The Personal Finance Podcast - The Complete Guide to Real Estate Notes (Should You Invest!?)

Episode Date: July 10, 2024

In this episode of the Personal Finance Podcast, we're going to talk about the complete guide to real estate notes and should you invest in real estate notes? How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Delete Me: Use Promo Code PFP for 20% off!   Relevant To This Episode:  21 Ways to Invest in Real Estate (8 Ways are Completely Passive!) 10 Things You MUST DO to Get Started Investing In Real Estate (Step-By-Step!) 5 Ways to Buy Real Estate With Low to No Money Down! 26 Ways to Find Real Estate Deals (Some You Have Never Heard Of!) Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon presents Laura versus Fruitflies. Swarming your fruit and terrorizing your kitchen, these little freaks multiply at a rate that would make a rabbit say, yo. Chill. But Laura shopped on Amazon and saved on cleaning spray, countertop wipes, and fly traps. Hey, fruit flies, your baby boom ends here. Save the Everyday with Amazon. The ride that steals the spotlight every time it hits the road, that's the Volkswagen Tiguan.

Its sleek exterior makes a first impression you can't ignore. Step inside to find available full leather seats and wood accents. Under the hood, the available 201 turbocharged horse power engine gives it a fun to drive edge. The refined Tiguan, you deserve more style. Visit vw.ca to learn more. SuvW, German engineered for all. on this episode of the personal finance podcast, the complete guide to real estate notes. And should you invest in real estate notes, let's get into it.

What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we're going to be diving into the complete guide to real estate notes. If you guys have any questions, make sure you join the master money. money newsletter by going to mastermoney.com slash newsletter and you'll be able to shoot over any questions you have when we send out that newsletter every single week. And I promise you I read every single one of them and try to get back to as many as possible. And a lot of times we put them on this show on our money Q&As. And don't forget to follow us on Spotify, Apple Podcasts, or whatever podcast player,

you love listening to this podcast on it. If you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Can I thank you guys enough for following the show and leaving those five-star ratings and reviews? They truly do help us grow this message that we believe anybody in this world can build wealth. And that's our entire goal is to teach everyone how they too can build well. Also, we are finishing out the studio. So get ready to get some brand new YouTube content as we start to finish building out our studio there. really excited about that as well. And so you're going to see a lot more YouTube content coming

through. You just go to the Andrew Ginkola YouTube channel. We have the podcast is going to be on there and the podcast is on there now. And then in addition, you'll be able to see some fresh new YouTube content as well as we go through this. Now today, we're going to be diving into real estate notes. Now, real estate notes are a very interesting way to invest. But one of the reasons why we're going to talk through real estate notes is I want to make sure that we are covering every single investment topic for you guys because there are reasons to invest in certain investments and there's other reasons not to invest in them. Now, you hear us talk about them all the time on this podcast where I love real estate investing specifically investing in cash flowing houses. So things like single family

houses, multifamily houses, that type of stuff is absolutely amazing if it's something that you're interested in. Now, real estate's not for everyone. So if you're not interested in tenants and toilets, then real estate notes is another way to get involved in real estate investing. But is it worth it? That's the big question that we all have when we start to think through in research new investment vehicles. Is it worth my time or am I better off just going out and buying an index fund? Well, today we're going to answer those questions for you when we dive into this episode. And so I'm really excited and pumped to kind of go through this because I have some experience of real estate notes. In fact, for years and years and years, I used to talk about this all the time.

Is when I used to go to this special real estate meetup here locally in my area, it was a meetup in the back of a Denny's, and there was just tons of millionaires in that meetup. And people would trade real estate notes all the time. They would trade houses all the time. They would buy and sell properties. And it was a really cool experience to watch these really wealthy people. People who have thousands and thousands of doors were in this place. And they were having conversations, even authors of larger books like John Schaub, building wealth

one house at a time. He was in that meetup. You know, the people that he dealt with were in that meetup as well. So there was a lot of folks in this meetup that really had tons and tons of experience. and I was in my 20s watching all of this happen, and it was absolutely amazing to kind of see what would develop in a back of a Denny's. You would have no idea when you looked at these guys.

