- Hey guys, this is Toby Mathis, and I'm joined today by Bill Mencarow who is the only guy I talk to about notes. He runs a investment group, which is an educational
group and a great platform that deals with this area. And today all we're going to talk about is building wealth with note investing. It's one area of investing that a lot of people
don't know anything about. And so we're going to make
sure you know about it. So first off, Bill,
thank you for being here. - Thank you, Toby. - Yeah, and second off, what is note investing and why
should somebody consider it? - Well, it's about the
only investment I know of where you can decide what interest rate you would like on your money. - That's interesting. That's a good way to put it. - (chuckles) And it's a secured investment unlike a lot of other investments. So what is it? Real estate note, people
call 'em trust deeds, mortgages, contracts
for deed in some states. It's a legal document created when somebody sells a property and lets the buyer purchase it without involving conventional lenders. Instead, very briefly, the
buyer pays the property seller in installment payments over time for the amount of the
purchase price plus interest less any down payment that was made. Just to give you a simple example, let's take a $300,000 single family house. Somebody is selling their home. And buyer comes, and it's free and clear, or it's got a fairly low balance that can be paid off on the mortgage. So $300,000 house. Buyer comes along, gives a
20% down payment, $60,000. Balance is $240,000. Now normally they would go to a bank or some other lender and get that cash. Well, in this case, the
seller of the property says, no, I will take back a note. It'll be 9% interest, 15 years, and the property buyer
will then pay the seller instead of the bank. Pays the seller every month in this case about $2,400 a month. And the note is held
by the property seller, and it's secured by a
lien on the property. So if there's any defaults or anything, ultimately the seller
could get the house back. And that's in a nutshell
what a real estate note is. - And so somebody's... So, for example, when you're teaching and you're teaching people
how to invest in notes, they might go and buy
that note from that owner, or that owner may say,
"Hey, you know what? "I want some more cash. "I'd like the cash in my pocket." And they'll go sell that note similar to what the banks do. I mean, the banks sell
all their mortgages too. They securitize 'em, right? So this is just private transaction. And is that accurate? Is that what they're doing? - Oh yeah, it's a negotiable instrument. You know, the person
who takes back the note when they sell their home
and getting $2,400 a month might someday decide, well,
you know, I need more cash for whatever reason, or
I'd like to take a trip around the world, or whatever it might be. They'd like a lump sum of cash. So this note is a negotiable instrument, and they can sell it to someone
else and get cash for it. They sell it at a discount because, number one, a lot of the payments have already been made and,
you know, they might have to sell it at a different
interest rate or something. But no, that's certainly done. The notes, I should say some may say, "Oh, 9% that's high for these days." Although we are getting close to that, it's for conventional interest rates. But the seller carryback
notes, private notes, whatever you want to call
'em, usually, quite often, almost all the time, carry
a higher interest rate than a conventional loan. And the pros for the
seller of the property who carries back this note, they can get full price for their property or even more sometimes. You know, there's an old
saying in real estate. You can have price or
you could have terms, but you can't have both. You'll get a higher return. The property seller
can get a higher return compared to other invest
investments, higher interest rate. There's no waiting or wondering if the buyer is going to
qualify for a conventional loan. You're quicker closing, getting a substantial monthly income, secured by the house
that if it's your home, you know that house and you
know how valuable it is, and it's secured by that
house that you might, God forbid, but if there's
a default, you get it back. And as you alluded to,
most people don't know that you can sell that note, or you can borrow against it from a bank. You can sell part of it. You can sell the next
x number of payments, or you can sell half the note. You know, you can do all
sorts of things with it. You can trade it. You could trade it for real estate, for a down payment on some real estate or a car or, you know, whatever. As I say, to use a legal term,
it's a negotiable instrument. And there's a lot more
you can do with notes. It's a tremendously flexible thing. If we have time, we'll go into
one or two of those things. - No, that's perfect because
I think you laid it out. Now a carryback, like if I'm the owner and I'm selling a property, I'm carrying back and I'm
holding a piece of paper that's going to give me an income stream, I'm doing that because it's
spreading the tax hit out. I can elect to treat it
as an installment sale under 453 and spread
it out over many years, which means I don't have to pay tax on that sale all in one shot like if I sold it and
