BiggerPockets

Building a Pipeline

Friday, August 26

Building a pipeline is a great way to have a consistent stream of notes to buy.

I have an investor that buys land subdivides, then sells at a profit.  He will carry the paper and then turn around sell the notes to me (at a discount of course!) in order to quickly realize his profits.  He then turns around and buys more land (to subdivide, sell with owner finance, etc.).  Nice formula.

We have a relationship that goes back 3 years now.  I have even coached him up so that his notes have all the features & terms that I want.  We have closed 11 deals now, and he just e-mailed me with 3 new deals.  The best part?  He automatically includes a discount to me!  

My average yield on each deal is in the 30% range.  Another great feature is that these notes are small, they typically range from $4000 to $15,000.  With this in mind I always have enough liquidity in my Roth IRA to buy these notes.

So, be sure to get out there and build your pipelines.  Be a consistent performer/closer, and you'll be sure to have note sellers contacting you whenever they are looking for cash! 

The Value of a Good Note Broker

Thursday, June 30

So it's been a while since I last posted, and for good reason:  I've been too busy closing note deals!  In the last 3 months I've closed 12 note deals, 9 of which have come from Note Broker, BP member, and business partner Marc Faulkner.

Marc essentially allows me to focus on my day job, which is running my physical therapy practice.  At night I can review all documentation and decide which deals I want to go with.

As a side note, Marc does NOT do my due diligence; that is up to me.  He simply provides me with the connection, and the information I request.

So my latest deal from Marc is a 3-note package; the seller actually had 6 notes but I was able to cherry-pick the 3 I liked the best.  She was a motivated seller in Arizona that I wouldn't have otherwise come across.

I was able to buy all 3 notes at 72% of remaining UPB.  These were all strong mobile home notes in that they had plenty of seasoning & are all close to maturity.  The "longest" note has 51 remaining payments.  

My respective yields will be 46.3%, 36.7% and 27.4%.  Not bad considering that all 3 will be held inside of my self-directed Roth IRA. 

The Type of Seller Finance Deal to Avoid

Wednesday, March 23

I just got done e-mailing a note seller who contacted me about a note he had for sale.  We exchanged 2 e-mails, and after the 2nd e-mail I knew this was going to be a "pass."

Our exchange:

Seller:  Here's the information you requested about the note for sale.  Please let me know if you have any other questions.

Me:  OK.  It appears that he only put $5000 down ($180,000 sales price vs. $175,000 1st TD)?  Do you have a copy of the appraisal?  Do you have a copy of the payor's credit report?

Seller:  He paid $25,000 outside of escrow in order to keep his tax basis down.  I never pulled credit, but he's been current and pays like clockwork.  We never ordered an appraisal.

Me:  That's probably information you shouldn't be airing out in public.  Thanks anyways and good luck with the sale.

Buying a Note Within Your Self-Directed-IRA

Friday, March 18

So I've had a few members here on BP ask me about buying notes with a Self-Directed IRA (SD-IRA).  I will go over buying a promissory note, secured by real estate, with Equity Trust (my current SD-IRA custodian).  Here are the steps:

1.  Go to www.trustetc.com

2.  Click on "Client Forms" on the LEFT Menu.

3.  On the "Buy Asset" Menu, click on "Invest in Promissory Notes, Mortgages, Deeds of Trust, or other types of Loans".  A Promissory Note DOI (Direction of Investment) form will pop up in a new window.

4.  Page 1 is the Cover Sheet.  Skip to Page 2.

5.  Section 1 is self-explanatory.  In Section 2 I normally choose Option 2.

6.  For Section 3, just be sure your titling is correct.  The entity buying the note is "Equity Trust Company, Custodian For Benefit Of (Your Name) IRA Account #XXXXX."  In my case, it reads "Equity Trust Company, Cust. FBO Loc Rao Roth IRA Account #12345."  As you can see, I've shortened "Custodian" into "Cust." and "For Benefit Of" into FBO, and I've distinguished that my IRA is a Roth IRA.

