Thoughts from the Desk of Bob Repass…
This month’s issue of The Buyline marks the 3 year Anniversary since we rolled it out under the NoteSchool, Colonial Funding Group and Colonial Capital Management banner. Seems like just yesterday, doesn’t it?
Hopefully you will agree that we have improved the quality and content from one month to the next. This effort of continually improving reminds me of the Japanese business philosophy of continuous improvement of working practices and process efficiency known as Kaizen.
The Japanese word kaizen simply means “change for the better” and refers to activities that continuously improve all functions and involve all levels of employees. That is our goal here at Colonial to maintain a culture of continuous improvement where all our employees are actively engaged in improving the company.
For example, earlier this year I had team members from across our organization prepare a SWOT analysis on our NotesDirect online trading platform. For those of you not familiar with a SWOT analysis; this is a process that identifies the strengths, weaknesses, opportunities and threats to an organization, a product or a service.
This resulted in the creation of a strategic plan for 2017 on improvements and tactics we can implement, both from an operational standpoint, as well as a marketing standpoint. You will be seeing these ideas come to life throughout this year.
Continually combining the collective talents within our company allows us to create a powerful engine for improvement.
Stay up to Speed with Eddie
When You Feel Like Giving Up… Don’t
by Eddie Speed
Back in July of 1982, Martha and I had just gotten married and gone to Disney World for our honeymoon. As soon as we got back to Mississippi we packed a moving van, pulled up stakes, and headed to the wild frontier of Dallas, Texas to start our note investment business.
We had scrimped and saved to stash away a few thousand dollars as seed money to live on. Martha had quit her steady job as a school teacher and I resigned from my job as a state horse inspector. And now we were opening what I guess you could call an independent, remote, very-loosely-affiliated outpost of my father-in-law’s note investing business.
It was a decision that took equal parts of courage and optimism, with a pinch of craziness thrown in. I had learned the note business from my father-in-law for two years (without pay) and Martha and I committed to make a go of it. It was a dream based on knowledge wrapped in determination dipped in youthful exuberance.
Of course, the note industry back then was still in its infancy, and was nothing of the scope it is now. But I believed in the future of the note business, and far more importantly, Martha and I believed in each other.
I wish I could say that thanks to my charm, good looks, and razor-sharp intellect we started right off making money hand over fist. But it was just the opposite. Those early months were some tough sleddin’. We knew we had to put money into advertising to get our name out there. I’ve always believed if you’re in business without advertising then you’re fishing without a worm on the hook. And I had to overcome the general mindset of the time which was: “Why would anybody go to a private investor vs. the big banks?” The answer is the big banks don’t have the tolerance for this type of note.
Entrepreneurship has a definite life cycle. In the later stages you have the freedom to focus on areas of the business that you’re best at and enjoy the most. But in the early stages you do everything. It’s hard, and it’s not very fun, but when you have to do it all yourself it’s the best way to learn every nook and cranny of the business.
Let me pause right here in the story to remind you that there were many times when Martha and I didn’t know if we were going to survive at this. We had no idea how all this was going to turn out. Month after month went by and our seed money got down below 10% of where we started. We felt blessed just to be able to pay the rent. I have to admit we were dang scared. Even so, I was determined to keep going.
Ever hear of Zig Ziglar’s three A’s? “It’s your Attitude, not your Aptitude, that determines your Altitude.” I admit I was short on lots of things, but I’ve never been short on attitude!
Toward the end of that first year, during the holiday season, a guy came walking into our office carrying a box. When I first saw him I had no idea that this would be a major turning point in our journey. He had seen one of our ads and came unannounced to our office.
He had owner-financed some condos and was trying to find a buyer to resell about twenty notes stuffed in his box. He had talked to a lot of people who didn’t have any idea how to help him. Even though I was just a rookie, I was able to connect him with the right buyers. I brokered all his notes, and the commissions enabled Martha and me to continue our entrepreneurial dream for another six months!
I’m sharing all this because you have to grit your teeth to make it as an entrepreneur, plus have a high tolerance for financial stress. While other people would see our old jobs teaching school and inspecting horses (and the paychecks that came with them) as a lifeline, as an entrepreneur I saw them as a chain that was holding us back.