there was bank financing. Here I actually have this thing. And I've done this, by the way, actually on behalf of clients
that had carryback notes. What's the typical discount on that? So let's say that I have $100,000 note that's getting $2,000 a month. I don't know, let's just
say it's 9% interest. I don't know if the numbers actually work, but let's just say you had that note. Would I sell that to somebody, and if so, at what discount is the market usually going to give? - It depends, of course, on, again, the investor wants to
determine what interest rate they're going to get on their investment. So if it's let's say a $100,000 note, you know, depending on how
many payments have been made, but let's say you know,
only a couple payments, so it's still bounce of $100,000. You'll probably get somewhere... It depends of course,
on the interest rate. You said a 9% note. There wouldn't be a whole
lot of discount on that. There are investors out
there who are looking to buy a note on the
secondary market, if you will, not a second note, but, you
know, on a reselling of a note. Maybe 85,000 you might end up with because the way it works, as
you, Toby, know very well, but notes are sold at a discount. And so here, give me example. I wrote down some numbers here. This $300,000 house that I
mentioned before, $60,000 down, $240,000 balance, written at 15 years, about 2,400 bucks a month
that the payer is paying. So the seller wants to sell that note, and the interest rate that
the investor wants is 12%. Well, you plug that into
a financial calculator. That comes to $200,000. So the investor pays
200,000 for that note. Getting $2,400 a month, if you
plug that in the calculator, that's a 12% return on your money. So, the investor who buys that note has converted a 9% note to
a 12% interest rate note, yet the terms, the note payer's
interest rate, still 9%. The monthly payment's still the same. The number of payments doesn't change. Nothing changes for the note payer itself. It's just by buying
the note at a discount, you increase your return on your money from 9% in this case to 12%. It's not usury because the payer is not
paying anything more. Payer may not not even
know the note has been sold until he gets a notice, so we'll make your
payments to Mr. Smith now instead of Mr. Jones. So it's a kind of a beautiful thing. And as I say, there's so much. What I like about it,
there's so much you can do when you own a note, and
that's just one example. - Where do you find them? So if I'm an investor, that
sounds really attractive to me 'cause like I'm looking at
it going, hey, right now, hey, money market might get you 5%, some CDs gets you 5%. But you're saying, hey, I'm willing to take a little more risk. And I know the market's
going nuts right now with the raising of the interest rates. Are there any of these out there? And if so, where do I find them? - Oh, there are a lot of 'em out there, and there are a lot
more being created now. You know, it's common sense as conventional mortgage
interest rates go up, fewer people can qualify to get a loan. Every time we have an
uptick in interest rates, there's a smaller and smaller pool of potential property buyers. So when a property seller
realizes, hey, you know, a year or so ago I could have
sold this house like that, but now it's sitting on
the market, what do I do? Well, people can't qualify for a loan, but maybe I'll offer to hold a note and in other words be the bank. Won't be a bank involved. It'll just be me selling the property and holding that note and
getting the monthly income. And once you offer what
they call seller financing, again, a word I don't like to use 'cause regulators love the word financing. It's not financing in my opinion. Anyway, when you have a
seller carryback situation, properties sell a lot faster, and they can sell for full price 'cause again, you get
terms or you get price, but you don't get both. But you asked where to find 'em. - [Toby] Yeah. - Well, on our website, we have a link to our Facebook group, and we have close to 6,000
members of our Facebook group. And we get pretty much every day people posting notes for sale. And we don't get involved
in the transactions. It's just a bulletin board, and people, they put their
contact information in. We're not involved. You know, you see a note
that might look interesting, you contact the seller directly. So that's papersourceonline.com. You go to the tab, Other Resources, and click on Facebook group. Where to find them, lots of places. If you're a member of a
Real Estate Investors Club or if there's one in your town, start going to that, talking
to real estate investors. These guys quite often have
notes that they want to sell. Think about who in your life do you think that you can think of would see notes on somewhat of a regular basis? Attorneys, accountants,
title company officials, real estate brokers, bank trust officers, financial planners, cultivate
relationships with them. Let 'em know that you buy notes. You might be interested. Some of 'em can accept a finder's fee. Others ethically cannot. You'll have to work that out with them. You know, people do other ways. They send out postcards, they put in ads, and that's one way to do it. You know, it costs money, but I know people are
successful doing that as well. It's a lot of work, and