I mean, you would have literally no idea how wealthy they actually were, which was just so cool to kind of watch this whole thing unfold. And so what they would do is they would put properties on the board. They'd have this big old, like projector board, like the old school projectors that you'd have, like if there's millennials listening at all, the old school projectors that you had, that had the light that shone on the wall

with the clear paper, that's the stuff they would use in the back of this Denny's. And we would go through and they'd put everybody who would put the properties they want to sell or the real estate notes that they want to sell, which that's one out for real estate notes, by the way, is you can actually sell them. And they would put it on this board and people would talk through and have conversations about them and dive deep into the details and then see if they wanted to buy them from those individuals. And so this is something I think is a really, really cool and powerful way to diversify your investments if you are already hitting your other investment goals. And so when we start this, just to start off the top of the show here, you need to make sure that you're hitting your investment goals before you start to get into other avenues like this, like real estate notes. So this is a wealth accelerator for a lot of people because you can snowball some of this stuff. And so if you're interested in real estate notes, I'm going to dive into the total guy today as we go into this. So the first question you may be asking yourself is what makes a good note.

And there's a few things that we want to dive in today to make sure that we look at this and make sure we evaluate it properly. But if you don't know what a real estate note is, what it is is you become the bank. So you have a large amount of cash on hand and you become the bank to either help somebody do a number of different things. One of which is, and we'll talk through the specific types of notes in a second, but one of which is you could help them renovate a property, for example. So it's a real estate investor who wants to flip a house. You help them renovate a property and then you charge an interest rate and they're supposed to pay you back within, you know, under a year typically is how long it is. So it's either three months, six months, nine months, something along. those lines. And because it's a short-term loan, it's a hard money loan, is what they call it.

Because you're giving that hard money loan, then you're going to get a much higher interest rate, usually 13, 14, 15%, because it's such a short amount of time and you're risking your capital for something that's a slightly more risky investment. And so that's how a real estate note works. Now, there's other ways to do it. You can put a real estate note for an investor who's going to own a rental property over the course of 30 years and they pay you as the bank. You get an interest rate of 6, 7, 8, 9, 10%, and that's just how it works. You're just making 7, 8, 9, 10%. And that's just how it works. you're just making 7, 8, 9, 10% on your money. And so a real estate note is just you becoming the bank as a private investor.

And so all you're doing is you're reaching a contract with a real estate investor that you trust and we'll talk through all of the specifics here in a second. And then you are the bank. And then they're just paying you and you earn interest. And that's why this is enticing because you're earning interest on your money. And so there's a lot of people out there who specialize in real estate notes. And this is the only way they invest is they buy tons and tons of real estate notes. And there's a lot of opportunities to buy these out there.

but you really need to know what makes a good note. So the number one obviously is creditworthiness of a borrower. Most real estate investors want to have folks who will give them real estate notes over going to a bank. When you go to a bank, you have to jump through a ton of different hoops. And so they're willing to work with you instead of a bank because you make their life easier. And so for a lot of real estate investors, you've got to check the creditworthiness of them and the borrower to ensure that you know they're going to pay you back, just like a bank would. loan to value ratio you also need to make sure and ideally it's below 80%, but you need to reduce the risk of the property value and make sure the loan to value ratio is less than 80%. Interest rate is another factor in determining if it's a good real estate note because interest rates obviously you want to make enough to make it worth your while.

So the big question to yourself is, well, is the interest rate high enough to make it worth risking this capital or should I just stick it into an index fund or an ETF and earn 8, 7, 8, 9, 10, percent over the course in the next 30 years and not have to do a single thing or collect my payments or anything like that. So you got to make sure that that is worth your time as well. You also have to understand the amortization schedule for a lot of folks like me. I would rather frontload a lot of the interests like banks do so that I know that I'm getting my interest over time and I'm getting it early so I can get paid back faster. And then the property type and location, you need to understand where the property is, you need to understand the location and understand what you need to be doing.