I’ve had so many nail-biter moments over the last 37 years I’m surprised I have any fingers left. I can’t even remember all the twists and turns along the way. And I sure couldn’t have predicted them all! I learned that just because a certain strategy worked once it may not work exactly the same way the next time. We stayed flexible and adaptable, and kept learning.
Eleanor Roosevelt and her husband Franklin helped guide America through some of the toughest times in our nation’s history, which makes this quote of hers one of my favorites: “You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, ‘I have lived through this horror. I can take the next thing that comes along.’ You must do the thing you think you cannot do.”
I’ll close this story with another of her quotes that should be posted on your desk so you see it every day: “The future belongs to those who believe in the beauty of their dreams.”
Small Investors Can Now Provide Turnkey Properties Nationwide
by Eddie Speed
Large real estate investment firms have been riding a large wave of opportunity and profit margins by providing turnkey rental investment properties to out of town investors. We recognized that small investors failed to pursue this opportunity because they didn’t have all of the necessary components. This inefficiency led us to create the solutions that will help investors purchasing 2 to 100 properties a year provide turnkey investment properties with the efficiency and scalability of the large investment firms.
For the past several years, traditional stock, bond and mutual fund investors have been seeking alternative investments for their discretionary and retirement funds. A high percentage of these investors turned their focus toward rental property; more specifically, turnkey rental property.
Investors prefer turnkey properties because all of the hard work has already been done. The property has been renovated to rent-ready condition, and a qualified tenant is already occupying the property. With property management already in place, these investors can focus simply on the numbers and purchase properties nationwide.
Data from numerous real estate and investment sources indicate that this trend will likely continue into the foreseeable future.
- 25% of investors chose real estate as the best investment for the next 10 years
- Since 2010 renters increased from 37 million to over 43 million
- Investors shifted from west coast rental properties to rental properties in the Southeast and Midwest
- Markets with the highest cap rates on SFR are in the southeast and Midwest
These investors did not have the time, expertise or the inclination to purchase properties, renovate them and load them with a tenant rather they preferred to buy a rental property that was already rented and with management in place.
Large investment companies recognized three market inefficiencies that led them directly to specific types of properties in specific geographical areas. Once they identified the opportunity, these firms created the solutions to the inefficiencies. Their pioneering efforts in this area have attracted individual investors worldwide.
These three inefficiencies combine to create the perfect storm for turnkey rental investment property.
Bankrate.com Financial Security Index survey 2016 US Census Bureau, Housing vacancy Survey Auction.com Where have the investors gone DSNews 2/16
- Lack of financing
- Lower price band properties
- Wholesale versus retail pricing
Dodd-Frank rules and regulations have made it difficult if not impossible for some buyers to obtain financing. Although new, more recent changes with FHA and Fannie Mae have started to enable potential homeowners to once again qualify for financing, a survey by Bankrate.com indicated that 45% of non-homeowners say that finances keep them from buying.
Lack of financing hit the lower price band property buyers particularly hard because it costs a lender more money to create a loan than they could profit on it. By limiting the profit to 3-5% of the loan origination caused many lenders to simply stop lending on properties that are worth less than $60,000 resulting in lower homeownership opportunities for consumers in this segment of the market.
Another inefficiency is that smaller investors, lacking all of the components to provide turnkey rentals to national buyers, are selling properties using the comparable sales approach to value and therefor selling at wholesale prices. Larger firms that have all of the components in place are able to fill the strong demand for these properties at the full retail value by using the income approach to value.
Would you rather be selling wholesale or retail?
Retail of course. To be able to sell at retail pricing you have to provide all of the solutions, services and documentation that the large firms offer.
Once the large investment firms identified these inefficacies, they created solutions to exploit the opportunities. The turnkey business model involves five steps.
- Determine the right rental neighborhood
- Acquire the property
- Renovate the property to rent-ready code
- Professional Property Management
- Find turnkey rental property buyer
Large companies were able to induce vendors to create national networks, data solutions, and marketing platforms. This is what made the model scalable.
