Five Ways To Buy Your First Investment Property

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property For Panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey Real estate investors, this is Scott Carson. I'm known across the country as the Note Guy and I've been an active note investor focused primarily on the niche of non performing notes, distressed mortgage notes on residential commercial properties for almost 20 years now. My company is we close notes.com and I know there's a lot of different things when it comes to the note world. Are you buying performing notes? Are you buying owner finance notes? Are you buying institutional debt? Like I would focus on Are you buying first seconds contract for each There's a lot of questions and it can be very confusing about what you can or cannot do. So one of the great things that we've hosted for the last couple of years that we do on just about a regular monthly basis is we host our one day class called Note Weekend. If you go to noteweekend.com you can register for our free three and a half hour class. We'll talk to you and share with you how you find fun and flip non performing notes. And yes, you can buy non performing notes from banks, hedge funds and a variety of different hard money lenders out there for your own portfolio. No, you don't have to have millions of dollars to dive into the non performing note game. We've got students that have bought plenty of deals with 2530 grand getting their ball rolling using their self directed IRA who are tired of dealing with toilets, tennis trash desks, tired of battling contractors and GCs to get properties rehabbed. We all know the market is changing and while it may not be like 2008, 9 and 10 again, it we do see a lot of distressed debt out there on both the residential and the commercial side. So if you're thinking about diving into the note game, becoming a note investor, a lean lord as you'd like to say, versus the landlord. Or you just want to figure out what it is about the sexy side of real estate in the note space. Well, check it out. Noteweekend.com doesn't cost you anything. 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Love to have you be part of our note family but get signed up today@noteweekend.com thanks and have a great day. Good morning, good afternoon and good evening everybody. Hey, welcome to this episode of the Notebook show. As always, Scott Carson. Excited to be here today. Today's episode, I want to go into a topic that I've gotten a few questions about from people. I've seen some people posting some stuff on Instagram and LinkedIn about one or two ways to buy your first investment property. And I think that's great if that's the only experience you have is going one or two ways. But there's a variety of different ways to get into real estate investing. And I wanted to share this with you guys not only as a way to kind of help educate you, but also give you some hope, some guidance. I had a conversation a few weeks ago with my sister who's got her primary house. She also has a rental property. The rental property was her husband's house they grew up with. It was purchased by his mom, has been paid off. They've owned it for a while and they're making some rental income. And I say, so are you going to buy more rental property? And they're like, no, we were going to hold off till we can afford to pay cash for something. I'm like, well that's okay. Why? Well, we don't have a mortgage. I'm like, okay, but do you realize that trying to wait to save for to pay off a house completely when you buy it, it's only getting more and more expensive to get ruck on. You have all this equity in your investment property. You could tap into that equity for and use it for a variety of reasons to buy for leverage? No, no, we just want Enough cash. I'm like, okay, well that's a limiting belief and there's no offense, they're great people, love them, but they are school teachers. They don't have a wealth of information when it comes to real estate investing. I know many of you that are watching this or listening to this may have friends that want to get into real estate investing or want to become investors, but they don't know where to begin because of a, limiting beliefs like A, I don't have a lot of money saved or B, I don't have good credit or C, you know, I can't afford to pay for a full property. Those are normal things. Why? Because that's how I felt, that's how I thought about real estate. You gotta have a lot of cash, we're gonna have great credit. Or you gotta know somebody who knows somebody, right? That's not the case that there's differently. There's five different ways we'll go through tonight to help you buy your first investment property. And I'm gonna throw a sixth one at the very end here. But the thing that you have to realize, ladies and gentlemen, is if there are, there's multiple ways to skin a cat. It's not the thing like I gotta go to. I got to have a 720 FICO score, I got to have a huge down payment or cash. You don't need that to do that. Okay. If you want to get into real estate investing, there's some ways to go along that course. Every, every niche, every way has its pros and cons. There are advantages and disadvantages, there's risks with everything that you do. It's called investing, not guaranteeing. So only be prepared, you know, to invest what you're comfortable losing. If you're going to be using your last five or ten thousand bucks, don't do this. Okay? There's some other ways you can get into involved wholesale. But we're not going to talk about wholesaling today. That's not one of these strategies for you to buy your first investment property. Wholesaling is really not investing. It's, it's just flipping. There's nothing wrong with that. But if you want to get into the property ownership, investment property, when you start making cash flow and having all those amazing write offs and do that stuff in really truly true, call yourself investor. These are one of five ways the bonus six way, just