Investing in Cashflow with Notes with Scott Carson - Passive Real Estate Investing with Maverick's Podcast

On this episode of Passive Real Estate Investing with Mavericks, I sit down with Scott Carson to uncover investing in cash flow using notes.

Hey, Mavericks. This is Ava Baukamp and this episode of Passive Real Estate Investing with Mavericks is brought to you by Legacy Impact Investors. We are an industrial investment firm located in cash flow country, the Midwest. We strive to shield off risk and beat inflation, all while producing predictable cash flow. We curate real estate investment opportunities for busy professionals and other real estate investors seeking passive income. To learn more about what we do and connect with me, go to www.legacyimpactinvestors.com.

Maverick. Noun. Unusual person. A visionary leader, go getter. An independent thinker. They see the vision for their life and pull that future to them with an unyielding belief that things can and must be better. They achieve what most innovative, influential, daring and direct. With a remarkably high tolerance for taking calculated risk. A foe to the status quo. This is Passive Real Estate Investing with Mavericks. Your host, Neal Timmons has been involved with over $300 million in real estate transactions. He's a published author, commercial property investor and real est syndicator. This show is for those who want to learn how to earn passive income through real estate investing. Now here's your host, Neil Timmons.

Welcome to Passive Real Estate Investing with Mavericks where we provide you actionable steps to grow your passive income and become job optional. Today, during this episode, you're going to get to discover investing in cash flow using notes. Now, for those of you who are new, I'm your host, Neil Timmons. I love passive income from real estate. Before I introduce you to today's Maverick, I want to make requests at any point you like what year, give us a thumbs up. Be certain to subscribe to the show, never miss a valuable episode and if you love what year, well, give us a written review. Plus, be sure to look at the description of this episode. We've packed it with thousands of dollars in free resources. Today we've got the privilege to learn from a person with two decades experience and over $1 billion in notes. Now, prior to his career on the note buying side, he was a mortgage originator. All of it changed, of course, in 08 when the market went upside down and he got introduced to a tremendous opportunity. Now, but describe today's Maverick. Someone who's absolutely passionate about helping, about educating others to help them get to their next level. Today's Maverick. I've got Scott Carson here with me. Scott, say welcome to the show for the audience's sake. Who are you? Where are you from? What do you do?

Yeah, glad to be here Neil, thank you so much for having me. And for those out there listening, I'm known across the country as the note Guy. But an active real estate investor and entrepreneur for over 20 years and I dive into the world of note investing. That's why I'm called the note guy. And for those that don't know, I buy debt. I buy mortgage debt on residential commercial properties, both performing and non performing. Talk about the difference of that. But we buy it for cash flow so I don't have to deal with rehabs or toilet stands and trash. It's. I like the passivity of it and bought over a billion dollars in debt in the last 20 years. I call Austin, Texas home but I buy in about 30 different states across the country. So that's just a little about me.

So tell me they don't. HTV doesn't put a lot of television shows on about buying debt so there's not a lot of folks who get to know exactly what that is or how about this, how'd you get into it?

So it's funny thing is I started a mortgage company with a buddy of mine and our sponsoring broker had sold off portfolios of mortgages to Wall street, stuff like that. And then when everything hit the fan in 2008 during the Great Recession, I was very lucky to have a couple mentors that had bought a lot of debt during the 80s days. And so they taught me the aspect of buying notes. And most people when they hear note investing they think of oh, I'm going to sell a house on terms, I'm going to offer owner financing, I'm going to carry the debt. That's one aspect of it. What I do is further up the food chain and we buy notes or mortgages direct from banks and hedge funds. So I had kind of like a three and a half, four year apprenticeship as we ran this mortgage company from 2004, 2008 and then when we hit the fan I just stopped on the origination side and just started calling banks and lenders that I dealt with to see if they had any notes on their books they were looking to sell off that was non performing and we started buying an individual note here and there, residentially bought it note on an apartment complex that we flipped. We bought some stuff very discounted because the borrowers hadn't paid in a while and we're able to work it back out with them to get them back on track for cash flow. Passive and others that we've had to foreclose and go from there. So that's kind of a unique experience. Dive in the world. There's only like three or four folks in the country that teach this kind of niche of real estate investing and we've bought over $1 billion in debt. And help people stay in their houses is what are we really prefer to do? Instead of rehabbing the property, I like to rehab the borrowers. Now that doesn't mean send them to the Betty Ford clink to dry out. Some of them do need to go there. But just trying to. When we buy that debt from a bank, we're usually buying it at a substantial discount. And then it's up to us to make our money to work with a borrower to get them back on track. And that's why I thought your audience would find value in this because you can buy this debt that's reperforming or what's non performing.

