4/28/13: The Asset Behind the Asset – Finding Gold in Distressed Debt

While many investors are pursuing profits in property foreclosures, fixers and flipping – there’s a small, elite universe of investors doing the same thing and finding gold behind the paper.

Just like distressed properties, the marketplace is full of distressed notes.  That means lots of opportunity for investors who know how to get in on that action.

To find out how the world of distressed debt works, we take a trip to Southern California to spend an afternoon with a guy who deals in distressed debt every day.

If you’re like most investors, you’ve heard stories about the fortunes made in discounted notes.

Then again, if you’re like most investors, distressed debt investing is one of those strange and mysterious activities you’re not quite sure how to actually do in real life.  No worries.  That’s why we boldly go where no talk show hosts have gone before seeking out new ideas and information!

Discussing the details of distressed debt deal making on this edition of The Real Estate Guys™ radio show:

  • Your distinguished host, Robert Helms
  • The dissed co-host, Russell Gray
  • Special guest and distressed debt expert, Michael Soliz

One of the reasons investing in distressed debt hasn’t really hit main street is because sourcing the opportunities isn’t as easy as finding a property.  After all, there’s a real estate agent and loan officer on every street corner eager to help you buy a property.  But there isn’t really a big network of people out there to usher you into world of distressed debt investing.

That’s why we like being us.  As hot shot radio hosts, we just walk into the marketplace and doors magically open.  The next thing you know, we’re sitting face to face with some of the most interesting people in the business.

For this episode, we sit down with Michael Soliz.  Michael has been involved in various aspects of the businesses behind the business of mortgage lending.  And when the mortgage meltdown happened he was right there, behind the scenes, watching how lenders and investors were coming together to clean up the mess…for a tidy profit.  And yes, he was taking notes.  (Ba dum tchhh!)

Once you get your mind around it, it’s easy to understand how you can make money investing in distressed notes.  The harder part is getting in on the action.  It’s even more of a relationship business than the property side is!

But back to how you make money investing in distressed notes…and in keeping with our “no investor left behind” policy, let’s hit the basics.

A “note” is simply the promise to pay – a promissory note.  It’s a liability to the borrower because he owes the unpaid balance to the note holder (the lender) and has to make the payments.  But it’s an asset to the lender, because he gets to collect the money.  So far so good.

Lenders like to lend on real estate because the debt is “secured”.  That means the borrower pledges the asset (the property) as collateral.  This essentially assures the lender that the borrower is going to make the payments or surrender the property (voluntarily or through legal means).  And since real estate never goes down (ha ha), the lender feels safe.

Well, as we all found out on the way to Oz, $#!+ happens.  The sub-prime contagion (you know, the one Bernanke said was “contained”) quickly spread throughout the economy and banks failed, property values plummeted, unemployment sky-rocketed and lots of debt went bad.  Oops.

After the smoke cleared, the capitalists got to work on cleaning up the mess.  Distressed assets are like chum for opportunity sharks…and there’s nothing wrong with that.  It’s how a capitalistic system cleans up problems.  But we’ll save that sermon for another Sunday.

So first, out came all the loan modification entrepreneurs.  They went to work on trying to get the bad debt restructured.  Unfortunately, many of the lenders were in denial and wouldn’t take the hit of reduced interest and principal balances.  Some got done, but nowhere near enough, leaving lots of distressed notes in the marketplace.

Then the Fed pumped the banks full of funny money to compensate for all the bad debt on their balance sheets.  The banks were dead, but hey, let’s put some powder and lipstick on the corpse and no one will notice.

We can debate whether all of that was a good idea or not, but it doesn’t matter. It’s what happened.

Now all of this life support bought the banks some time to feign solvency, while they slowly clean up all the robo-signing improprieties and meter out the dump of foreclosures onto the market.   Think about it.  If they dumped all the foreclosures on the market at the same time, what happens to values?  More downward pressure, leading to even more defaults.  That’s pouring gas on the fire.  So obviously, they didn’t do that.  Better to pull the band aid off every so agonizingly slowly.

