You’ve got questions. We’ve got answers.
That’s right. It’s time for another segment of Ask The Guys … when we talk about trends, challenges, and investment opportunities.
This time we’re tackling listener questions about investing in the face of a potential recession, the pros and cons of private note investing, whether it makes sense to leverage gold to invest in real estate … and more!
Remember … we aren’t tax advisors or legal professionals.
We give ideas and information … NOT advice.
In this episode of The Real Estate Guys™ show, hear from:
- Your knowing host, Robert Helms
- His crowing co-host, Russell Gray
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Preparing for a recession
James from Phoenix, Arizona, just moved to the area and is interested in purchasing a single-family rental property.
He wants to know what zip codes we feel offer the best opportunities for a solid cash flow, long-term equity investment.
He also wants to hear our thoughts on how we think a possible recession will affect the Phoenix housing market.
First off, we don’t get into the specificity of zip codes in any market. BUT we do know a great provider in Phoenix that absolutely has the answer.
It’s always better to find someone with boots on the ground knowledge to learn more about a marketplace. So, that’s our advice there. Find a good team member … and work with them.
But when it comes to recession … that’s something we can definitely talk about.
As a country, we recently had a tax code change. One of the biggest changes was that state and local taxes are no longer deductible on your federal income tax.
People who lived in high tax states like California are suddenly realizing what a big difference that deduction made … and they are moving to greener pastures.
Phoenix is a major metro that offers a lot of the quality of life amenities people want … and its close proximity to California makes it a hot destination for those fleeing the state’s high prices.
For investors, the key is to find properties with what we like to call “recession resistant pricing.”
If things go well, the value of the property moves up … but those rents are still in demand even when things in the economy aren’t doing as well.
So, your mission ought to be to get with a great local provider and work together to find properties that hit in this sweet spot.
The good news is that Phoenix is a market where we saw pretty good stability in the last downturn.
A look at note investing
Larry from Folsom, California, wants to know what we think about the notes business … and what we think about the notes business as a real estate business.
Some people like to invest in the property. Some people like to invest in the financing.
The note business means that you are writing mortgages, carrying back mortgages, placing private notes, or buying second-hand notes that are loans.
You get the note … and you get the interest … and you have the collateral against the property.
There are two primary reasons people invest in notes.
Some people invest in notes because they want the yield … they want the interest rate, which often can be higher than traditional mortgages.
Other people invest in notes or make hard money loans because what they really want is the property.
They make a loan to someone who is in need … if it pays off, great. If it doesn’t, they get the property.
So, the note business is an interesting business. It can be appealing because you are able to derive income without the hassle of landlording or the risk of the property going down in value.
But that doesn’t mean note investing is without capital risk. It all depends on whether you want to sell the note or not after you buy it.
Where the real money gets made in notes is when you’re trading in notes and you’re using distressed property.
You might go in and lend to somebody who may not be a prime borrower in an ideal situation … so they’re going to pay a premium.
That means you are going to get a little bit of extra interest … and maybe a little bit of extra protective equity.
You can also take things a step further and purchase loans from people who own them already and have decided for whatever reason they don’t want them.
So, you would offer them a discount to the face value of the note.
Now, you’ll be getting paid back more than you lend plus more!
And that discount is added to the interest that a person’s going to pay. That can bring your yield up quite a bit.
Another approach is to buy non-performing notes in the hopes that you can rehab them and get the person paying again OR that you’ll be successful in foreclosing on the collateral.
These types of notes can sometimes be bought for pennies on the dollar.
The key takeaway here is that there are a lot of different ways to get involved in the note side of the business for people who aren’t as interested in dealing with the real estate and tenant side of things.
You don’t have the landlord responsibilities … you do have the debt collection responsibilities.
Overall, we like the note business … but we don’t like the note business as a real estate business.
Now, this is just because of our personal investment philosophies. We don’t want to make a bunch of money because someone else had to be foreclosed on.
For us, it’s too messy and can be ugly. But if you have a more combative personality … it might work for you.
Leveraging against gold
Quentin from Mahomet, Illinois, is seeing the value of the dollar go down … and wondering why an investor shouldn’t just buy gold to use as collateral and leverage against it.
Quentin feels that if the dollar tanks, then your collateral … the price of gold … goes up all while your real estate cash flow asset makes money.
The question is … are there downsides to this approach?
Leveraging against gold has been on our mind for a long, long time.
It has only been in the last 50 years or so that gold hasn’t been money … there’s a good possibility it’s going to come back and eventually be money again.
Central banks are loading up on it. So, we don’t think it’s a bad idea to take some of your liquid reserves and put them into gold.
Gold shouldn’t be considered as an investment. Gold is a place to store wealth … just like cash.
But gold protects you from cash failing and has a longer track record of success.
Borrowing against gold is just like borrowing against any other asset. The equation always just comes down to being able to provide the cash flow to service all the debt involved.
If you lose control of cash flow … everything leveraged unravels.
Still, if you’ve done the math … and you feel comfortable … it’s not a bad way of thinking.
More Ask The Guys
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