there is an expense. I prefer the networking and the online like our Paper Source Facebook group. - Let me do a shameless plug for you because Paper Source
Online is a great place to learn about note investing too 'cause I know you have the
Paper Source University. We also have a bunch of
courses that you've created inside of our Infinity Investing Portal, which is a great place to learn about what kind of investments. And since we're going to learn about this, what could you tell people to avoid? So if somebody hears
this video and they say, "Hey, you know what, "I'm really interested in going
out and buying some notes," there's probably some notes
that you say don't touch with the 10 foot pole. And then there's notes that you say these are the ones you consider. What's an easy rule to follow for somebody who's out there thinking
about getting involved in note investing? - Okay, I would suggest several things, particularly if you're new to this. I would get yourself a mentor or somebody who is experienced in notes. Maybe it's a friend of yours. Maybe it's, you know... We'll be happy to help you at no charge. You know, just send me an email, and you know, I can't hold
your hand at every moment, but I'm happy to give you some advice. Specifically for somebody starting out, I would only stick with
first position notes. I wouldn't go to seconds or certainly not anything lower than that. I'd look for the type of property. I would stick with single family houses unless you really know
that you can handle... I mean, the way I look at it is would I want to own this property if I had to foreclose? So, you know, what am I
going to do with a factory? I don't know anything about factories. So I don't buy notes on
factories or shopping centers. I buy notes on single
family houses, on farmland, you know, some things that I
personally know what to do with if I had to take possession. So think about that. Think about the down payment. What was the down payment that was made? If it's less than 15 or 20%, you know, that's a scary situation because the property value may drop, and you might find yourself underwater. You don't want the property back. So, the higher the down
payment, the better. Notes that have property that, you know, you'll see this a lot with mobile homes, there'd no money down or $1,000 down. Those usually default. So I stay away from those. - Unless you want them, right? Unless you're like, yeah,
I would love to own that. - Exactly, that's what I'm saying. Unless you really want to own it. Like, okay, non-performing notes, which we're not going to
get into right now I guess, but I don't particularly think we need to, but that's the kind of thing
that, yeah, you got to look at. I'm probably going to end up
owning this property very likely. But ultimately the value
of a real estate note depends upon the economic conditions that support the value of the property. And say that again. The value of the note, there's a lot of factors,
but the value of a note really depends on the economic condition that support the value of the property. For example, an owner-occupied
single family house in a good neighborhood, in an area with a diversified
long-term stable economy is about the best collateral you can get. So that's what I look at. Amortized note is more valuable
than one with a balloon 'cause often the balloons aren't paid, and they have to, you know- - You're going to end with the product. - Yeah, exactly. - And, Bill, do you have to foreclose? Like so somebody buys the note, and the borrower starts to default. Is it all on you, or are there
services that you could use to go do the foreclosure
or start the process, or is there anybody that can
manage notes, things like that? - Yeah, they can. You don't have to go to foreclosure. I don't like foreclosure. I've been investing in
notes since the 80s. I've never foreclosed. - You negotiated with them. You negotiated with them.
- Absolutely. First of all, I don't
want to throw somebody out of their house. - The banks did it in 2007 and eight. They just en mass just
started tossing people out. Would it have been
better if the government hadn't gotten involved and
started paying the banks off? Would've been better if we
let a bunch of note investors go buy those mortgages and negotiate with the folks that were the borrowers? - Well, I'll go back to
how you started that. It's always better if the
government isn't involved in anything, whatever it is. So yeah, absolutely. That was a horrible, horrible time. And, you know, it put
banks in back into business that shouldn't be in the
business today as you... I mean, the goal is, now I'm getting on my high horse here, but the goal is to shut
down all smaller banks, so that all we have are the
Chase Manhattans of the world, the giant mega corporation banks. That's what they're trying to do and cut out the small community banks. And then of course, when we get central bank digital currency and there's no paper money left, and the government,
like in communist China where the government controls your money, and if they don't like your opinions, they cut off your money
and you can't travel and you can't get a loan
and things like that. In my humble opinion, that's the direction that this present US government wants to go in. But we can (indistinct).
