Thoughts from the Desk of Bob Repass…
For obvious reasons this graduation “season” is unlike any other that I have ever seen. Most high school and college graduation ceremonies turned into parades as students rode in cars down the street while people cheered, were conducted virtually or, at best, from a large social distance as they received their well-earned diplomas.
I always enjoy reading or watching YouTube videos of commencement speeches and the advice speakers offer to these young adults facing the next stage of their life. I try and adapt that advice to how I can take it and learn from it, although I am far, and I mean far, removed from my graduation day.
One address that made an impression on me was given by Amy Chua, a Professor at Yale Law School, and the author of “Battle Hymn of the Tiger Mom”. She said “As you prepare to take on the world, I’d like to give you a few tips:
Go for it: Never avoid doing something because you’re afraid to fail. Everything in my life that’s been valuable and precious is something I was almost too scared to do.
Don’t make excuses. If something goes wrong, don’t blame others. Start with yourself.
Find your comparative advantage. I believe that every one of you has a slightly different gift to offer the world. Embrace it, and play to your strength.
Reject pettiness and bitterness. It’s a waste of valuable energy. Generosity will always make everything better. It will lighten your burdens and help you see the way.”
These 4 tips resonated with me and I think they should with every entrepreneur and note investor. Think about it. We wouldn’t be successful if somewhere along the way we didn’t “go for it.” We wouldn’t be successful if we just made excuses. We wouldn’t be successful if we didn’t constantly search for competitive advantages. We wouldn’t be successful if we didn’t strive to always be generous and make things better.
During the final semester of this year as her students had to adapt to attending classes virtually, Chua asked her students how they were feeling during these times, I love one student’s response: “We all like to think we’re the smartest person in the room. Now that we’re taking classes remotely, that’s finally true.”
Congratulations and good luck to the Class of 2020 and their families!
Stay up to Speed with Eddie
If You Have a Solution, You’ll Have No Fear
by Eddie Speed
Normal news channels are missing the big story. But they’re not the only ones.
We held a training session last weekend, and it was a real eye-opener — not just for our students, but also for me and all our instructors.
Just to explain the situation, this was a virtual class that we held online, and most of the attendees described themselves as real estate investors. Like all our classes, we took them through case study after case study that showed how creative financing was pivotal to making the deals close and earning profits. We also taught them about partials and how to borrow new investment money by using an existing note as collateral (hypothecation). I also described how I first learned the art of creative financing from my father-in-law, and how my wife Martha is a whiz at using money from self-directed retirement accounts to invest in notes for tax-free income.
About two-thirds of the way through the training, we took a simple poll from the students. The results were jaw-dropping to me and our entire teaching staff.
One of the questions on the poll asked if they expected creative financing would play an important role in their future deals. A grand total of 0% of the students answered “yes.” All my instructors were dumbfounded just like me. Obviously, our students were confused and something wasn’t getting through. The urgency of the current market situation had not sunk in. They were either uninformed or living happily in denial.
Apparently we hadn’t fully communicated that if the people who buy your properties can’t get financing, it’s a giant problem not just for them but also for you. With all the turmoil in the market right now, there’s an 18-wheel Mack truck headed right towards every real estate investor. The only way to not get flattened is by knowing how to architect deals to locate financing apart from traditional lenders.
SINCE COVID-19 REARED ITS UGLY HEAD, HERE ARE OUR NEW CHALLENGES
COVID-19 is a 7-headed black swan that has changed life as we know it. I don’t just mean the nuisance of wearing a mask to the grocery store, but huge changes all up and down the stream of how money flows from lenders to homebuyers:
- The Mortgage Bankers Association reports that mortgage availability plunged about 25% in April due to the weakening of the economy and job market.
- Since mid-May over 41 million Americans have filed for unemployment (which is about 20% of the total workforce) making lenders averse to risks. Some experts are saying 50% of these unemployed workers won’t get their jobs back any time soon.
- As of May 24thabout 4.2 million mortgages are in forbearance, which is about 8.46% of all federally backed mortgages.
- The government designated 80% of the recent stimulus money to buy bonds invested in mortgages to help prop up the industry and avoid a serious crash.
- Warehouse lenders (who loan money to banks and mortgage companies) have made huge cutbacks on loaning money until the logjam clears up downstream.
- Loan originators (like banks and mortgage companies who borrow money from warehouse lenders) have tightened their credit standards for borrowers. They’re now requiring bigger down payments of at least 20%, compared to 3 to 5% a few months ago. Plus they require credit scores of over 700 instead of the previous 640. This will keep thousands of potential borrowers in the penalty box and out of the homeownership market.
