his particular tax circumstances, with probably about $50,000 to $65,000. Let's assume that he ends up with 50. He just got really rolled. Now, because he's in his 40s, Josh, that he can actually

put in a 17,500 a year after taxes as a contribution into that every year. If the company housing that solo 401 gave him that income. Now, his wife can be the only other employee ever of that company. Okay. And again, this is aside from where he works, all right. Typically, people making 80,000 don't have the ability in a side business to make enough for he and his wife to put in 35,000 a year after tax. Right, right, right. But they have that 50,000 now, and they slowly but surely, and they buy a note with it. And that note, they're buying a note somewhere around 80, $85,000, and they're off to the races. Gotcha.

Gotcha. Okay, okay. And really quickly, let's take the last scenario. Somebody say mid-60s, well, early 60s, getting close to retirement. They've got their, say, quarter million dollar house paid off, but they don't have any investments at all. Okay, I just had kind of a variation on this. The guy's in his late 50s. When he first called me, he quoted me back to me. He said, I want to retire yesterday afternoon around 4.30. So he had already sold his home and it didn't have any or very little taxation. He was able to bank about $100,000.

He had about a $25,000 pension that's going to come when he actually retires. And he had a piece of land that was farmland in Kansas where he's from. And so what we did was we tax deferred that. And instead of what I would have told Brandon to do, is this guy's at least twice as old as you, Brandon. What we had him do was just buy a couple of a very small, brand new and super well-located income properties. One, for cash, because he's not interested in capital growth at this point. Okay. And the other, he only borrowed about 40% of value or less, and he'll pay that off in three

years with the cash flow, right? Now, he's got those properties. the spreadsheets say that he's going to make 3,000 a month. Spreadsheets are always good until their day they're not. So I just tell people, just look at divide by two. He's going to make about 30,000 a year instead of 36. Then he's going to take his IRA that he has, put it into the solo. He's got 100,000 in that, and he's going to be buying the notes with that. Now, that's not a very, he's not going to be rich, but he just created a retirement that when he

retires in, say, three years, he'll have a couple thousand dollars in income he would have had before he met me. He's going to have, he said he can live on $2,000 a month after taxes. And I believe him. He lives in the Midwest. He's a very humble guy. and so he already had that before he met me. Now he's got another $30,000, 40 to 50% of which is tax sheltered. So he's only going to pay taxes on that much. And since he already had an IRA that's rollable,

he rolls that over and gets a tax-free income that he can access at any time he wants, in a year and a half when he turns 59 and a half. Now that in, and here's, here's a point about having discounted notes in your solo 401 on the Roth side. Even after you retire, those notes tend to pay off randomly. When they do, you made a profit and you end up buying a bigger note and your income goes up.

You've got a raise in retirement. And that continues to happen. Okay. Well, cool. All right. So last question I got before. we start wrapping things up real quickly, what is the best state to invest in right now if you had to pick one and why? Well, Texas, and it's a no-brainer, I've been in several states around the country.

This is my 10th anniversary month of having a band in San Diego. And I tell people this, do the macro analysis first. And so compare your market that you're so happy with that allows you to drive by and then look at other states, look at other investment regions. And Texas isn't the be-all end-all. There are some excellent markets around the country. They still don't measure up to Texas. You'll do well enough. So Texas isn't the end-all be-all, but there are other markets

that will not be as good as Texas. So therefore, Texas is the end-all be-all is what you're saying. If I thought these other markets were worth my time, I'd be there. I've been in multiple states before. And here's what my macro analysis told me and why I made the decision. When you look at all the jobs, and that's the bottom line that when all the smokes cleared, right? When you look at all the jobs net, net, net created in the country in the last 12 to 18 months, more of them were created in Texas

than the other 49 states combined. Whoa. Game over. Yeah, that's a serious factoid that I was not aware of. Yeah, and when you look at, and now you look at all the markets from where people are calling me and you ask them,

is your state losing population? Let me go on the site that I love to go on and check out what the percentage of them who are leaving to live in Texas. Let's look at how many businesses have left your state to go to places like Tennessee, the Carolinas, the Dakotas, other places. They're not going to California. They're not going to the Midwest for the most part.

They're coming to places that don't tax businesses to death, that don't tax their citizens to death, that don't regulate everything that moves and doesn't move. go to a place where if you went to Austin or San Antonio or the Dallas-Fort Worth Metroplex today in any coffee house, you can't swing a dead cat without hitting two venture capitalists. I don't really like to swing dead cats, but okay. But it's true. And that's the macro analysis and that's the analysis that you need to begin with before you decide on where you're going to invest.

If the macro analysis doesn't make you grin ear to ear on whatever region you're looking at, it makes no sense to do the microanalysis because you don't want to invest there anyway. Okay. Okay. No, good. Listen, there are definitely lots of great markets out there. You certainly don't have to invest in Texas, but there's definitely an argument for it right there. What then, Jeff, as we close this up here, what would be your favorite real estate book? It's a book I've been trying to find for the last three years and I can't find it anymore. It's called Real Estate Counseling by Charles Chatt, C-H-A-T-A-M.