- We can combat that. We can combat that by doing
business with each other, right? And that's what it seems like. It seems like you're
saying, hey, you know what, when you sell a house, you
don't need to go to the bank. Owner carries it back. And then if he has an
outlet or she has an outlet, then they can sell it to another investor if they need the money. Otherwise they just
take the income stream. But like you said, like I
could go negotiate with you. Let's say you had a note. I don't need the whole thing. I might just say, hey, I want
a part of the income stream. Maybe I'm doing half. Maybe you say, hey, I
need $50,000 of that. You have a $240,000 note. Is it uncommon for someone to say, "Hey, I just need a little bit, "and I'll sell you this
portion of the income stream?" - Oh yeah, yeah. It's very good point, Toby. You can sell it all. You can sell part of it. You can sell half the payment. The investor gets half the payment. You get the other half of the payment. You can sell the investor in
the next five years of payments for a lump sum of money
at a lower interest rate than the face amount that
you paid for the note, and that can be profitable to you. There's all sorts of
different ways to do it. Take an example of this note, the $240,000 note on the
$300,000 house written in 9%. You bought it at... You get a 12% return because
you bought it at a discount. You can sell that note to
another investor for a 7% yield. And I just did the figures
before we got on here. If you sold that note that
you bought for $200,000 because you bought it at a discount as notes are sold at a discount, and it's a face rate of 9%, well, you sell it to an investor and say, okay, how'd you like 7% on your money? A lot better you can get
anywhere else secured by a single family house, great. Okay, you sell that to him for a 7% yield. Well, how much is he paying
for that $2,400 a month for 15 years at a 7% yield? He or she pays $270,000 for that note. What did you pay for the note? $200,000. - And the IRS would say
that's capital gains. It's whatever that face value goes up is capital gains I believe. And you just made nice little
profit negotiating some notes. Is that what your people do, Bill? - Oh yeah, people do that all the time. Well, I know we've just got
a few minutes left, Toby, but I don't want to skip over one, what I call the world's
greatest retirement plan. It's on the same subject of buying and selling and reselling notes. Take this 15 year note
that we're dealing with, this 200 and whatever,
$40,000 note face value. So let's say you bought that for $200,000. Take the next... This takes a financial calculator, and I've worked this out before this. If you sell the next nine
years of payments of that note to a private investor at a
6% return on their money, you'd sell it for $200,000,
exactly what you paid for it. After nine years, the investor bought
nine years of payments, after the next nine years, they're done. They're done, they're out of it. What happens to the rest of the payments? It's a 15 year note. What happens to those
six years of payments? You get 'em, you get 'em back. So, you get $2,400 each
month for the next six years. If you do that 10 times, after the nine years, you'd have almost
$300,000 a year coming in each time with nothing invested. - And people are doing this
in their retirement plans. People are doing this 'cause people are... I know what they're
already going to say like, where do I get the money if
I'm not sitting on money? You might be sitting on money. These are unrelated parties. You could do private notes
inside of a self-directed IRA or self-trust deed 401k. I'm sure you have folks
doing it in their Roths where they're never
going to pay tax anyway. So like they can go ahead and flip a whole bunch of these notes, and they don't have to
worry about a tax hit. - [Bill] Exactly right, exactly right. - No, that seems ingenious, and it seems pretty obvious
like this is something somebody might want to be doing. It's just I don't think there's
a lot of information at it 'cause there's these behemoths that want to be dominating
the lending markets. You got Visa. You got MasterCard. I always joke like, who's the
servant in the MasterCard? Like they don't even hide it like. Like you become their servant when you're borrowing from these guys. But there's these huge institutions that make their money being the lender. And a lot of people don't realize I could just go to
somebody in my community. Maybe it's somebody that you know that you're not related to, or it could even be a sibling you could actually do
these transactions with in a retirement plan. And they say instead of going to the bank, let me be your lender, or you just go out and you
start investing in notes. And a lot of people don't
realize it's literally that easy. Is that a fair statement? - Oh yeah, this is not rockets... What do they say? It's not rocket science.