Now, when it comes to evaluating real estate notes, if you ever want to get into this, if you're interested in this, you have to evaluate the property just like you're buying it as well. So real estate notes are a lot more work up front because you need to be evaluating the property. You need to see what the cash flow is. And typically, you have the investor give you that evaluation, but you always check but verify. You run the numbers yourself as well because you have to know if they even know what they're doing. And so that's a huge, huge factor. And so you have to understand real estate investing before you get into real estate.

real estate notes. This is not something where you can take the fast lane and not understand the upfront cost and understand what needs to be done in real estate investing. You need to be a real estate investor yourself when you start to evaluate these properties before you lend out your hard-earned dollars. You do not want to make a mistake on these. All the work and all the money is made up front. And so you got to make sure that you're putting the time in up front before you do this. Now, there's a bunch of different types of real estate notes that we can talk through. And I'm going to go through a bunch of them today and then just go quickly through all the different and then you can kind of think through this, and then we'll talk through how to find notes.

So the first one is performing notes. So performing notes are notes where the borrower is current on all payments and the loan is being repaid as agreed. So this is what a lot of people would put into that back of the dendies that I keep talking about, where they would put notes up, for example, and there would be people that are already paying on these notes, and they're looking to trade these notes for a property. So sometimes people will have real estate notes, which is why this is a valuable asset, because you can trade real estate notes for other properties.

or things like that, especially if somebody has been current on their payments and they've shown they've been current on their payments for a longer period of time. And so these are the ones that I would be interested in buying if you're going to buy one is ones that are actually performing to have real people in them. You're going to pay a little more for them. But at the same time, this means their regular, predictable income, their lower risk compared to non-performing notes, which we'll talk about in a second. And they generally have lower yields compared to riskier notes. And sometimes you can do partnerships. You can do joint ventures on these notes where you can buy them from someone and say, hey, I'll give you X percent if you let me buy this. And so maybe

your interest rate is a little lower, but you're able to take over that note and you can do a joint venture with them and do all the work. So there are things like that that you can do as well. Now, there's non-performing notes. Non-performing notes are a lot more risky. This is something you really need to know what you're doing before you're interested in this. But these are notes where the borrower has stopped making payments and the loan is in default. Now, there's a couple of reasons to be interested in this. One, you have to read through the entire contract, but sometimes people just don't know how to get other people to pay. And so if someone's not paying on those non-performing notes, you can take over the note. And a lot of times, and you need to check this, but a lot of times the

property is what is backing the note. So, for example, if they go into default, then you can foreclose on them essentially and take the property back. And that's one option that you have available to that investor. But it requires a lot of active management and a clear strategy for handling these default. So you have to have a plan in place. You have to know what you're doing. And that's So if you never done this before and you really are interested in this kind of stuff because you want to get properties at a discount, this is a way to get properties at a discount, then I would recommend doing a joint venture with people who know what they're doing first a couple of times before you actually do it on your own yourself because you're going to make mistakes. And so you want to make sure you do it with someone else who's already made all the mistakes so that you can purchase at a significant discount because this is an opportunity, but it is much higher risk just like anything else. There's also reperforming notes. And reperforming notes are notes that were once performing, but have since been modest. and the borrower is now making payments again. So this means the borrower is paying on these notes. Then all of a sudden something happened in their life.

You restructure the note to a lower monthly payment typically. And now they're paying the note back again because they can afford to pay it. And so reperforming notes have a little bit of a higher risk because you see a borrower with a tendency to not pay. And then you restructure to a note that they possibly could pay. And so that is something that you could definitely, you know, get immediate yield on. but at the same time, it often involves modified loans and extended payment periods. And so those longer payment periods means that they can have a lower monthly payment. But it does have potential for better returns because they're paying that interest rate longer.