He was one of the iconic real estate agents that I learned from. he was in Pasadena, the guy was so good at figuring out what was best for people, even when they bought their homes to live in, that he very rarely showed buyers even three homes before they bought. And it wasn't that it was from an agent's point of view. He's the guy that has allowed me to be able to ask the right questions and understand people who ask the kind of questions you guys have been asking me this morning so that I can understand exactly what's inside their head,

what makes sense, where's their comfort zone, how does this or that particular approach and strategy or complex of strategies work? What fits for them? And that's the man that made it happen for me. I've never met anybody or read any other book that did me better than that outside of the CCIM classes. right on right on what about uh business books that are non real estate any any favorites in there emith revisited um i think all the other books that that guy wrote i think are good kindling but i and that's just not my opinion and i've talked to guys that that forgot more than i know about what that book was about and they say the same thing but i thought that book was outstanding I also think there's a book for real estate, especially when it comes to tax-deferred exchanges and investment.

And I'm sorry, I forget the title, but you can look up the author. His name is Royce Ringsdorf. Okay. And the guy is gold. And we'll look it up and put it in the show notes too. Yeah, perfect, perfect. All right, man. And last question for me is on hobbies.

You were a big baseball buff. Any other hobbies other than baseball? No. I retired tearfully a little over a decade ago from Empire and I miss it like crazy. I was a bodybuilder until my elbows gave out again 10 years ago. So now I'm looking to reestablish my fishing skills, which is why I got rid of of my two-seater and have a crossover now. Nice.

All right. Last question from me. Jeff, what do you think sets apart those investors who really do well from those who just fizzle out and fail? The ones that do well over the long haul begin by realizing that they may not know what, not know what they don't know, but they want to find out.

They eventually then establish a very well, laid out plan and they execute that plan with narrowly focused purpose. And that the number one attribute to that plan has to be flexibility. If they do those things, they end up succeeding because Murphy's going to visit them. He knows where we all live. We're all going to have our turn in his barrel. But if you have a plan, you execute it right, you either are an expert or you have found somebody to mentor you and advise you, you're going to succeed.

Oh, great. Nice. Nice. Well, good, Jeff. Well, listen, man, it has, it has certainly been enlightening. I'm going to have to go back and probably listen once or twice to get some of the stuff that you're talking about. But, you know, that is kind of part for the course. I think for a lot of people in that preparing for retirement is certainly probably a little more complicated than it than it should be, but with the right information you can do right by it. So thank you so much for being on the show, and we definitely appreciate it. Hey, it's been my pleasure. Fielding questions from Whippersnappers are us.

Thank you, Jeff, and we'll talk to you later. All right, catch you guys later. All right, see you on the blog. All right, everybody. That was our show with Jeff Brown, Retirement Specialist, and an all-around great guy. There was definitely a lot of awesome feedback in there. Lots of great information about things like notes, retirement, 401Ks, IRAs.

A lot of this stuff is really complicated, guys, and we definitely recommend you jump out there and do some reading. Brandon's wagging his finger around telling me he wants to say something. What do you want to say, Brandon? Well, I was going to say, the one thing that I always get from talking to Jeff Brown, And every time I talk to him, and I read his thing is, it's motivation to take care of my retirement more.

I mean, being 27, I don't think about retirement at all. But every time I talk to him, I'm like, man, I really need to think about when I'm 60 instead of just when I'm, you know,

next year or the year after. So definitely that happened again today. It probably did for a lot of other people listening. Yeah, I'm freaking out. Yeah, you only got a couple years to go till you're like 70, right? I've been a long way to go, baby.

I'm so funny. I ignored it. Could you tell? Yeah, I could. As is customary, everybody, ignoring Brandon. I just want to invite everybody. First, again, thank you for listening. And I just want to invite you guys to head over iTunes and leave us a rating. Hopefully you've listened to the previous 16 shows and have an idea that we're here to

try and help you guys out with your real estate and wealth building and really looking to create a positive influence in your investments. So, you know, definitely do that. And, of course, jump on the show notes at biggerpockets.com slash show 17 and leave some feedback. Questions. If you have questions, always, you can always ask them on our show notes or you can ask them on our forums at biggerpockets.com slash forums.

We really appreciate all your support. And we really are amazed at the, outpouring of support that you guys have had for the show. So thank you very much. And finally, do come join us over at Facebook at Facebook.com slash bigger pockets. Check us out on Twitter. At Twitter.com slash bigger pockets.

Our YouTube channel, we're starting to put out some really great stuff at YouTube.com slash bigger pockets and so on and so forth. And finally, be sure to sign up for your free BiggerPockets account at biggerpockets. dot com slash sign up. That's about it. Everybody, have a great week for biggerpockets.com. I'm Joshua Dorkin, signing off. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the height, you're in the right place. Be sure to join the millions of others who have benefited from BiggerPockets.com.

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