Meanwhile, borrowers quickly figured out they could stop paying on their underwater seconds.  Why?  Because as long as they kept paying the first position mortgage, the first lender wouldn’t foreclose.  If the second position note holder wanted to foreclose, he had to pay off the first, which was often more than the property was worth.  And do you think the 2nd position note holder knew that property wasn’t going up in value anytime soon?  Sure they did.

So now the 2nd note holder is the proud owner of a non-performing note with insufficient collateral.  That’s way too much hassle for a note holder.  If they were willing to accept all that brain damage, they’d be the landlord.  But that’s good thing for us, because now they’re getting agitated over having this bad debt on their books.

You with us so far?  We know it’s a lot of buildup, but if you don’t really understand the problem, you won’t be able to understand the opportunity.  If you’ve read this far, we’re guessing you’re motivated.  Good job!  You’ve already outlasted much of your competition, which means more opportunity for you.

That’s one of the great things about distressed note investing.  Most investors would rather climb all over the throngs of other investors chasing the property deal.  They can’t be bothered to learn the art of distressed note investing, which leaves more for those of us who do learn about it.

Now back to our 2nd note holder…

So if you’re the distressed note holder, you’ve got no cash coming in and this embarrassing blemish on your balance sheet.  Worse, you’re expending money trying to collect and account for this note.  And you’re paying “opportunity cost”.  That is, you aren’t able to put your resources to work on other, more profitable activities.

In other words, you’ve become a serious “don’t wanter”.

So you get out the calculator and realize you’ve already collected a lot of interest on the loan (back when the borrower was paying), which was mostly pure profit.  And the borrower still owes most of the principal balance of the loan.  Hey! Why not sell the note at a discount to someone else who’s interested in trying to collect, and take those funds and move on to something you’d rather do?

As Michael explains, all this “distressed paper” (these bad notes) get bundled up and sold in bulk to a deep pocketed investor who gets a healthy bulk discount.

The bulk buyer often turns around and sells a chunk of portfolio (at a mark up) to smaller investors who can’t buy in bulk. (This is where you, as Mom and Pop investor, come in).

But WHY would YOU want to buy a note like this?  After all, it’s underwater and the borrower’s not paying. (Note: (Sorry, we just wanted to put a note in a note)  Not all distressed notes are non-paying, as Michael explains in the interview)

The main reason is because you can buy these notes for PENNIES on the dollar.  And, as Michael explains, there are at least six different “exit strategies” for making a profit on them.  And when you listen through the whole episode, you’ll find out how you can get a bonus podcast where he explains each of those six exit strategies.  Cool, right?

Heck.  Since you’ve already read this far, we think you deserve to be rewarded.  You’re clearly eager to learn about this – and who are we to deny you?  So, click here to access this bonus podcast now.

Obviously, there’s a lot more to learn than we can share on this post.  And since we already have carpal tunnel in both hands, we’re going to sign off so you can listen to this episode on investing in distressed notes with Michael Soliz.  Enjoy!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

In Memphis, Elvis May Live, but Cash Flow is King!

When it comes to cash flow rental property, Memphis remains a very attractive market for beginning and sophisticated investors alike.  That’s why we keep going back!  Click here to learn more about The Real Estate Guys™ next educational field trip to Memphis, Tennessee.

If you’re a real estate investor looking for cash flowing properties in a major landlord friendly market, you owe it to yourself to take a close look at Memphis.

Memphis was recently named one of the top 20 cash flowing markets for single family homes.  Click here and look for the Wall Street Journal article, “Bang for the Buck: Where Investing in Rental Homes is the Most Profitable”.

Does that mean you should run out and order a few dozen Memphis houses online?

No.  But if you’re serious about building passive income through rental real estate, Memphis is a market you should invest the time and money to get to know.  And The Real Estate Guys™ can help!

Of course, we don’t sell real estate.  We’re just radio guys.  But because of the popularity of The Real Estate Guys™ radio show, we get to know lots of awesome people all over the world…including Memphis!

So we’ve got a great network of Memphis market experts, including property managers and “turnkey” rental property providers, who are ready, willing and able to share their market expertise with you over a 2-1/2 day educational field trip.

