Be The Bank
Be The Bank
020 - Flight to Quality
Ready to navigate the tumultuous waters of real estate investing? Experience the shift in investor behavior as we discuss the latest trend towards lower risk investment options, offering modest returns backed by hard assets like real property. We challenge the conventions of real estate investing, dissecting the role of a portfolio manager versus an investor, and highlighting the importance of understanding the return on investment while exposing the potential pitfalls of house flipping.
Ever wondered about the rewards, or the risks, of investing in private money or hard money loans? Richard Thornton helps us to peel back the curtain on these investment strategies, illuminating how the advertised annual yield might differ from reality due to the latency period between reinvestment. We'll also dive into the not-so-distant past, unpicking the impact of the 2008-2009 market pause on the risk factor of private money lenders. Listen in as we explore the advantages of having a larger portfolio, including the convenience of having someone manage the fund for you, and draw comparisons between investing in a fund and buying municipal bonds. It's a crash course in real estate investment, not to be missed!
About the Host:
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Facebook - bethebank
Twitter - bethebank1
Instagram - bethebankpodcast
American Note Buyers - https://anbfunds.com/
Monthly Broadcast - https://youtube.com/playlist?list=PLzc944w1xydt5aLDrrEPHJhdJeDkBjjD4
Interested in real estate. How about wealth? Well, they go hand in hand, and here you'll learn all about it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, justin Bogart, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note and, most importantly, educate you so you can be the bank. This is Be the Bank brought to you by American Notebuyers. Now here's your host, justin Bogart.
Justin Bogard:Welcome to Be the Bank podcast, season number five, episode number 20. Today, richard Thornton is going to be talking with us, and one of the main things that we're going to discuss today is kind of what it looked like to be in a portfolio, like a fund, or versus owning a couple of notes. I'm going to dive into some specifics on that, so stay tuned, hey dude.
Richard Thornton:Hey, you know I was worried there for a section because I heard a little fellow talk in the opener and I thought he said with your host, jackson Begard, and I thought I thought, wait a minute, something got screwed up here.
Justin Bogard:It must be a latency issue. Those of you that are listening to us, we record this podcast via our YouTube channel so you can check out American Notebuyers YouTube channel so you can see what's happening Pretty much. Richard has this ongoing problem with his computer where all of a sudden his camera works but it doesn't, and what I mean by that is that I can see Richard on camera but he can't see himself when we're on the application we're using to record this. So it's also given him some latency issues. So when he's speaking, his words come through quicker than his mouth is moving on the camera that we're seeing on the video recording. So it's quite interesting. I just need to think faster, yeah, or maybe have your think fast. Yeah, think faster than your words come out slower. Is you're able to move your mouth before you talk? Like a half a second, like it would work perfectly.
Richard Thornton:Telepathy is a good thing, which we may be. So they know, musk is now experimenting with silicon chips and imprinted in brains, and they're doing it for people with disabilities. But you know, what's coming down the road is the Borg. So when you want to invest in notes, you'll know what notes are immediately available because you've talked to the Borg. You'll have a ready main market and I'm sure, I am sure that investing in notes will be at the front of that list.
Justin Bogard:They better be.
Richard Thornton:Forget the stock market crap and all that I mean.
Justin Bogard:Well, speaking of the stock market, that's when I get the most interaction with people is when the stock market starts going sideways or when there's I'm using air quotes here for those that can't see the fear. When the fear is out there about the economy possibly going bad or something is wrong, or with real estate, like, people just get worried and it's just quite interesting. So I don't know about you, but for those of you who don't know, richard is in Petaluma, which is the in California, and I am in Indiana, which is the Midwest. So we see two totally different types of individuals, investors and even housing and real estate. So we always think it's comical how we compare and contrast things and just think it's just the polar opposite, really right.
Richard Thornton:Very much. So you know, I don't know I won't digress too much, but you know they say the housing market's cooled down, and I know it's cooled down some places and it seems to have cooled down here. And then I keep getting these notices in the mail, like the realtors send you, you know, and we get houses that are being sold for $100,000 or $200,000 over asking, still Still. Yeah, I'm going, what the heck? I don't get it. I mean, it's such a jumbled market out here, it's just amazing.
Justin Bogard:It's a new frontier for us in the real estate world. I believe in the, and I wasn't investing in the 08, 09 and 10 era, but you obviously were. I'm sure it was in that. At that standpoint you were like I don't know if I've ever seen anything like this before, nor will I ever go through this again, and I think we're all saying the same thing now.