- Government entities like Fannie Mae, Freddie Mac, and FHA who ultimately buy the mortgages from loan originators have tightened their restrictions on loans they will accept.
- Scratch & dent loans and agency buybacks have caused a logjam in the money lending industry because loan originators have to buy their loans back from Fannie Mae, Freddie Mac, and FHA if something goes wrong with the borrower (like missed payments from a layoff.)
- Many private hard money lenders who normally make passive investments to wholesalers and rehabbers have decided to invest their money elsewhere, leaving many investors high and dry for investment capital.
Obviously, deals that used to close easily will fall by the wayside. But have you heard any of those points discussed on the evening news? I doubt it! (If you ask me, most of the news people are distracted by other agendas that keep them from reporting real news.) This kind of information won’t come to you; you have to go looking for it. That’s why most real estate investors are so out of the loop.
If you were a real estate investor back in 2008 when the Lehman Brothers debacle made other top financial institutions fall like dominoes, you remember what a mess it was. Brace yourself, because today’s situation is looking just as serious, if not worse.
YOU EITHER HAVE A SOLUTION AND NO FEAR, OR NO SOLUTION AND LOTS OF FEAR
Right now I’m seeing three categories of Investors:
- Investors who are clueless about the market situation aren’t feeling any fear.
- Investors who understand the situation are feeling absolute fear.
- Investors who understand the situations AND creative financing are feeling NO FEAR!
This third group of investors understand the potential of creative financing and are confident in using the toolbox of techniques that we teach at NoteSchool. That’s why they’re feeling more optimistic right now than in a typical strong market. They know they’ll have a huge advantage over other investors who haven’t learned creative financing.
I’m super excited about today’s market! I don’t have any fear of the unknown because I’ve seen how creative techniques have worked to solve problems in previous black swan markets.
I tell people that I may not have a crystal ball, but I do have a rearview mirror. I started my note career during the terrible market of 1980 when mortgage rates were 20%. Because I had a basic understanding of creative financing, I thrived while other investors shriveled like dead buttercups. Only a trained investor will see the opportunities that others miss. I’ve always boosted my net worth more in down markets than in boom markets; but not because I took advantage of people who were hurting, it’s because I knew how to help the people no one else could.
When times are good, homebuyers can simply go through traditional lenders. When times are tough, they go through YOU!
NOW IS THE TIME TO THINK LIKE AN ENTREPRENEUR AND SEIZE THE OPPORTUNITY
A couple of days ago, I spoke with my good friend Pat Precourt. He’s a real estate investor who truly understands the importance of getting your head wired like an entrepreneur. (He’ll be speaking at Summer Summit in June!) He advises other investors not to get lost in the details that keep you from seizing great opportunities. Too many investors think they must have the answer to every possible question that might possibly arise before they take the first step into entrepreneurship. To succeed, you have to rewire your mind to not let roadblocks keep you from moving forward. If it’s hard for you to think like an entrepreneur, the best way to do that is to be around successful entrepreneurs in masterminds, classes, online meet-ups, etc.
In the next few months, we’ll see lots of ill-equipped, untrained real estate investors dropping out of the business. Some will even lose their shirts. But opportunities are hidden inside problems the same way pearls are hidden inside oysters.
Capital Markets Update
By: Ryan Parson
For private investors, Access has been a less talked about wealth component the past few years, especially for real estate investors. Prior to 2008, for most, real estate was a type of investment with “in your backyard” access. However, since the 2008 market cycle began and significant regulatory changes took effect, allowing deal sponsors to advertise their deals beyond their existing investor relationships, many local real estate investors’ access has greatly expanded. With the 2020 market cycle now revealing its valuation and cash flow reset fury, access is another significant component that investors need to take a very hard look at – right now!
Types of Access Points
Beyond just access to appropriate deal flow, an investor’s chosen Access Point methodology is another critical component for an investor to manage. However, creating an Access Point methodology, as part of a more holistic Investment Policy, is something that many investors have simply not even thought about or put very little time into understanding its ramifications towards their financial freedom. Access Points are the vehicles investors use and where they can actually place their capital. There are generally four types:
- Open-Ended Fund
- Closed-Ended Fund
- Direct Ownership
While there are others, these four are typically the most common types of Access Points that investors utilize and that deal sponsor’s offer. Each comes with its own set of benefits and challenges to the investor. Even though these are four general categories, each Access Point deal sponsors offer are structured very differently so the investor needs to understand the components of each offering to make sure it meets their specific needs.