Large firms were now able to use data to determine the best rental markets in the country. They could acquire tens of thousands of homes in a single purchase from Fannie Mae and Freddie Mac. A national network of renovation companies could renovate the homes efficiently and get them up to code.
Having professional management is very important for the passive cash investor. The property management companies they use have national standards on tenant qualifications and online account access. National property management companies are able to qualify and place tenants into these homes while marketing-platforms targeted investors who were interested in or had already purchased rental properties in targeted areas.
A full marketing spectrum of direct mail, web presence and even mobile marketing are all easy platforms to utilize today. Combining those platforms with a proven lead source enables turnkey providers to build a scalable business model.
This proven model, while very profitable, is missing a key component that can make it even more profitable. This key component will also attract more investors to do more transactions.
The component that has been missing from the turnkey model, until now, is the ability to offer seller financing to the turnkey rental property investor. Adding seller financing in today’s financial market opens up the opportunity like never before.
What we have found is:
- Seller financing can be structured so that the net operating income (rent after expenses) can cover the debt service (monthly seller financed mortgage payment)
- Interest on the seller financed loans can be as low as 5%
- The term on the seller financed loans can be as short as 5 years
- The down payment by the borrower can be 10% to 50%
Passive rental property and IRA investors are extremely attracted to this model because:
- They don’t have to pay all cash, so they are able to purchase more assets
- The debt service is covered by the rent
- The short-term financing means that they will own the properties free and clear in a short period of time
This model works exceptionally well in the Midwest and Southeast where rental rates are very strong as compared to property values. Rental property investors seek out these same geographical areas because they offer the highest returns nationwide.
This property in Dayton Ohio shows comparable sales of $40,000. Three bedroom/two bath homes in this area rent for $750 per month. After taxes, insurance, management fees, the monthly net operating income is $459. The annual net operating income is $5508.
While a real estate agent placed the comparable sales value at $40,000, real estate investors today are utilizing the income approach to value. This approach to value is applied because of the market inefficiency of property valuation in the lower price band space.
This approach shows that an investors looking for a 10% return on investment, would pay $55,000 to receive $5,500 per year. Think of it this way: if a cash investor placed $55,000 into a moneymaking machine and it spit out $5,500 per year to that investor, his return on investment would be 10% per year.
Is 10% an acceptable return on a tenant occupied property? Absolutely. According to DSNews (2/16), the best rental market in the country is producing a 7.3% return!
If we apply seller financing for this investor, their cash on cash return will be even higher. In this example, the sales price was $55,000.
Seller financing is a real game changer in this investment vehicle. Traditional banks and other lenders are not active in this space and therefor a lending void is left in the market. At NoteSchool, our Executive Team has purchased over $2.5 Billion in seller financed notes over the past 34 years and our experience shows that when the banks say “no”, seller financing immediately fills that void.
Based upon the monthly NOI, if they put 50% down, we could offer to finance the balance at 6.25% for 6 years. This way the tenant is essentially paying for half of the purchase and the cash investor will own it free and clear in 6 years.
If the cash investor put less down, or wanted a longer term or different interest rate, we could certainly create a different loan to fit the transaction.
If the turnkey seller followed all of the 6 steps properly, they made an even better return. In this example, the turnkey seller acquired the property through purchasing a non-performing loan and receiving a deed in lieu of foreclosure. Once acquired, he renovated the property and was all in for $20,237.
The down payment of $27,500 provided by the cash investor covered the entire expense and about a $7,000 profit upfront. In addition, the turnkey seller receives a passive $459 per month for 72 months secured by the property!
Conclusion and Game Changer
The demand for turnkey rentals is very strong and every indicator shows that the trend is likely to continue into the foreseeable future. The time to make this a part of your overall investment plans is now. The best investment is fulfilling a demand by creating solutions to market inefficiencies.
This turnkey model does not work on every property. It is best to apply the model and calculations before purchasing the property rather than after purchasing the property and trying to force it into this model.
Although seller financing is the perfect solution for lower price band properties, you do not have to use seller financing on every property. Third party financing works on more expensive properties and “all cash” works as well.