Richard Thornton:Yeah, in a very different way. But yes, I mean, things are just a mess. Markets are a mess right now and there's a whole lot of tumult. That's the best way to put it. I think there's some little hot spots in some places and not in others, and it's just a whole lot of depends totally on what's going on. Like we've got a whole bunch of old houses out here. I mean when I say old, I mean my whole neighborhood. A lot of the stuff is built, you know, 1860 to 1920. I don't know.
Justin Bogard:That's interesting.
Richard Thornton:But your previous comment about the jitters in the market is called flight to quality. That is the overall term and a lot of people start buying CDs and things like that when they have so much tumultuousness in the market. I think that there is a bit of, as you've said, a bit of a flight to quality in investing in notes and especially in investing in a fund, because if you look at the difference between buying individual notes as opposed to buying in a fund, the funds easier and safer.
Justin Bogard:It seems to be a pretty, almost clear answer. For investors that I've talked to recently, because of that fear and that they see the economy feels like it's going down, even though we know it just really goes up and down and that is a cause for concern is like where can I put my money to get just a modest return? And where can I put my money to where there is a safety net behind it, to where I know that there's a hard asset supporting it? And obviously you know our fund is buying real estate notes across the country and all these notes are secured by real property, traditionally residential property.
Richard Thornton:Yeah, I mean when you look at it. So I talked about this. I'm for those of you who don't know, I'm making a small series of videos regarding investing in funds and basically it's note investing 101. But one of the things I mentioned in there and I did a little research to back this up is that a lot of is that I compare what we're doing since we have, since we are investing, and especially we're in a fund to investing in municipal bonds. Why is that? We are asset backed. So, yes, we as a fund may have a little problem disposing of a property, but guess what? You still got.
Richard Thornton:I'm going through that right now with the property. When I bought the note, the property, I was at 50% loan to value on the house and we're now selling the house and the house is right now it's at about 30% loan to value. So even if that defaulted, I'm gonna get out very well. So to me, that actually is quite comparable to buying a municipal bond. You don't have the credit worthiness of a city or anything like that, but you got a lot of there there. And so what are you gonna yield to you? Getting on munis? Well, munis are three to 5% right now. Well, the fund starts at six and goes to eight and a half right.
Justin Bogard:Six and a half to eight. Yeah, I almost had it Right. A couple of half percent off on either side.
Richard Thornton:I was short on the bottom and long on the top, so I almost got it.
Justin Bogard:You're being too generous, all right, that's right. Pull it back, pull it back.
Richard Thornton:That's right. So, anyway, I think a lot of people need to keep that in mind, especially when you invest in a fund as opposed to a one-off note.
Justin Bogard:The management of it is a lot different too.
Richard Thornton:Oh, totally.
Justin Bogard:One-off versus a portfolio. So if you have time for it, then obviously build yourself a note portfolio. That'd be a great income for you and keep things going and you can be pretty active in the business. If you don't, a fund's a great way to do that because somebody's doing that for you and, quite frankly, if in a large portfolio on a fund, if one note goes bad, the rest of them just absorb kind of that bump in the road.
Justin Bogard:So I described this to somebody earlier today when I was talking with them. I was just like you just imagine you're going down the road and the fund is a shock absorber. All the other loans in there are just shock absorbers. So once they go over a bump they just, you know, the tires and the suspension kind of compresses and then it decompresses once it goes back over it. So it's. I think it's a really good analogy to show like how it's pretty resilient overall and that's why we buy assets that are, you know, the 125 to 50,000 range assets. As far as the UPB, that we're buying the Unpaid Principal Balance, and that really helps us, as opposed to having a $10 million fund and you buy $10, $1 million mortgages. Like that doesn't make a whole lot of sense, right? Because if one goes down, you lose 10% of your portfolio.
Richard Thornton:Right, right, yeah. And so also one of the responses I get quite often is as well, if I can go out and buy a note myself and get a 9% yield, why should I do something with you guys and get a six and a half or to eight? Well, there's a pretty good reason and you just went through some of those. You can be a yield hog or drunk on yield and if you look at the actual dollars, you know per 100,000 if you get an 8% yield versus a 9% yield. So you've got $1,000 difference and is that worth the money?
Justin Bogard:You're working a lot harder for that extra juice. Yeah, yeah, yeah. And do you have to go?
Richard Thornton:through the foreclosure, and do you have to? Yes, you're gonna get your money back, like I was just talking about, but there can be a lot of headaches between here and there. That's a pretty good comparison.
