All Forum Posts by: Rob Cee

I like investing in buy and hold real estate when there is a economic downturn and you can get super deals with high cash flow with a big upside on appreciation (i.e. 2008-2012). But unless I can get a really good deal on a rental, I favor notes/hard money lending (I personally do HML, I do not buy existing notes at this time). Also when you live in expensive areas of the U.S. where the cash flow on rentals is poor (NYC, Boston, Coastal CA, DC, Seattle, etc..), and you can't find a good return on rentals in your backyard, I especially favor notes over rentals. I'm personally not a fan of buying rentals far away from where you live.

It's not just the tenants/toilets management part of owning rentals, I think it takes a lot more initial up front work to acquire good cash flowing buy and hold rentals then it does to lend on a hard money deal. When I bought rentals, it took months and months of driving out to look at properties that popped up, making offers, inspecting properties, fixing properties, screening tenants. This was all far more work then HML. With HML I do not leave my office. It rarely takes me more then an hour to evaluate if I want to fund a HML. There is also more liability being a landlord (getting sued for slip & fall, etc...) then owning the note. Also when you have to evict, you have to eat all the costs. When you foreclose on a note, all the back interest and foreclosure costs get tacked on the payoff on your note.

To me the tax advantages of owning rentals are a little over hyped.  The main tax advantage people are talking about with rentals is you can depreciate, this shelters a little of your cash flow.  This is the only "phantom loss".  But if you sell you have to re-capture that depreciation unless of course you 1031X.  And 1031X can be spotty, because you usually want to sell a rental at a market peak, and that means what you are likely to 1031X into is also at a market peak.  Everything else you can deduct you have to come out of pocket for (maintenance, repairs, etc...).   

If there is another downturn like 2008-2012 where I can get super deals on rentals in prime locations, I would go in again on rentals. But if not, for me it's much less hassle making 9-12% on HML's then finding and managing rentals.

I'm just reading about this because I'm curious, I have not really looked into it thoroughly. But I did go on to PPR's site and read though and watch the videos on their performing note training. What I'm talking about is NOT buying NPN and doing all the work to get them re-performing or foreclosing, etc... That sounds like WAY too much brain damage for me. I'm talking about buying the performing 2nds that PPR sells that they already did all the heavy lifting and got performing. And that they warranty. From what Dave says on his BP podcast and what he and his partner say in their performing notes training videos, it doesn't sound like you do a lot of work as the investor buying their performing 2nds. It is just not really clear to me what the risks are if they fully warranty the performing 2nds they sell. Jay have you read though their stuff and watched their performing note videos on the PPR Academy site? Where they talk about the advantages of buying performing 2nds from them?

 I thought from what I read on the PPR site & watching their videos that if the performing 2nds you buy stop performing, they step in and deal with it to get it re-performing (and if they can't they replace it with another performing note), so it didn't seem like you are buying a job.  I guess I was confused, I thought I read that they warranty the performing 2nds they sell.  I have been doing a lot of hard money lending in CA (just 1st trust deeds) the past few years.  But the returns they talk about on their PPR Academy site look a lot better than what I'm getting lending.  The warranty would be key and understanding that completely.   But it all sounded too good to be true.  Wasn't much talk about what the risks  are and what can go wrong in their performing notes training videos.

 Thanks @Jay Hinrichs for your excellent questions. Since PPR offers the warranty, I'm still trying to nail down all the risks to buying a performing 2nd from PPR if it goes south. Someone mentioned it could be the opportunity cost of interest that could have been earned elsewhere (since you only get your principle back if it goes south). But that isn't a major risk IMO. Major risks to me are risks of loss of principle. Jay mentioned they could go out of business, that is a risk. It seems like if they had to replace it, it may be difficult to find a replacement note that matched your note that went south (similar ROI, face value, equity cushion, etc..). How long is their warranty good for?

Thanks @Bill Gulley for the detail level of your answers.  There are some great nuggets in many of your posts in the note forum and I take close notes when I read them.  