But it can have potential for better returns because if you buy them at a discount, then you got some good stuff going on there. Now, there are other type of notes where there are things like first lien notes. First lien, if you've ever gone and got a mortgage, for example, you'll see there will be documents in there that said, you know, the mortgage is the first lien on the house, for example. And these are notes secured by the first position lien on the property. And in case of default, if they start to not pay, you have the primary claim on the property. And so you want to make sure that your notes are first lien notes typically

on the property. I'm not super interested in second lien notes, which are notes secured by the second position of the property. So if they default, the first lien has first access to the property, then you get second access, which is just higher risk due to your subordinate position. So you want to make sure that you have those first lien notes, but there are second lien notes as well. They're higher risk, but they're usually used for like home equity lines of credit. So if you go get a he lock, for example, it's usually the second lien because the mortgage takes precedence on the first lien. Now, they're also seller financing notes. Sometimes, and this is one I think I'm super interested in, because sometimes people will sell their property and they are seller financing their property.

If you don't know what seller financing is, that's when, like say, for example, you own your house. And so if you want to sell your house and you want to sell it at a premium, you could seller finance it to another investor and then all of a sudden they start making payments to you. But then maybe later on down the line you realize, eh, I don't really like doing this anymore. I don't want to do this. It's my first time trying it. It's just not my thing. Well, someone can come in and they can buy that note from you so that you can just get your cash up front. Maybe something happened in life. You just want to retire. You want to get that cash on hand. You want to stick it in an index fund. You're tired of chasing down this person. Then you can have an investor come in and buy

your owner finance notes. I think these ones are really interesting because you could probably get some decent deals on some of these. You know, there's a lot of people out there who are seller financing their house and they don't want to deal with it anymore. And so I think that's a really, really cool way to go through that. Now, you can also do commercial notes and commercial notes are on commercial properties, obviously, things like warehouses or shopping plazas or anything like that. And usually these are closer to a traditional business transaction.

And so these are typically larger, more complex. There's a lot more hoops that you have to go through than residential notes. But they can offer much higher yields because businesses can typically. pay higher yields and businesses are used to paying higher yields. So those are also very interesting. Right now, that might be a higher risk than normal because commercial properties are struggling at the time I'm recording this. And so you want to make sure that you understand the market before you do that. Then there's residential notes. Obviously, we've been talking a lot about that, which are notes secured by residential properties, including single family homes,

multifamily homes, condos, all those different types of things. Now, there's also jumbo notes. And if you don't know what a jumbo note is, these are notes for low. loans that exceed the conforming loan limits set by government-sponsored enterprises. These are things like Fannie Mae, Freddie Mac, and these are typically for things like luxury properties and could be higher risk due to the loan amount. I am not ever interested in jumbo loans. That is not something I would even touch with a 10-foot pole. But if you are, if that's your thing, more power to you.

And then we have government-back loans. So when it comes to government-back loans, these are notes backed by the government agencies. So this will be like the FHA, the VA, or the USDA. And these are lower risk because they have government-backed. and generally they offer much lower yields. So your return's going to be much lower, but they honestly are like a sure thing almost. And so that's something where if you are just looking for a sure thing and you want to put some cash away and diversify into different areas, then that might

be a great way to go is with those government back loans. So those are 10 different type of loans. I know I'm talking through a bunch of these here now, but I wanted to touch base on all of these as we dive into this because I want you to just have a full understanding of how this actually works. And so next, what we're going to do is we're going to dive into how to find these real estate notes. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to

the top of the page, making sure it reaches the right candidates. And it makes a huge difference. Sponsored jobs on Indeed get 45% more applications than non-sponsored ones. And there's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash personal finance. Just go to Indeed.com slash personal finance right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance. Terms and conditions apply. Hiring, Indeed is all you need. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just

hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius isn't an insurance company. They're an online marketplace that helps you compare life insurance quotes from some of the top insurers in America, all in one place for free.

And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without all the guesswork. And they walk you through everything. Answer your questions, handle the paperwork, and help you get the coverage that actually fits your life today. and where it's going. So protect your family with a policy that grows with your life. With PolicyGenius, you can see if you can find 20-year life insurance policies

starting at just $276 a year for $1 million of coverage. Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you can save. That's PolicyGenius.com. Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation, fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada,

reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community.

Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. All right, so next we are going to be talking about how to find real estate notes. And there's four kind of ways that I know of to find real estate notes that can help you throughout this process.

And the first one is banks and credit unions. So if you're looking for non-performing notes, banks and credit unions are willing to get rid of their non-performing notes if that's what you're looking for. And typically, they will sell either non-performing or underperforming notes that they are just not interested in holding anymore. Now, for me, if the bank doesn't want to hold it, I'm not super interested in holding it either because they're in the business of making money. they have a lot of very smart people that work for them. And so a lot of times, I am not really willing to take on a note that a bank or a credit union does not want. Now, there are also companies who are loan brokers. So what they do is they go out and they find real estate investors and they connect buyers and sellers of mortgage notes. And so these loan brokers are going to help you maybe connect

with other real estate investors across the country and or even in your area. And then they take a commission and make money for being a middleman. Now, this is a helpful service. If you are interested in buying either a high volume of notes or you're trying to look for your first one. This may be one that can help you because they can walk you step by step to the process just just to get your feet wet as you start to find some of these real estate notes. But you're not going to get as good of a deal because that broker is typically taking a portion of the profits that you could be making if you found the notes on your own. But usually when they're looking for notes, they kind of do the research on some of the

borrowers to make sure they're actually credit worthy and they give you some additional information on the borrowers that you may not have otherwise. if you did it on your own. Now, there are also real estate investment platforms. So there's online marketplaces for buying and selling notes, which can be good, especially if you're just looking for some notes online. Again, they're not going to be as profitable as off market stuff would be, but there are a bunch of different ways that you can look at this. Now, there are different platforms like study soup or note solution that will help you kind of, you know, connect with other buyers out there. But do your research. Make sure you understand, you know, where you're even looking

when you do this because it's really, really important to do that and do some background research before you even utilize a platform. And then lastly, this is my favorite sellers. And so private sellers are networking with either real estate investors and then locally going and finding notes. So a lot of times these real estate investors will get notes. And you can either buy them for like a flat rate price. Sometimes they'll get notes under contract and they'll sell them to you for a few thousand dollars to depending on how well performing the note is. They might sell for it a little bit more. And these private sellers are also willing to swap it for real estate. A lot of them want more cash flowing properties. That's what they typically are looking for. And so they're

willing to sell those notes to you or do a swap if you're not willing to deal with a property that you have anymore or you want to do some sort of swap. And if you have like, say, for example, you have a single family residence that's worth a lot. You can get multiple notes if you wanted to go that route instead for that property. Say it's your personal residence or something like that. And so finding private sellers, one of the best ways to do this by far is to go to your local real estate meetups. I say this all the time for real estate investors. But you meet so many people at your local real estate meetups. And typically there are a lot of people there who either want to buy notes and or who are willing to sell notes as well. And you say, hey, you tell

everybody what you're trying to do, that you're the guy or girl who is there to buy notes and they're going to start connecting you with the right people. So go to your local real estate meetups, even if there are some outside of your specific area. Maybe you have to drive 30, 45 minutes an hour. I used to drive about 45 minutes to an hour to the best one that I could find. And so sometimes you've got to drive a little farther outside of your area, but it is worth the time to meet with the right people. So try a bunch of different real estate meetups in your area if there are multiple and try to figure out which one has the best one with the investors who are the most motivated to move. You want to see a lot of transactions happening. You want to see a lot of movement going on.

And if that's not happening at your local real estate meetup and they're just kind of yapping around, you don't really want to be at that meetup. You're not here to learn more. I mean, you are, but at the same time, you really want to go where stuff's happening and stuff is being made happen. So sometimes you might have to drive an hour. Sometimes you might have to drive an hour and a half, but it is worth the time and the energy if there's a lot of stuff going on that can really, really help you and benefit you. So real estate meetups by far are my favorite ways to meet private sellers because you're going to meet them there.