put on that investment cap. Now the first strategy is many of us like, we like flip this house, we like hgtv. I mean millions of People every year go to Waco up here at Magnolia to see Joanna Chip Gaines house, right? They got famous for the whole flip this house. Good bones. There's all these investment shows on hgtv. And I was one of those people, I was like, oh yeah, I grew up in a hardware store. I can fix about anything. I like the idea of buying real estate. Well, I didn't know how to do it, okay? I fell flat in my ass the first time until I learned the right. But the first way, if you see a deal, see a property that needs to work, how do you finance it? Well, you don't need cash. If you're on cash, you can go get what's called a hard money loan, an hml, a hard money lender. There are lenders out there now, that's all that they do, are loans to investors to fix and flip property. Now there are some caveats about it, okay? A hard money loan is not a long term finance option. It is primarily for fix and flipping. It's a short term loan of six to 12 months. Okay? It's got higher interest rates, eight to 12, maybe up to 14%. Now that can seem high, like, oh my God, it's too high. But if you think about this, if you're, if you're gonna flip a Property, it's a $150,000. You buy it for 100 and you're gonna make 50 grand. And you borrow a hundred grand, are you going to let 8 or 12% in your interest fees if it takes you a year to stop you from making 50 grand? No. It makes sense numbers wise. Not long term, but short term it does. There's going to usually be a couple points of origination. That's a fee that the broker is going to charge. A point is one point is 1% alone. So if you're going to borrow 100 grand, you're going to pay one to three points in fees. Now usually what's going to happen, it varies a little bit. But a lot of times hard money lenders will lend off of what's called the after repair value, the R of a property. So if you're going to fix it up and the property's going to be 150, that means you could probably borrow up to 100 grand. So if you can buy that property, it probably needs work and figure in all your repairs into that 100 grand, you may not be able, you may not need to bring any cash to the table. All right? In today's competitor, you probably got to expect to bring 20, 30% of the purchase price to the table in cases. And it's usually not credit based. They're not usually going to care about your credit score. I mean they may look at it, may ask, and you have a horrible credit score, may I do it? But this is if you've got B and C credit, if the deal makes sense, you can usually find a hard money lender that'll lend to you. Of course, as always, you got to be familiar with, you know, have a crew, repairs. I would not get into hard money lending or take a home loan if it's, if it's your first deal, there's other ways to do it. I'd make sure you've got multiple bids when it comes to contractors. If you can do the work yourself, you can save some money. But also don't let you have to do with all the work yourself, slow you down. And that's where a lot of people do. They save money, they go buy an ugly house, they take forever to fix it up and sometimes they over rehab the property and they can't get for what they want to. Hard money lenders are a great way, if it makes sense, to take it down. Of course, harmony lenders will often review what kind of repairs you want and see if it makes sense. And they're often a really good judge if it makes sense as a project. Otherwise they'll tell you it's too expensive or you need to get it a cheaper price. I've used hard money lending in the past. I've been a hard money lender. If you're good, if you're interested in that fix and flip model, just be careful of the times, days on market and the time to sell because that number is obviously creeped up. But hard money lending is, there's plenty of lenders out there. They don't care where your credit score is. You know, if you've got some money to put down or you want to borrow, partner with a friend who's got some money and go in together. And this is one of the great ways that a lot of investors get started fixing and flipping property. But like I said, it's not a long term strategy. Now if you want a long term strategy, then what you want to look at buying a property and using what's called a DSCR loan. And DSCR stands for debt service coverage ratio and what it is, there's lenders that do these DSER loans full, totally 100% based on the coverage of the debt. That's why it's called debt Service coverage ratio. Okay. It's driven 100% by property income. A lot of apartments, a lot of commercial properties are financed with DSCR loans. And usually the underlying numbers they want to see, a debt coverage ratio needs to be at 125%. So if your mortgage and costs for that property, mortgage, insurance, taxes is a hundred, you know, $1,000 a month, they want to see you bringing in 12, 50. Okay. So that's what they want you to be at 125%. Otherwise if it's below 125% it's not considered very good. If it's below 1%, it's bad. If it's a 200% where you get twice the amount of income compared to expenses, that's a really good deal. It's almost a slam dunk to get finance. It's longer term financing can be up to 30 years. All right. And a lot of DSRs will have some different ways to make it a little bit more affordable the first couple years. A lot of times these DSRs will do only interest only loans like the first 10 years. Then after 10 years it goes to a full principal and interest payment. So it's going to save you a little bit of money, make it a little bit more optimized for cash flow in the first 10 years. Of course, what's going to happen those first 10 years, you're hopefully value the property is going to go up and appreciate some. You may not write down the principal amount of the loan a lot, but you've got some extra cash flow for those unexpected expenses. The interest rates are going to be usually 1 to 3% higher than what your traditional 