Always keep the end product in mind. If you will be providing a seller financed turnkey rental investment property, make sure that the projected numbers work for both you and the cash investor. If third party financing is available, run that scenario as well. A full cash option can always be added to a lower or higher price band transaction.
Although this model works anywhere, if you are going to build a scalable investment business out of it, focus on strong rental markets in the Midwest and Southeast. The monthly rent on the property should be greater than 1% of the after repaired property value. For example if the property is worth $55,000, the rent needs to exceed $550 per month for the turnkey model to work.
Anticipate investor questions by documenting everything: neighborhood rent reports, renovated items, inspection reports, tenant qualification paperwork and property management information. You investors will certainly want to see that information and having it all available will show that you professional.
NoteSchool, through its Turnkey Flipping Academy, has invested countless hours of strategic planning and was able to engage national vendors in all steps involved in providing turnkey rental properties to individual investors nationwide.
We have a vendor for neighborhood rental reports, access to discounted non-performing notes and REO’s, national property preservation and renovation, national turnkey cash buyer lead list with a complete marketing program, a national seller to follow up on your marketing leads, and even closing assistance for creating the seller financed note.
This vendor network gives individual investors the same access to national vendors that the large multi-million dollar firms. It is what allows the small investor to unlock this opportunity and build a scalable national business. It is a true game changer that levels the playing field.
For over 35 years, I have worked with real estate investors through both Colonial Funding Group and NoteSchool. That same foundation of innovation and industry leadership can be found in Colonial Capital Management, the Seller Finance Coalition and NoteSchool’s Turnkey Flipping Academy [TFA].
For more information, go to www.turnkeyflippingacademy.com
- Bankrate.com Financial Security Index survey 2016
- US Census Bureau, Housing vacancy Survey
- Auction.com Where have the investors gone
- DSNews 2/16
In The Spotlight
Remembering a Friend
On February 9th the note industry said good-bye to one of the giants of the business, Tom Reaves who passed away after a long battle with cancer. Tom and his son-in-law, David Campbell, began in 1996 to purchase, rehabilitate, rent, and sell manufactured homes, as well as offer homes for purchase under land contracts. In 1998, National Asset Advisors expanded into development of mobile home communities, and later entered the REO land contract business. Under Tom’s guidance, the company thrived, and has now expanded nationwide to include a real estate brokerage and mortgage lending/servicing arm.
At NoteExpo 2015, Tom was given the NoteSchool Lifetime Achievement Award for his commitment to the owner-finance home industry, recognized for “always remaining focused on doing the next right thing, his continual demonstration of high moral business standards, and for his visionary leadership and entrepreneurial spirit.” His longtime friend and business associate, Eddie Speed, who presented him with the award, said “Tom had such an impact on me. He was an example of how to conduct business ethically and always with honor and respect for others.”
Tom’s employees lauded him for his selfless spirit and caring attention, despite the medical challenges that he faced over the past two years.
“It is a rare gift for someone to be able to always place themselves behind others, to serve as a way of life – and that is exactly the example Tom set for all of us,” said friend and colleague Chris Cobbs. “He was caring and engaging, always more interested in what others had to say, the stories they told, and the things that were important to them.”
Tom made us all better and he will be truly missed.
Capital Markets Update
Destination Wealth. Are you clear for take-off?
By Ryan Parson
Last month I introduced you to the term “WealthCare.” Just like our health, which we value greatly, our wealth needs an annual check-up, too. We know check-ups are an important part of a clear, actionable plan to long-term success. However, sometimes it’s more difficult than it should be to get that plan off the ground and operating smoothly.
This month, we will focus on ways to make your wealth goals take off, by successfully overcoming adversity. I’ve made several analogies over the years to airline flights. Today, as chilly February weather settles in over much of the country, imagine how nice it would be to catch a flight bound for a warmer destination — even if for only a few days! Well, what applies to flying is also true with life and wealth goals.
Know your destination
Whenever you fly somewhere, you have a specific destination in mind, a place you are trying to get to. Now apply that to your wealth — where are you trying to “get to” with your wealth? It may be a place, or a position, or a numerical goal. Perhaps a new home, or early retirement. What is your ultimate wealth goal, your desired destination?