Justin Bogard:I don't think we've done that before, but I like what you said about that. And when you're first starting out in the business and you really want to do this full-time, that's okay. Go ahead and do that, right. You know, buy a few notes and start getting your teeth cut in the business, and that's fine too. A lot of people get into this for the knowledge, so that they feel reassurance that this is the right investment for them. But then they figure out they nine times out of ten they don't really want to do it full-time or have the time to do it after their nine to five job, and they just end up having a.
Justin Bogard:That's why we had the fund so aggressively priced for return for investors, because we want them to, you know, get into the fund because it just makes everything better for the rest of us. We'll get better deals now. We can buy at bigger discounts, we can buy in bulk. We got all those advantages now of having a larger bankroll as opposed to. You know, when it's just you and I in there, we're suffocated on capital. We only have so much that we can use.
Richard Thornton:Right, and it's a little bit like I mean. So do you want to consider yourself a portfolio manager or actively managing a portfolio? What's the difference? If I'm a manager, if I'm going to be a manager at a job, I'm going to go in and I'm going to want to do the job for a while. I don't care what it is, if it's plumbing, if it's installing you know certain types of pipes, or if it's running different types of analyses.
Richard Thornton:For I mean, I worked for a syndicator for a while, so I did nothing but run spreadsheets and I knew the investment and I knew the spreadsheets in and out and I really knew what made the numbers work. And it wasn't until after I did that myself that I could step up and start to become a manager of other people doing that for the company. Investing in notes is a little bit like that. Sure, go out, cut your teeth, you know. Get to know the product before you step up and become the manager of your own portfolio and putting your money with a fund or something, because then you could say, oh, I know what those guys are doing, I know what's involved, I know why I want to be just a manager and not down in the trenches.
Justin Bogard:That's a great explanation there. I was talking to somebody recently about. This is one of my new pet beavers, about flipping houses and fixing and flipping them Like I get it. Some people can make some money and on paper sometimes the deals look really good when they're done with the ROI's. But living through it, yeah.
Justin Bogard:Like what you said. What you said was great, because I fully believe that's what we should do as managers is we should actually do the work. Do the job so we can understand it. So if we find you know simpler ways to do the process or build a better system running, obviously you're going to have good knowledge on how to do that. But yeah, I just don't get how fixing flippers actually make and sustained money because of how much time they put into it that you can't really put a dollar value on. And at the end of the day which my other pet peeves at the end of the day, right, I don't think you really make money Well, so that's why I got out of it.
Richard Thornton:When I was flipping houses years ago I mean I got out of it in 2016, I think, 2014, 15, so on there I was making 50 to 70% on my flips and I said, if I can make that kind of money in a six month period because that's start to finish by the house do the reconstruction. You know renovation and actually be sitting at the closing table. That's what it was taking. I was willing to take all those risks that you talked about, but when all of the weekenders got in there and and yield started going down and you got the market being where it is right now, where a lot of people, a lot of flippers, are happy with a 15% return, I'm saying no way, no way. Am I going to have those sleepless nights? Am I going to wonder if my HVAC units, c units, going to blow out and I'm not going to be able to sell the property or whatever it is that goes wrong? I mean, renovation, is renovation right? Yeah, it's a big world of unknowns. I agree with you.
Justin Bogard:Let's switch topics quickly, but along the same lines, and talk about the lender in those situations. So lending short term for a fixed-list project because that's kind of your area of expertise is what we also called hard money, meaning Richard is going to lend money out, or anyone can lend money out on a project, knowing that the balloon is due, like in 11 and 12 months and I usually.
Richard Thornton:Usually PC term is private money, not hard money.
Justin Bogard:It's always been private and hard money. I never knew which one was right or wrong.
Narrator:I hear more hard.
Justin Bogard:Do you hear more private money where you're at?
Richard Thornton:because I was here, yeah, yeah, I hear private money and they say, oh, you want me to make a hard money, long go. No, no, I said private, I don't know.
Justin Bogard:No, I don't want anyone to know about. This is in public.
Richard Thornton:Everybody it's. It's hard money, but yeah, so go ahead. I interrupted you.
Justin Bogard:I don't know what I was gonna say. I was just trying to compare the.
Richard Thornton:Lender a little bit, yeah, so. So when I'm trying to, I'm doing my different networking groups and things like that People ask me the legitimate question why should I invest in a note, a long-term note, where I'm gonna make? I want 9%, 8%, whatever it is there we go.
Justin Bogard:Okay let's go down this path.
Richard Thornton:Yeah, versus 12 or 13 in some cases. Out here from a flipper. Well we're talking about interest rates.