The weekend includes classroom sessions, a bus tour of the greater Memphis metro (so you can compare and get to know various neighborhoods) and some great networking over tasty Memphis meals.  We’ll even stop by Graceland and pay our respects to Elvis!

You’ll learn how to tour a real estate market and look for signs of growth and decline.  Plus you’ll meet fellow investors from all over, as well as the local team of Memphis market experts.  No one will try to sell you anything during the trip (not allowed), but you’ll make great contacts for pursuing future opportunities.  The WORST thing that happens is you’ll learn a lot, make some new friends and you’ll have a ton of fun.  C’mon, you’ve always wanted to see Graceland, right?

So CLICK HERE NOW to get all the details and we’ll look forward to seeing YOU in marvelous Memphis, Tennessee!



4/21/13: Should I Stay or Should I Go? Knowing When to Sell an Investment Property

In case you’ve been snoozing, many real estate markets are heating up.  In fact, investors who were brave enough to buy a few years back actually have (are you ready?)….equity!

Yes, it’s true.  Equity is happening again.

And whether you were an early adopter and have seen some appreciation, or you’re running a little late to the party, one of the questions you should be asking yourself is “Should I stay or should I go?”

What a great question!  In fact, it was this very question (sent in to Ask The Guys™ by our faithful listener, Keith in Anchorage Alaska) that inspired this entire episode.

So behind the microphones in a secret location hidden somewhere deep within The Real Estate Guys™ think tank:

  • Your super hot host, Robert Helms
  • You not-so-cool co-host, Russell Gray

Keith’s questions was really about financial analysis.  But in considering the question, we realized there are a whole host of things to think about when deciding to stand pat or move on.

First, the math.

Wait! Come back!  Math is good.  And math can be fun when it saves you THOUSANDS OF DOLLARS, don’t you agree?

Big shot investors monitor the frothiness of the market by the cap rate.  In keeping with our no-investor-left-behind-policy, cap rate is simply the NOI (Net Operating Income – rent, less operating expenses BEFORE debt service) divided by the price or current market value of the property.

When cap rates FALL, it means investors are paying MORE for the SAME income.  That means the income is MORE EXPENSIVE.  Got it?  And who wants to pay more for the same?

So, if you’re smart (and lucky), you buy when cap rates are HIGH (you paid LESS for the income, which is a good deal), then sell when cap rates are low.

There’s another way to do the math that we find a little simpler, but essentially tells the same story.  It’s called GRM (Gross Rent Multiplier) or Rent Ratio.  It doesn’t include expenses, so it isn’t precise enough for investment due diligence or loan qualifying, but it’s a great way to tell if a market is getting overbought (buyers bidding up the price…potentially to an unsustainable level or “a bubble”).

So, let’s say a property that generates $10,000 a year GROSS rents and sells for $100,000.  This means it’s selling for 10 times gross. Make sense?

Now if that same property now sells for $120,000 but still only rents for $10,000 a year, it’s now selling at 12 times gross.  Ergo (we always wanted to say that) buyers are paying 20% MORE for the SAME income.  Great if you’re a seller (time to go?) but not so great if you’re the buyer.

If you’re watching a market and GRMs are generally rising- or if you already own property in that market – you need to dig deeper and find out why prices are going up when income isn’t.  If there’s no rationale for it, it may mean there’s just too much money chasing too many deals (or worse. “dumb” money chasing deals), you may decide it’s time to sell (at a premium) and take your equity and head for a less heated market. Then hope the whole process repeats itself there!

Of course, all of this happens over the course of years, not hours like the stock market.  So while you’re waiting, you’re collecting rents, taking generous tax deductions and enjoying your life.

And speaking of tax deductions…

Another reason why it may make sense to sell a property is because you’ve used up the tax benefits (primarily depreciation) available to you on that particular property.  This has nothing to do with the market (it could be fine), and everything to do with you and your personal tax situation.

Remember, according to our good friend CPA Tom Wheelwright (author of Tax Free Wealth), a savvy real estate investor should be paying pretty near ZERO INCOME TAX (sorry to shout…we got excited).