Now, with that goal in mind, what you will do to achieve these goals when you meet obstacles? There will always be challenges and hurdles that arise between you and your goals. How can you focus on reaching your destination, when all flights seemed to be cancelled, and you just can’t get off the ground?
We all know “stuff happens”: the taxi (or Uber) taking you to the airport arrives late; your luggage wheel falls off; your flight is delayed. Each of these things can create an obstacle in your journey, but not one is insurmountable in reaching your final destination.
To see above the horizon, you’ve got to lift off
The first step in achieving your goals is clear, but sometimes that initial lift-off is the most difficult thing to do! Remember, once you lift off, it’s always sunny up there ”above” the rain clouds and surface weather — where you can dare to dream , and push the otherwise limitless skyline.
The only way to deal with adversity is to push beyond it, and focus on your goals. This is the key difference between High Net Worth families, accredited investors, and others: they have the ability to imagine the horizon’s view from above the cloud line. It’s where your business, personal or wealth goals await you. That’s the only horizon High Net Worth families and accredited investors see, and a very common element of the families and investors we serve in the Mile Marker Club.
Bad weather is only a temporary setback
Remember, if you have an experienced crew on board and you know how to fly your plane, rain becomes a delay, not a show stopper. Storms are only temporary hindrances to reaching your destination. The same is true with the “dampers” on our wealth. Depending on where we are with our wealth and businesses, we will always face the “rain clouds” of adversity: a bad car accident, a business failing, a lost job or a poor investment choice.
Similar to the effect weather has on your flight, issues like turbulence will inevitably arise. Our wealth will always face disturbances that we can’t ignore, and that require our attention. It’s a simple truth to being successful with our wealth accumulation and preservation goals.
Bottom line: the ride will get a bit bumpy at times, but not disastrous if you know how to maneuver. The personal time we invest in our wealth education is a key distinction in knowing how to smooth out the bumps.
Take control — no autopilot allowed!
We all bear the risk of not living up to our potential to generate as much wealth as we are able. We live in what I’ll call a generous, but wealth-destroying world. Generous because many of us spend freely to achieve our dreams and life aspirations. We give generously to charities or to our children.
most message is this: take control. You must accumulate and protect your wealth, or others will undoubtedly try to do it for you —and nobody will ever be more interested in your wealth than you are. Take the lead yourself — for example, be mindful of last month’s WealthCare Plan Review Checklist, or someone else will be calling the shots, and piloting for you.
Don’t get in your own way
You wouldn’t think of trying to reverse engines and slow a jet cruising at 550 mph when you are flying your plane. So, if you’re sailing along at cruising altitude, don’t get in your own way! If all is going smoothly, enjoy your ride above the clouds.
That said, we still have to be cautious because for 94% of High Net Worth families, the wealth is gone by the 3rd generation. This can be prevented!
Every generation needs a clear flight plan to continue, if you so desire, the successful wealth goals you have achieved. Our constant focus is to educate you, and share with the next generation (as well as your circle of friends/family) the best way to enable them to stay “above the clouds” for many generations to come.
Smooth landings depend on a great crew
Every flight has a landing, but a good crew makes your flight smooth and successful. Consider the “ground crew,” who ensures technical details are in order and runways are clear for take-off. And your “in-flight” crew, whose expertise and genuine care keep your flight on time, clear of turbulence, and soaring above the clouds. With a good crew, it can help to make your flight smoother. Who’s part of your crew, to assist you?
Like every flight that smoothly touches down on time, it takes many people coming together to achieve successful wealth accumulation and preservation. The same is true for High Net Worth individuals. Having trusted “financial family friendships” around you can help you plan for a smooth landing.
Ready for take-off and a smooth landing? Yes, each wealth strategy and investment has one.
To aid with your Wealth Education, Mile Marker Club has many online and face-to-face wealth education opportunities and networking events available. For more information or to register, see the events listed on the right or visit our Upcoming Events schedule.
Quote of the Month
“The way we measure productivity is flawed. People checking their phones over dinner is not the measure of productivity” – Timothy Ferris