Justin Bogard:Let's let's Clarify this. We're talking about interest rate, so when Richard says 12 or 13, he's saying just the interest rate annualized 12 or 13 percent right.
Richard Thornton:So I mean, the first glaring factor is is that If you're only making Owned else, if you're making 9% or 10%, you're making that all year long, whereas, and for many years.
Justin Bogard:Whereas on investing in a note right.
Richard Thornton:Right right, investing in a note, whereas if you go and you invest in a hard money or private money loan, your money is probably only standing outstanding six to eight months at the most and, yes, you're making 12%. But then can you get it reinvested. You know there's always gonna be a latency period there of at least one or two months before you Can get it reinvested in the best of cases. So if you look at your annual yield, it's not actually 12%, it's, you know, what you got at your in your pocket. At the end of the day it's probably closer to 10.
Justin Bogard:Yeah, there's drag on that.
Richard Thornton:Yeah.
Richard Thornton:So that's the one thing.
Richard Thornton:Another thing which I think is Especially out in here in California A lot of people have been lulled into, is that they do not realize that when Joe renovator or Jesse, or you know him, him or her, whatever the names are put in a half a million dollars on a, on a house, and You're making a loan, that's 75% loan to value, as soon as you do that, soon as they get into the renovation, you were over lent, you do, you are, you are lending at that point probably 130 or 140, if not more, percent of the value of that house because they've got all.
Richard Thornton:They've got all ripped to shreds and nobody's gonna want to go in and and it's not worth what they paid for at that point because it doesn't have drywall, it doesn't have a kitchen, it doesn't have, you know, whatever it is there they're doing. So you've got a huge risk period there and that's actually inevitably why I got out of the market. The market paused for a while and I realized that I had debt services $10,000 a month. That was sitting over my head and if the market didn't turn around quickly, I was gonna be underwater very quickly. And a lot of people don't perceive that risk because they haven't been bitten yet.
Justin Bogard:High risk, high reward.
Richard Thornton:Yeah, and a lot of you know there was a lot of in 08, no 9. There were a lot of hot shot private lenders out here that you know basically were Driving beamers and Maserati's and they act like they had it all figured out too.
Richard Thornton:Yeah, I mean, and they're talking about the subprime guys. If you want to see, you know what the subprime guys are doing. Just watch the big short, because they portrayed it very well. Those guys were out there making loans and buying trailers and boats and you know all sorts of Stuff, and they had no idea what they were doing. These aren't the subprime guys. These are guys that said I'm investing in 65% loan to value and I know what I'm doing, and la la la, and they all went south. I mean I would. This is Not an exact numerical number, but I'd have to say that probably one out of ten Private money lenders made it through that period. That makes sense.
Justin Bogard:Yeah, because you're. You're You're investing into the current, as is, value of the property. On top of that, you're also financing some of the rehab work. So you're banking on the appreciation of the asset from when it was purchased at the closing table and you're raising the loan to when it's actually gonna be finished, and you don't know if it's gonna get finished. And you yes, you have a draw schedule. You don't have to give them all the money up front, but you still have that, that high risk factor of you've got a lot of money into this project that isn't really finished, and so are you banking on the value of the home being sold at a higher rate. But you're also banking on the individual that's borrowing the money, that's gc in the job, that they're gonna do it right. So there's a lot more risk that people Maybe don't realize. That's you know on the surface there.
Richard Thornton:Yeah, it's a game of musical chairs that you may not really like a way to put it yeah, you may not realize you're playing because if the music stops, guess what? You better find that chair. You better find that chair because everybody else is gonna be trying to find that chair and somebody's gonna be out. Yep and that's what happened out here in 08 no 9, and I have a lot of very nice properties that were just all of a sudden worth worth half, if that.
Justin Bogard:Geez, alright, richard. Well, we are just running up on the clock here. The think this is a good stopping point for a conversation today. Thanks for being on our podcast again. Obviously, this is episode number 20 of season 5 of the be the bank Podcast. You can check out our American note buyers YouTube channel. See the video stream of that and all the videos that we do as well and in Richard's video series will be up there shortly as well. So we got that going for us, richard. I will catch you later. My friend, it's in.
Richard Thornton:Bye.
Narrator:Thanks for listening to be the bank. We hope you learned something from today's show. If you enjoyed this episode, please rate, review us. Plus, check out our channel on YouTube and follow us on Facebook and Twitter at be the bank and on Instagram at be the bank podcast. Be the bank is sponsored by American note buyers. Thanks again for listening.