Other reasons to consider selling are changes in the neighborhood, the physical condition of the property, the kinds of tenants you’re attracting, or local changes to landlord law.

The point is that you don’t want to develop LAME (Lazy Asset Manager Entropy…it’s a pseudo medical term that we just made up).  Sometimes it’s easy to get lulled to sleep just sitting at home opening rent checks all day.  We understand.  But we don’t want you to be blindsided in slow motion if the market is telling you it’s time to move on.

So listen to the episode and consider your own markets and properties.  Then ask yourself, “Should I stay or should I go?”

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

4/7/13: Why “A” Students Work for “C” Students – Robert Kiyosaki Looks at Education

Robert Kiyosaki describes his new book, Why A Students Work for C Students as “the most important book I’ve ever written.”  That’s quite a statement when you consider that Kiyosaki is the best-selling financial author in the history of the world!

So what makes this book so important?

To find out, we jumped into our semi-private jet (the one we share with about 135 other Southwest Airlines passengers) and headed out to sunny Phoenix, Arizona to pay a visit on Robert Kiyosaki.

Robert and his wife Kim were kind enough to welcome us into their home, where we pulled out the mobile microphones and set up shop in one of the most awesome man caves we’ve ever seen.

Behind the microphones for this episode of The Real Estate Guys™ radio show:

  • Your manly host, Robert Helms
  • Your caveman co-host, Russell Gray
  • A man who never caves, best selling author Robert Kiyosaki

It’s no secret the U.S. economy is struggling right now.  The most recent jobs report showed only 88,000 net new jobs created in March.  Not only is that a weak result, it’s nowhere near enough to keep up with the number of job seekers entering the market.  Not good.  Our experience is that tenants who actually have jobs are much more likely to pay the rent. 😉

Robert Kiyosaki contends that we don’t have a financial crisis.  Instead, he says, we have an education crisis.  Kiyosaki says the big problem is the world’s educational system is designed to mass produce job seekers.  But what we really need are job creators.

And while Kiyosaki agrees that burdensome regulation, oppressive taxation and a broken banking system all make it worse, the root problem is a system that crushes the creative spirit of potential entrepreneurs.

What does this have to do with real estate investing?  After all, that’s what The Real Estate Guys™ show is all about.

We get questions all the time about creative real estate.  It’s an alluring topic that’s made many late night real estate investing infomercial gurus lots of money over the years.  So obviously, developing and maintaining a creative mindset should be a high priority for any investor.

And if you were trained in conventional education to stay inside the lines, avoid making mistakes and always drive toward the one predetermined “right answer”, then you may also find yourself struggling with the creative side of real estate investing.

Of course, the first step toward solving a problem is recognizing it’s root cause.  Why A Students Work for C Students may provide some helpful insights into the mental and emotional conditioning that may be hindering your creative spirit.

But more than that, Kiyosaki says this book is a tool to be used to help parents and all concerned adults help a child discover and cultivate their inner entrepreneur and/or investor.

He also tells us that “C” stands for “Capitalist”.  A true capitalist finds new and better ways to deliver more and better products to meet the needs of the market for a lower price.  When they succeed, their business grows and they need to employ more people (directly or indirectly) to help them.  Can you think of anything the economy needs more than capitalists right now?

Yet Kiyosaki tells us that “capitalist” has become a dirty word associated with greed, selfishness and corruption.  But, he says, there’s a big difference between pure capitalism and the crony capitalism associated with Washington DC and Wall Street.

Our take on what Kiyosaki is saying is that capitalism is the solution, but an ineffective educational system is hindering our development of capitalists.

So once  again, Robert Kiyosaki is putting forth a controversial message.  But it’s one that he is convinced the world, and especially the U.S., needs to hear.  Like it or not.

As entrepreneurs and investors, we like it.  We think if more job creators are raised up, the economy will become strong and vibrant once again.  That means more jobs for our tenants, more demand for our properties, and more prosperity for everyone right down to the entry level workers through more production of better goods for less money. What’s not to like about that?

So tune in as we talk capitalism and education with Robert Kiyosaki.

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!