30 year fixed rate on your primary residence is going to be. A lot of DSR lenders are still going to want you to bring some money to the table, usually somewhere between 25, 20% so that they're financing at 75 to 80. Sometimes you can get a little bit higher. Just depends on the relationship with the bank and what's going on the project. But once again it's almost 100% based on the income of the property, not on your credit. All right, that's the great thing about that. If you can find a property that you can get rented or you have a motivated seller who wants to move a property, or you can take one down and put some renters in there because rent rates are high in that area with your and your DSCR looks to be good. Hey, you may be able to rock and roll, get rock and roll along without having to do a lot of work. Yeah, borrow a little bit of money. Friends, family, raising private capital is a whole different thing. We'll talk about on a different episode. But DSCR loans, hey there's, they're very popular these days and it's something for you to get into start right now. So if you got a down payment and you can make 125% off your debt coverage and everything, there you go. It's pretty cheap money too. Okay, now, yes, interest rates are like six and a half, so you might be paying six to 10% on a deal here. But if the, if your numbers will make that great, get a DSER loan. When rates drop down a little bit more, go refinance, make more cash flow. Third thing, if you, if you don't have a hard money lender, don't want to do a dser, then owner financing is an option for you when it comes to buying real estate. And we call this kind of buying on terms, you know, and this is, we see this a lot right now, especially as interest rates have creeped up a little bit higher and properties have stayed on the market longer than expected. You're starting to see more owner financing options out there now. This is where basically the property owner finances the home. Finances the property to you. The buyer. Okay, you might need some down payment. Normal down payment may be 10%. You know, this works really well if you have a big chunk. But maybe you can't qualify traditionally because you, you're self employed, even done your taxes. You know, there's a whole lot of owner financing it takes, but it's actually more owner financing deals that take place than conventional every year across the board. This works really well right now with motivated sellers. People that can't sell their house, they got to move, they've gone through divorce, they gotta sell it and they need something to cover their monthly payment. So they may be willing to own or finance the property for it. It's also too, you'll have a lot of real estate investors that are tax savvy. They don't wanna sell their investment properties because they're gonna get hit with a huge tax bill. So they may be willing to own or finance to kind of spread out their tax burden and just get taxed on the income coming in off that owner finance note. I mean there's a variety of different ways we've seen owner. I've seen owner finance deals as little as 5% interest rate all the way up to 10, 11% or 12% or greater. It all depends on A different situation how what you look like as a bar, how much down payment you have and going from there. Now, don't get me wrong, some places you can get owner financing 100%. Okay. Or they'll structure the deal to oversell the property over, finance the property a little bit, but you can get the full purchase price. There's a couple different ways to structure owner finance deals out there. Interest rates are going to be a little bit higher than your traditional 30 year. If you went to a bank and got it okay. Just because a, the investor who owns the property is going to want to probably get a pretty decent return for the investment. Some of the note buyers out there that are buying owner finance notes are going to want to see an 8%, 9% or 10% or greater interest rate. That mortgage. Okay. Like I said, it's usually going to be 90 to 100 of the purchase price. 10 down is usually the ballpark we tell people to do. They're going to offer up owner financing, but we've seen people do less. We've also seen people do more. And like I said, it's usually not credit based at all. So if you see somebody who's motivated to sell and is wanting to get off and you can take that over and you know they'll owner finance the property to you, the D transfers to you. You're not responsible for taxes and insurance and upkeep of the property, but you can get in without having to put a 20, 30% down and have to jump through the hoops of bank financing. Owner finance is the way to go. There's a lot of people that are doing that buying investment properties via owner financing because the seller can't sell them traditionally because issues they're fixing them up, turn around and sell them and then paying off the owner finance note. Okay. As always, you want to double check. If you're doing this once or twice a year and that's it, then you can do it pretty easily. I can consult an attorney. Whether you're originating a loan or you're buying under financing, double check everything. All right. And you've also got to be, if you're offering financing, you're doing it multiple times or buying from somebody who does it multiple times, they've got to make sure that they're Dodd Frank compliant and that the loan is not predatory. So you want to make sure they go through a licensed mortgage loan originator. And that's something to take a look. If you'd like more information on that, reach out to me. I'd be glad to share more about that. Another one it's been very, very popular lately with. I've got a family member doing this, a couple of realtor buddies of mine, some friends. It's the. Oh, wait a second, let me go back. We take this back. It's buying something too. This is another strategy that's really starting to blossom because we had such a great period with low interest rate people that bought and got 2, 3% mortgage. But