Open-Ended Funds are typically offered as an ongoing vehicle where the Fund Manager is constantly buying and selling assets for the Fund. Often, these types of Funds offer redemption features so an investor can exit the Fund, after a stated lock-up period. New investors can come into the Fund over time as well. One significant advantage for the investor is that they automatically have diversification in their portfolio because their investment into the Fund exposes their capital beyond just a single asset and across all assets the Fund owns. A disadvantage is that the investor has no day-to-day control over the assets in the Fund and is relying solely on the fund manager’s discretion. Distributions to investors may be made monthly, quarterly, or at different intervals and come in the form of cash to the investor or may be reinvested back to the Fund, depending on the fund’s specific setup.
Closed-Ended Funds, similar to open-ended funds, typically have multiple assets in them and therefore provide an element of diversification. However, there are typically no redemption options as the Fund is designed to have a finite shelf-life, both in terms of a fundraising period and an estimated deal lifecycle. The deals the manager selects for the Fund have an expected return which is generally distributed to investors once the deal is fully completed and then distributed to the investor at the close of the Fund. After the Fund is closed, no more deals will be done and hopefully all investors receive their principal and return on investment back at that time. Regular cash distributions may or may not occur depending on the type of assets going into the Fund. If the assets are long-term growth-related assets, such as a motel conversion to affordable housing, there may not be immediate cash flows until the project is completed and rent payments are collected.
Syndications are generally structured for the purpose of raising capital to acquire a small number of assets and/or one single asset. These structures are very commonly used for larger value assets, such as multi-family apartment complexes. Generally, there isn’t the diversification, and like a closed-ended fund, it has a shelf-life based on the syndication sponsor’s belief about when the asset will be liquidated and principal returned to investors. The syndication may or may not offer cash flow over the life of the offering.
Direct Ownership provides investors the greatest control over their assets – in that they make all day-to-day decisions. With Funds and Syndications, the investor is relying solely on the manager to make ongoing decisions. With direct ownership, all of the investor’s capital has full exposure to the asset and therefore doesn’t bring the diversification element. Depending on type of asset, there may or may not be a current cash flow component. However, it gives the investor the control to fully position the asset to the specification of their portfolio.
These four access points can offer investors many benefits that advance their individual financial freedom objectives. However, the investor must carefully assess those benefits (and risks) and how much investment capital is allocated amongst these access points, in addition to the asset classes themselves, as well as the many other components when making private investments.
Continue to be safe and well!
The Trading Corner
By: Scot Tyler
Well I had no idea I would be writing my 3rd piece during this pandemic. I thought surely this would blow over quickly, but as we all know that didn’t happen and it still hasn’t just yet. There have been some encouraging things with the lifting of some restrictions in different areas of our country with businesses at 25%, 50% or even 75% capacity. Many companies and employees are still choosing to work remotely or not a full work week at the office to continue practicing social distancing. As I write this here at Colonial’s office, we’re slowly returning folks back to the office, staggering work schedules so everyone is not at the office at the same time and working from home on the other days.
I wrote last month about the note business being an “ever changing” industry and those who are flexible and have well thought out plans when something unexpected comes along (insert Coronavirus here) are prepared to adapt to the change and succeed. However with that adapted ability, a thought out business plan and flexibility comes the tough days and long hours to get through this stressful time. What I’ve found over the last 60 days working remotely from home is that it’s easy to get into the habit of working even during the “down time”. Most of our clients are entrepreneurs who typically avoid a typical 8-5 workday/week. The technology today, accessibility to smart phones, texts, email, instant messaging, etc., allows us to have access to really a 24-hour workday if we choose.
When working remotely from home during this pandemic, I realized how vital it is that we realize when it’s time to cut the work day off so we can maintain our “sanity”. Everyone should set a realistic time to end your work day and try to stick to it all through-out the week. Put your cell phone down. Don’t check or respond to an email after your designated stopping time. Don’t go back to your PC and see if someone has responded to an email you sent. It’s OK to wait until tomorrow to dive back in full force. What I think you’ll find is you’ll be more productive during you’re workday by being refreshed, energized and motivated to tackle those daily tasks.
We all need our “sanity” especially with everything going on us around which is beyond our control. Make sure you give yourself a designated rest time to unplug from the daily demands of your business so you stay refreshed and ready to attack your workday with “sanity”. J
Here’s a loan that came across our trade desk that we recently funded. If you’re interested in purchasing it, email me at [email protected]
Performing Note – SFR-O/O
$50,000 sale with $750 down
$49,250 / 10.02% / $476.00/month for 240 months
109 made / 131 left
Current UPB $37,743.25
Until next month.