They're always there typically, and it's one of the best ways to do this. Now, one big question, and this is a huge factor is how do you do due diligence before someone? So say, for example, you started to network with other real estate investors. You started to find some notes. How do you actually do due diligence on that note to make sure. it is the proper note to purchase and or the proper note to go forward and deal with a specific buyer. And so the first thing you want to do is evaluate the borrower's creditworthiness. And so to do

this, one, you're going to obviously check their credit score and you're going to do a credit report on them. Then you want to also do an income verification to ensure the borrower has stable and sufficient income. Then you're going to look at their employment history to make sure they're actually employed to be able to pay you with this note. And then look at their debt to income ratio. So their debt to income ratio ensures they're not over leveraged. They don't have a ton of other debt out there. They don't have a bunch of different Ferraris and Lamborghinis that they can't pay you back on. And so you want to make sure that their debt to income ratio is low enough that makes a ton of sense.

And so you're going to do a huge evaluation on them when you do this. I also want you to do a background check on them to just to see, you know, other financial information usually pops up on that background check. And so just doing as much due diligence as you possibly can. It'd be kind of a similar due diligence to doing a background check on some one like a tenant if you're going to rent a property to them. This is why it helps to understand real estate when you are a note investor because a lot of it coincides, especially on the upfront work that you have to do. Now, number two is if this is your first time investing in real estate notes,

I want you to make sure you assess the property completely. So you want to make sure you get a professional appraisal so you can determine the current market value, just like a bank would ask for. You also want to make sure that there is a property inspection available. If they have not gotten a property inspection over the course the last year, you want to make sure that they get a property inspector in there and make them pay for it. And then if they want the note from you, they have to pay for a property inspector going forward. You want to get a title search to make sure there's no liens or encumbrances on that property. Make sure they don't owe back taxes or anything like that. And so getting a title search is really important. And then you want to do location analysis to make

sure that the neighborhood looks good. You want to make sure you determine those factors as well. So boots on the ground, you want to see that property and ensure that this is a good property for you to be investing in. Now, next, you want to think through the loan terms and conditions. So you want to talk through the interest rate. Typically, I would have some sort of blanket interest rate that you were looking for prior to actually having this conversation. Aim for a loan to value ratio below 80%. You want to also look at the loan duration. You can go 10 years. You can go 15 years. You can go 20 years. You can customize this as much as you possibly want. But the sooner you get paid back, the better typically. And then also you want to talk through a down

payment. Are they going to give you a down payment? How much is it going to be? And then talk through that portion as well. A higher down payment reduces your risk as a borrower. And it makes sure they have more skin in the game, more equity in the property. It reduces your risk because if they default, you still get to keep that down payment cash. And so you've ensured that you've got some of that cash in hand. I know some people want to stretch it out just so they can get more interest. But really a down payment is a huge benefit because it makes sure they have skin in the game. If they start off with zero down payment, that to me is somewhat of a red flag because they're not. fully in the property. People who don't pay for things are not fully invested. I've given away

a ton of free stuff to people. And I always, always, always can tell that people who do not pay for something just don't treat it as well. They don't show up on time. There's a lot of different things that factor in there. So another big one there for sure. Then you want to do legal and compliance checks. And so legal and compliance checks would be things like regulatory compliance and making sure the loan complies with all the federal and state and local regulations. You want to look at loan documentation and review all loan documents for accuracy and completeness. You want to make sure they meet the insurance requirements. You want to make sure they have insurance in the property,

just like a bank would make you have. And so some borrowers try to get away with not having one, which is why they go private. You want to make sure they have insurance. That is the last thing you need is a property to catch on fire and they don't have homeowners insurance and they can't pay you back. And so making sure they have insurance is really, really important. Insurance is like a bubble wrap for your life.