guess what? Now they've got to move, they can't sell the property or there's issues where they've gone through divorce, they're moving and can't move it. As you know, can't sell a property as fast because of the way the market is. So buying subject to. What does that mean? What means that you're buying subject to the existing financing. I've been doing subject to deals for years. You're basically taking over the mortgage payments. Okay. The borrower may owe something. This is great. When it's a low interest rate, you can step into a property, take over, start making the mortgage payments. You may need some money, may need to pay the borrower who sell letting you take over some money to walk away somebody towards their equity. That can be structured differently. You may need to make up some back payments if they fall behind two, three or four months. Okay. It works well. When the motivated seller is very motivated and can't afford to the the mortgage payment because of something that's happened. You're not taking advantage. You're literally helping them avoid a foreclosure. Late payments will only affect them for 24 months, but a foreclosure will affect them for seven years. Okay. And it's usually desirable when you can buy via subject to when it is a low interest rate. Okay. I prefer to buy when there is some equity. Some people will buy and take over something too when there's no equity or a little negative equity. I never understood that. But they hope over time that by paying down that mortgage that negative equity will go away. Or they'll build more equity or some equity when there's zero equity because of appreciation of the properties. Okay, now what you do when you take this over subject to is up to you. There's a couple different ways. Some people buy substitute for their own investment to move into those properties zone. Others will buy them and turn around and rent them out or the turnaround and owner finance them to sell them to somebody and make the difference. If They've got a 3% mortgage on the underlying mortgage, they'll turn around and owner finance it at 8% and make a 5%, 5% difference in between along with, you know, a down payment or other things. Okay. As always, Highly, highly. Definitely want to check and consult with an attorney. Some states are okay with this, others frown up on it. Other ways are specific ways to structure the deal. So always consult with an attorney you're going to buy. Be subject to one of the biggest caveats we hear is, oh, this violates the due on sale clause. Yes and no. I've only had a couple subject to deals where the bank actually came back and enforced the due on sale clause. Most of the time, as long as the bank is getting paid, the tax getting paid and there's insurance on the property informing, you know where the bank of the plaintiff, they're gonna pay off something, they don't care. So there's ways to specifically structure it via land contracts or LLCs. Just make sure you get with an attorney to structure this properly. Okay. Don't try to do this on your own because you can really screw this up. Okay. Next way is what's been very popular, like I've talked about before with some friends, family members are doing this and this is short term rentals, not buying a property turn into an Airbnb. But what they're doing is something called a rental arbitrage. Okay? Now if you buy a rental property in a DCR and you get a DSR loan and you're into a short term rental or rental, that's completely fine, but you don't necessarily need to have that down payment to buy the property. I have friends or what they're doing is they're going to landlords who have a property for rent or a home for rent. Maybe it's a condo or apartment unit and they're renting it the property for a year. They're signing a one year, two year lease with the idea that they're going to sublet this on short term rentals. Now you got to be very careful about this. You want to make sure and let the landlord know this is what you're planning on doing. If they won't allow you to do this, then don't do this. This will violate the lease. Okay? You're going to need some money down. Not like 20 or 30, like you're buying the property, but you're going to need some money to provide furnishings, beds, drawers, entertainment in the house, TVs, things like that. So you know, I've got a buddy that he puts 10 to $15,000 in furnishings into each one of his rentals and he's gone from 0 to 25 of these short term rental arbitrages in the last 90 days. Okay, you want to definitely check your local ordinances. Some cities are very frowned upon these things. Like here in Austin, Texas you got to have a specific license to do it here. Others completely outlaw ban them all. Some apartment complexes won't allow them or they allow only a certain specific. So always check with the management and the ordinances. I will tell you right this you can leverage though services like Airbnb, VRBO services to help you with bookings, to help you with some management cleaning. They can really do a great job. But it is much more hands on than just a traditional 30 day rental or a 12 month rental. There's more income because it's a higher dollar per night thing. But you also run into, you've got to have cleaning on staff, you're responsible for the upkeep of the property and it can kind of run you to death a little bit if you're not expecting. So I would not be doing this outside of your local market to begin with. As always, if you can't invest in your own market, that's a great thing. But if you're in a difficult market like California or other places, hey, there are other markets to go to and just be familiar with the markets that you're in now. Those are the five ways of buying your first investment property basically or rent becoming, having a real estate investment. The bonus way is something that I've been doing for the last six years and that's called buying notes. Some people frown upon the idea of buying real estate because they don't want to deal with