I think the degree of difficultly goes up when buying existing notes vs. being the one that makes the initial loan (which is what I've been doing for the last 3 years).  I noted some of your advice Bill G. to learn more to become a good or better note buyer.  And Dion, it sounds like you don't think guru courses are all that effective.  It seems like the best way to make the jump from lending to buying notes at discount would be to have a very experienced mentor be there to walk you through your first few note purchases.  Or at least have an experienced note buyer you can go to with questions that pop up during your due diligence process.  And then the challenge would be to find a mentor like that without paying an arm, a leg, and 6 children for it:)   

Definitely the fastest and most complete way to knowledge of anything is find someone that is really good at it and learn from them.

@Mike Hartzog thanks for the link to you your blog post Mike.  That is well done and excellent info.  That's the kind of info I like to continually read.

Good post Bill G, thanks.  

I have a pretty good knowledge of loan underwriting standards working in the conventional mortgage lending business for many years.  I'm lending in CA major metro areas right now because I know the state pretty well having previously lived there 25 years and knowing some hard money brokers there.   I have been just lending 1st trust deeds and only on investment properties.   As I don't want to deal with the extra hassles of foreclosing on owner occupants.

Since I'm not local where I lend, a big risk I'm taking is not seeing the properties I lend on in person. Yes I get an appraisal and I review it very closely, but I believe a note investor has to look at the "forced liquidation value" of a property not necessarily the appraisers sunny view. Also, sometimes I feel these appraisers try to "hit a value" to make the deal happen to continue to get that hard money brokers business. I have seen some really inflated appraisals on some loans I have rejected. You have to look very closely, for example recently I saw one sloppy appraiser providing 3/2 comps for a "3/2" subject that was really only a 2/1 in public records....so they were giving full value in the appraisal to non-permitted square footage! I caught this reviewing the title records on the subject. Had I lent on that and my borrower defaulted, I may have had to take back what was really a 2/1 (with non-permitted work making it a 3/2) and had a much lower LTV than I thought I had. These are the type of small details I want to keep learning about to further mitigate my risks. These are the types of details I would like to see in educational materials (but they often do not have this level of detail). I'm amazed at small note investors that lend all around the country in these far away states and often on rural property. How can they feel comfortable with the collateral? I have recently thought about getting appraisal reviews from an independent 3rd party appraiser hired by me on the trust deeds I am considering funding if I have any doubts about the neighborhood or appraisal. What is more difficult to get when you are lending on non local property you can't see, is detail on the physical condition. Often the appraisal doesn't give you a lot on this, it's more based on value. A lot of times comps can be used that are in much better shape.

I think market timing is also important in trust deed lending. You have to know local market conditions. A major price slide in values can put your principle at serious risk even if you started out with a conservative LTV.

The 2 biggest keys for me so far are: 1. Getting a really solid valuation and 2. Having a low LTV. If I get those two things right at the onset I should be ahead of the game in worst case getting my principle back if things go south.

Thanks for the responses.  I always learn so much more about stories of deals where investors lost money vs. their successes.  People always like to talk about their successes but rarely about their losses.    I like materials that talk about examples of deals gone bad, what happened, what could have been done to prevent it, etc...  There is a lot that can go wrong with lending on real estate.  So far in it looks like the PPR, Papersource, Dvorken, Gordon Moss stuff might be good for me to look at.  I really liked the George Coats book, I just wish someone would update that book since it's so dated.    

I have been doing hard money lending for a few years though hard money brokers which source and set up the loans for me to fund. I have not gone out and purchased any existing notes yet, I have just funded new loans. What are the best education materials to further my knowledge? Materials with a lot of DETAIL on all the due diligence that has to be done, everything that can go wrong, examples of what has gone wrong, details on making sure all the paperwork is bullet proof, etc... I'm more interested in materials that focus on the note investing side of it, not as much note brokering. Since I'm doing most of my HML in CA, I read the George Coats book "Smart Trust Deed Investing in California" which had some good detail but is an older book (1991). I want to keep furthering my education so I can mitigate my risks as much as possible on these investments I'm making. Thanks for your suggestions!

Thanks Dion.  Rehabber did not want to use another escrow company I asked about that.  So I passed on it.  Seems like that is non-arms length.