All right, number five is you also want to look at the borrower's financial stability. And so you want to look at their checking. and savings account, you also want to look at their assets. You want to ask for all this stuff. They need to present this to you. Then you want to look at some of their past history, make sure they have no bankruptcies or foreclosures. If they do, I'm not interested in lending to them. And then you also want to think through a couple of different things here is you want to think through your exit strategy. So first, you want to think through what is the borrowers plan with this property and understand their plan for repayment, including their income sources. And if they have contingency

plans, you want them to present to you as many plans as possible. And you want to have a a clear plan for foreclosure and you want to outline that up front with them because if they do not pay, you know exactly what's going to happen and you want to have that in the contract and you want them to sign it. Also, three things I want you to have on hand on your team is you want to have legal counsel, meaning you want to have an attorney who specializes in real estate. You also want to have a CPA and or your CFP if you have a CFP, if you have a certified financial planner and make sure that they're kind of in agreement with you on this and this is a decent investment. And then also a loan servicer. So you can use a reputable,

loan servicer to manage the loan and handle the payments and deal with any delinquencies if you want to. Now, that's going to cost you more if you want a loan servicer and or you could do it all yourself. Loan servicers are like having a property manager, but for your notes. Obviously, keeping detailed records and regular reviews of this note is going to be really, really important. And then just continue to do risk assessment on the property and the note. If the note feels like it's getting a little too risky, maybe you purchase this note and they're underwater on the note or you made a mistake or something like that, then you can look to sell the note as well. if you wanted to, but just also monitor those economic conditions and look at that kind of stuff as well.

So that's how you do your upfront research is you want to go through that due diligence checklist there and make sure you do that. If you guys want a printable of a due diligence checklist on this kind of stuff, just let me know. And we can produce one for you and get it rolling there. So just shoot me an email. Now, we've done all this work. We have notes in hand. But the question then kind of becomes, do you really want to invest in real estate notes instead of buying something like an S&P 500 index fund? While historically, the S&P 500 index fund, while historically, the S&P P 500 index fund has returned 7 to 10% to investors. If you had 100% S&P 500 over the course of the last 30 years, you're making right around 10% return on your money. And so it's like, hey, do I really want to deal with

all this stuff, all this extra work for a little bit of diversification to invest in real estate when I could just be investing in the S&P 500, which is completely passive. And so it's a great question to kind of think through. And this is a reason why I don't invest in real estate notes is because I'm more interested in doing more passive things and focusing on my businesses, instead of investing in real estate notes, because I can make more in the S&P 500 currently. If you can find somebody who's going to give you a 10% interest rate on a real estate note, it's pretty tough to find that. And usually that's crossing into the hard money line. And I think that is something where it's a lot more work to invest in hard money notes than it would be in something else. So your risk premium goes

up when you invest in real estate notes. It's significantly more risky than would be just investing in an index fund or an ETF. Also, real estate notes are less liquid than stocks. They are very ill liquid compared to stocks. I mean, you can't just get your cash out immediately like a stock. You would have to, you know, go sell the note, find somebody who's going to buy the note. It would be a whole process for you to liquidate that cash. And hopefully you can find somebody because if you do make a mistake, it's going to be hard to get rid of that note at the price that you paid. And so you've got to make sure that you were doing that. And then there's is managerial effort on a real estate note, meaning you're just going to be doing more work

than you would be in the S&P 500. For those three reasons, I'm not buying real estate notes right now. Now, that's not to say I ever would because they are very interesting to me. And I've watched people get very, very wealthy on real estate notes because they start to compound over time. You start to get some cash flow coming in. You can buy additional notes. And then all of a sudden, you are really, really cooking with gas here when you start to snowball some of this stuff. But it's just not an asset class currently that I'm interested in because I can make more in an index fund and do less work. But if you want to diversify into real estate, but you don't want to do the type of work that real estate takes, this is a good route to take because it is less work than

working directly with real estate investing. If you don't want to deal with tenants or toilets or fixing stuff or any of that kind of stuff, real estate notes is a more passive way to invest in real estate. If real estate is your thing, if you like tangible assets and you say to yourself, I like to see what I'm investing in. People say that all the time to me, then this is a great option for you. And I think for a lot of people, it depends on your personal plan, what your preference is, but you got to run the numbers on all the options before you actually invest in something like this. For me, when it comes to real estate investing, I am more interested in the actual properties because A, I think you can make a lot more money on the properties.