toilets, tenants and trash outs. They don't have the experience of dealing with rehabs or fix and flips. They don't want to deal with that. You know, that's, that's the thing, they don't necessarily want to own a real estate. They like the cash flow aspect of it. And a lot of people, if you're buying a rental property, what we see with a lot of our friends who are renters or not renters, but rental or landlords is that they're looking to get a 250 to 300 month cash flow on a monthly basis. But with notes you can often buy a note and get that cash flow immediately without the deal in a toilet intensive trash out. So they haven't fixed and flipping in a lot of ways. Now what is notes? Note investing is where you literally, you buy that note from the lender, whether it's owner finance. You buy that note from the seller or you buy it from the bank or you buy it from a lender or other hedge fund. We've bought thousands of notes for the last 20 years. Now you can buy performing notes or non performing notes. A performing note is a note that's been performing, the borrower's been paying on time. You could probably buy a performing note at an 8 to 10% cash and cash return. Maybe greater, maybe less. It just depends on the scenario. A non performing note is where you're buying the note and the borrower has not performed. It means they haven't paid in at least 90 days or longer. You'll buy non performing notes at a bigger discount than performing. The bar still owes what they owe and you've got a little bit more work with a non performing of working to either get the borrower back on track with payments, some sort of loan modification or going the route to liquidate or get them out of the property through foreclosure or selling the property or cash for keys. There's a whole variety of exit strategies. We don't have time today for those. Make sure you follow me and I'll share with those in a bit. But the thing is that you're buying the note. The collateral security of that note is the underlying home is the asset you and I highly recommend you only buy first liens because if you're in the first lien position, the only thing that wipe you out is taxes and God. Well, if you've got insurance, you're good. If the taxes are paid, you're good. Okay, I would not buy second liens or junior liens, especially not right now. They're really overpriced and they're in a much riskier position than first lien. Now don't get me wrong, if you're small amount of money, yes, you can step in and buy second liens at a usually buy them at a lot cheaper rate. It may be cheaper to buy that route, but I like being in the first lean position. That's my position in my personal opinion. But you're buying that note usually at a discount for cash flow and the words of Bill McCarl. And note investing is the only strategy that we know where you decide what kind of return you want your money to make. If you're happy making 8 to 12, great one make more 15 to 20, great, you can do that. What I like about note investing is a lot of times you'll buy these notes you Become the bank. You're not in charge of rehab. You're not dealing with toilet stands and trash outs or the property management unless you foreclose. And there's professionals you can hire for that. As always with note investing, there are some risks, there's some pros and cons. Each stays a little bit different. Do not try to do this on your own. Do not try to be a note investor from just listening to YouTube, university or podcast. You get with licensed professionals, servicing companies, attorneys. And you really need a coach to walk you through that and I'm here to help you out with that. Okay? As always, consult professionals. Every. Like I said before beginning, every strategy has pros and cons. Know your risks, know your market, know your tolerances. What do you want to accomplish? What do you want to do? What do you not want to do? Going to your local real estate investor association and meetup groups is a great way to get your feet started. Get your feet wet. Talk to people there, talk to professionals. They're doing the strategies. Learn, take a class, get a coach. Getting educated is going to be help you out with a lot more than trying to figure out in yourself. I the biggest mistake I see new wannabe investors is they try to figure it out in their own because they think they know everything. I'm raising my hand and I can call myself on that because that's how I felt and I see it happening. Oh, I'm smart. I'll figure that out. Oh, I got 20 years as a realtor. My dad was a in the rehab. Trust me, it's a different market, different time. Get educated, get learned. It's called investing too, ladies and gentlemen, not called guaranteed. All right? If you can't afford for the 20 or 15 or 10 or 50 that you're going to put into the deal to lose that, don't do it. Keep it on your own. I always am a big advocate of investing yourself and understand that never, never invest in something you don't know. And as always, results will vary on experience and deal flow and each deal is completely different. But guess what, ladies and gentlemen, there's multiple ways for you to do with small amounts of money, limited amounts of money, no credit, bad credit. These are five plus the bonus of six is not investing. No investing doesn't care what your credit score is, all right? You just need cash to go do it. So I encourage you. Hopefully this was helpful. If you like this, make sure to share it. Subscribe to the channels. Follow me. We are here to help you. As always, guys, we are here to help take you to the next level. Subscribe to my channel. Check out We Close notes dot com. That's my main website. And if you'd like to jump on a phone call to talk about any one of these strategies, I'm glad to recommend one or two, depending on what you say or put you in the right path to success. Don't let money, credit or lack of experience stop you from resting. So go out there guys and gals, take some action and we'll see at the top. Bye. Sam sat.