- Rocket science. - Well, no, there's another one. Oh, it's not rocket surgery. It's not brain science. (Toby laughs) But, no, I mean nobody
has to be embarrassed. Nobody's born learning this stuff. We have on our website, I created a... I took my three day intro course
on notes and boiled it down to seven fairly lengthy digital sessions, and it's free. I just made it free, and you can sign up for
it at Paper Source Online. And it's an introduction of
notes to give you an idea, is this something I
really am interested in? Do I want to do this? You know, yeah, it takes some effort, and you got to learn some terms that you may not be familiar with, but the rewards can be tremendous. You know, I'm not a guy who says, oh, you know, you're going to
make a million dollars a year in your pajamas and all that stuff. I, you know, don't like
a lot of that stuff. - You and me both. - Yeah, exactly right. I think that's why we get along so well because we both have the same attitude about that kind of stuff, very good. But no, it can be a tremendous thing. And as you pointed out, Toby, not many people know about it. And that's something people I think at least take the
e-course and look into it. And you might say, oh, this is not for me. It's not for everybody
you know, but check. - Check it out. - A little bit of education never hurts. And you can chew gum and
walk at the same time. You can learn about different investments. And this is one of those areas that I would recommend
people really get to know because the more you
get to know about notes, it's going to help you in other ways. And when you're going in and negotiating, if you're ever buying a
home or something like that, all of a sudden you're going
to realize, wait a second, maybe I don't have to
jump through all the hoops with the bank and go
through their underwriting and deal what this person, that person, and a mountain paperwork this
thick and everything else. Maybe I can go to a private individual, and I find a group where there's people that are like, yeah, I would
love to be be your lender. I know there's still Dodd-Frank, and there's still some rules that these guys have to follow, especially if it's a primary residence, but everybody's aware of the rules, and everybody's aware of what's necessary. And all of a sudden, it's so much easier. I've done this myself personally, especially when I was growing
my portfolio and levering up. I would look for somebody
that I knew and say, "Hey, I don't want to
partner on this deal, "but I wouldn't mind having
if you want a decent return, "then we can negotiate something
that you're going to get." It's better than what the
bank's going to offer, but there's not as many fees, and there's not as many
of these crazy costs that they lump onto these things. And like you said, so much faster, and we're keeping the bank out of it. The bank doesn't... They're making profit on these things. Why don't we just keep the
profit to our private community and help your neighbor out. Bill, this has been fantastic. I'm going to tell people
go to Paper Source Online. I'll put it in the show notes. And I can't recommend highly enough to go to individual like Bill who is not selling a course. He's not trying to get you to
do this, that, or the other. I've never figured out
how Bill makes his money. Other than that he's a
really good investor, and he is got a really good community. And I know you do an event because I get to come speak
at it every year in Vegas, and you have a really, really
good group of professionals that are part of this organization that are part of the Paper Source, and I get to meet 'em all the time. I got a bunch of his
clients, great people. So, Bill, thank you for
sharing your wisdom today. And is there anything else
you want to throw in there? - You know, we covered a lot, Toby. There's actually a lot more we could say. I've got notes here. I think we covered
(Toby laughs) a good part of 'em. I'd say, again, it's something
that people should look at. Oh, okay, one thing to cover,
the three Ps very quickly. You look at the paper,
you look at the property, you look at the payer
before you buy a note. The payer's credit history, employment. I heard somebody say once,
"Check their car out, "see what the condition of their car is." Is there a bunch of trash inside of it? And also look at the radio to
see what stations it's set on. And if it's set on something you think is crazy, crazy music, don't buy the note or don't
rent to 'em anyway. (laughs) So you got the paper,
the payer, the property,. You look at all those things, and I'll make sure the paper's in order. So, you know, that's again, would I want to own this property that's secured by the note? That's key.
- Perfect. - You know, we've gone
all over those things. Again, thank you again
for the opportunity. It's papersourceonline.com, and if people want to
know what my wife and I do in our spare time, we
do a talk radio program on a commercial FM station
in the Texas Hill country. And you can go to
firstcoupleoftexasradio.com, and you might find some
interesting things. - (laughs) Perfect, Bill. I know you have a diverse background. That's awesome, but in the meantime, everybody go to that Paper Source Online and go learn about note investing and see if it's something that will help you build up your wealth. A lot of people are always willing to help you when you
have a big pile of money. We want to help you get
the big pile of money. And, Bill, you've been
really, really helpful in that over the years, helping so many people, and I hear about it from
your clients all the time. So thank you for joining us. And, guys, go check it out.