And B, you get cash flow, you get appreciation, you get the tax benefits, you get every single benefit to those properties. And in addition, you own a physical asset, which I absolutely love. So I'm more interested in that than I would be in real estate notes overall. Now, what happens if they don't pay you? Because this is the bigger question that a lot of people have. Number one is you'd either default or go into foreclosure. So if they stop paying you, you need to either initiate foreclosure proceedings to recover your investment, which is a whole legal process to seize and sell the property.

You can also renegotiate loan terms to the borrower to avoid foreclosure. So most people do this, they kind of do a loan modification. Or you can do a short sale, which allows the borrower to sell the property for less than the loan balance, which most of you do not want to do. This happened a lot in 2008, 2009, where you can buy short sales. but a lot of banks went out of business doing that. That's not something you ever want to be doing. Now, how should they pay you?

How do they typically pay? Do they mail you a check? Or how does this actually work? So the first one is direct bank transfers, and you could do that directly, have them just transfer from your bank to their bank, or you can use third-party servicers with companies that handle loan payments

and keep track of interest and principal paid. That's another option as well. Now, you've heard me talk about like, this can snowball and I've seen people get really wealthy. Well, how does this snowball? one is you can reinvest your investment returns. So when your money comes in, you can take those dollars and reinvest those interest payments into additional notes to compound the amount of notes that you own because you can see here if you start to buy multiple real estate notes and

you're making 7% on a ton of different ones. Let's say, for example, you have a million dollars in real estate notes, $100,000 in each note where you're going to be making some decent money there in interest. And so you want to make sure that you know that you can see to start to compound. And when that interest starts coming in, you'd make enough on a yearly basis. to kind of reinvest into another note pretty soon. And so eventually this starts to snowball and grow over time where then it's really, really making a huge difference in your life. And as you gain experience and you build capital, you can buy more notes, you can buy larger notes. You can roll up multiple properties and notes. And that's how you can really start to make more. And then you

can apply the income from your notes to acquire higher value notes over time. And so you can do things like hotels or other things that would be much larger, larger endeavors or things like apartment and complexes, that kind of stuff. So it's pretty, pretty interesting. So when would somebody do this? One, if you're passionate about this stuff and you think this is really, really interesting, I think that's actually very important if you think this is super interesting and you want to invest more into something like this. Two, you have to understand it completely. You always need to understand what you're investing in completely and understand it backwards and forwards before you start. And then three, if you have a ton of extra cash and you are in the wealth acceleration phase of your

financial journey, then definitely I would look at this. Now, when would I avoid this? If you're still getting your financial foundation set up, I would avoid this at all cost. If you're not maxing out those retirement accounts, if you don't have an emergency fund, if you have any high interest debt, all that stuff needs to be done first before you even get into this. But if you are interested in investing in real estate and diversifying that way, you're hitting your investment goals for retirement. You have the extra cash on hand. Then I think it's a okay.

And you're also okay with possibly making less than you would in an index fund or an ETF. Then that is completely fine. And I completely understand. Some people just love this kind of stuff. And if you love this kind of stuff, then more power to you. Dive on in because we want to get our dollars invested. And that's the number one thing we want to be doing here. Maybe we're not optimizing for the highest value investment.

But if you're enjoying what you're doing and you love doing this every single day, more power to you. I think that is a really, really cool way to invest your money. Listen, thank you guys so much for listening to this episode. I know this was kind of in the weeds today. But I think it's really, really important for people to understand each type of investment. And so we'll dive into different types of investments like this. If there's something you want me to dive into like this and dive a little deeper, please let me know and we can do so because I want this podcast to bring you as much value as we possibly can.

That's the entire goal of this show. And so I appreciate every single one of you listening to this episode. I hope you have a great rest of your week and we'll see you on the next episode. Frozen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Playojo. The online casino with all the latest slot and live casino.

games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey, I just won. Woohoo! Feel the fun! Play, oh Joe! Honey, forget about the lasagna. Let's celebrate! 19 plus Ontario only. Please play responsibly. Concern about your gambling or that of someone close to you. Call 16-531-2600 or visit connexonterio.ca.ca.