7.  For Section 4, the answer is typically "No", as the only documents you will need to send to Equity Trust will be the Purchase Agreement (signed by you), the Original Note, and the Assignment of Note (signed and notarized by the seller).

8.  (Section 5 is self-explanatory).

9.  Section 6 has been a big pain in the @ss.  Even though technically you are NOT lending money, in Equity Trust's eyes as the note-holder to be, you are "owning" money lent to the payor/borrower.  So, fill this in with the payor's information.  I had 4 deals delayed because of this section.

10.  Click "Buying an Existing Note" in Section 7.

11.  Section 8 is redundant, but go ahead and fill in "Yes" and write "I am buying the note at a discount because I am an investor" in the space provided.

12.  In Section 9, everything is self-explanatory except for "Total # of Payments" and "Date of 1st Payment" - fill this in as it applies to YOU.  For example, if you are buying a 48 payment note that originated 6 months ago, the "Total # of Payments" is 42, not 48, and the "Date of 1st Payment" is the 1st payment YOU are collecting, not the 1st payment the payor made.

13.  Sections 10 & 11 should be easy to fill in.  Ignore Section 12, as we would NEVER invest in unsecured notes!

There you have it. Now all you have to do is find a good note, buy it, and sit back and watch the monthly payments come in!

 I hope this proves to be helpful.

BP's "Good Note" Sold for a 73.9% Yield!

Thursday, February 24

A couple of months ago I wrote about the "Good Note" I found and bought off of BP.  Well, I just sold it for a 73.9% yield.  Here are the numbers.

I (actually, my Roth IRA) purchased 57 payments of $287.23 for a 19.6% yield ($10,600).

I collected the January and February 2011 payments of $287.23.  I then sold then remaining 55 payments to my aunt, who just had a 1.0% yield (yuck!) CD mature, at a 12% yield to her.

So, here are the numbers:

My Roth IRA paid $10,600 for this note.

My Roth IRA collected $574.46 in payments.

My Roth IRA collected $12,105.94 from my aunt for the remaining 55 payments.

In 3 months my Roth IRA made ($12,105.94 + $574.46 = $12,680.40) - $10,600 = $2080.40.

Let's calculate for yield (to simplify I added the sum collected to get my FV.  I know this is "sloppy" by most note investors' standards but I am trying to keep it simple):

N = 3 months

PV = -$10,600

PMT = 0

FV = $12,680.40

Y = 73.9%

My aunt is quite happy that she'll be making 12% on her money without really having to think or work.  In fact, I think I just found another investor.

Also, because I found this note on BiggerPockets, I made a donation to the site.  If you find BP to be of value, I would encourage you to do the same!  Thanks Josh!

Snowballing Your Money

Tuesday, February 15

I wrote this "strategy" to a fellow BP member, and I thought why not share it with everyone on BP?

So, the concept is Snowballing Your Money.  And here is the basic outline:

1.  Set up a self-directed Roth IRA (remember, your contributions to your Roth IRA are with after-tax money.  Whatever you can grow it to is all yours to keep).  If you make too much money, a self-directed IRA or 401(k) is fine.

2.  Pay yourself $416.66 per month.  Since the Roth IRA's annual contribution limit is $5000, $5000 divided by 12 months is $416.66 per month.

3.  After a while you should have some working capital.  Let's say you have $25,000.  You can buy a note that looks like this:

N = 120

I = 7.0%

PV = $30,000

PMT = $348.33

at a 12.0% yield for $24,278.46.

Now your Roth IRA will grow by $764.99 ($416.66 + $348.33) per month.

4.  After 24 months your Roth IRA will have an additional $18,359.76 to work with.  You might say buy a note that looks like this:

N = 60 

I = 6.0%

PV = $20,000

PMT = $386.66

at a 12.0% yield for $17,382.14.

Now your Roth IRA will grow by $1151.65 ($764.99 + $386.66) per month.

See where this is going?

And remember, because it is a Roth IRA, you have already paid your taxes, so whatever you grow your Roth IRA to, is ALL YOURS, TAX-FREE.

Just imagine what your Roth IRA will look like once you are getting paid 10 times per month.  20 times per month.  50, 100...