Let's talk about debt. There's typically two sides to the debt. Performing debt and non performing debt. One side is a little more active. Fair to say that non performing debt becomes more active than the passive side of it. There's multiple ways to participate in a passive basis in the debt world. But talk to me about the differences between those and maybe what you over the course of your 20 years in a billion dollars, what percentages is in each bucket?

Yeah, so we have bought probably 90% of what we've bought has been non performing. And by non performing, that means the borrower hasn't paid their mortgage, whether it's a residential property or commercial property, at least six months, usually sometimes six years or longer. They haven't paid in a while because the bank is kind of kicked the cane down the road. Not one to foreclose in a way. Or that mortgage had been sold off multiple times, different institutions or investors like me. So in a non performing note, we buy that at a big discount and we prefer to buy stuff that's occupied so I don't have to go in and rehab it. And our biggest goal since we buy that debt usually like a 50% discount, give or take a little bit, depending on where it's at in the foreclosure process, is that we'll reach back out to the homeowner and say, hey, what's going on, Jim? What happened? Tell me your country western song. Grandma got run over by a reindeer. Okay, you got kicked out of work, your dog got hit by a train, Whatever, whatever it might be, let's get you back on track. Do you want to stay or do you want to go? If you want to stay, you got to pay. If you want to go, that's fine. We'll just. You can either sign the property over to us now because we're now the lender. We can try to sell it like on a short sale or sell it traditionally or if you won't play ball with us and want to be paying the ass, then we're close. Like because we were the bank and have the same rights to. And that takes some working. There are. The great thing about is not me going and knocking on doors and all the stuff that we bought. There are servicing companies that handle a lot of that communication. The borrower. Once you decide to go the legal route to foreclose, then you hire attorneys in each state that you own debt in and then they'll handle the heavy lifting and report back to you at the bar. Comes to the table, wants to do a modification or something like that.

Got it. All right, talk to me about the. So there's plenty of people who are listening to this going okay, I get it all. But there's no way I'm doing that.

Right.

Two things. There's typically avenues. Talk to me about the performing side and then there are certainly people who put some sort of fund structures together out there. Whether it's you or a variety of folks. Yep. To participate in people like what you just described.

Exactly. And performing notes. You can buy performing notes that are either been performing from the get go. Somebody sells a house on owner financing, they want to sell the note off because they want to receive cash in after 12 months. And so you can buy into those deals on different trading platforms or from their note investors. I mean you could literally go to LinkedIn and look for like note sellers or note investors and find a lot of people that way. And that can make you a good 6, 8, 10% return or more dependent on how the underlying note is written. Now there's also kind of a third level that kind of bridges the two gaps. So our biggest goal when we buy non performing stuff is to get re performing. And so if we get the bar back on track making 12 months of on time payments, it's now considered as re performing. And we would sell that to people that are looking for a 10 or 12% cash and cash return. Because we bought it at 50. Yep. We get the bar, make a year of payments. Now we could turn around and sell that back to Wall street or other investors at 85.90 because it's now considered reperforming and so we got a year cash flow plus a good 25, 35 bump above what we paid for the asset. But it also leaves a good, good chunk of the profits on the bone. Now to that note buyer who looks for a passive return. They hire a servicing company, collect payments, the borrower's got some skin in the game because they put a chunk down. They made 12 months payments, they don't want to default, they get over their hiccups. And you can make oftentimes a 10 to 12% return by buying this reperforming stuff because you're still going to buy 80 cents on the dollar. That leaves a good chunk of equity in case the bar doesn't decides to fall off the wagon again. You have to foreclose.

Yeah, no, that makes sense. Now you probably see a number of people, there's lots of ways to invest in this. Literally just, I mean obviously everybody can always invest in their own name, but IRAs are probably. I see a lot of people in this kind of space with IRAs. 401 self directed stuff. 401ks, any sort of retirement plan?

Yeah, roughly about. Yeah, it's totally true. When I talk to the folks at the different self directed IRA companies, I always like to ask them that too, like do you have an idea? And they literally tell me about 40 to 50% of what they have under management as far as invested funds is going into some sort of note, whether a they're offering financing or buying a note. It's in the note business. And I always say most people are already in the note business. They're just on the wrong side of the payment stream. If you've got a mortgage, a car payment, credit card, you've got money going out and that money coming in. And that's why you like notes, because the cash flow comes in without having to worry about 12 cents of trash out. Worrying about winterization of a house if it's vacant, or dealing with a deadbeat tenant in some cases, stuff like that. But it's a. If you're using your self directed IRA money, great. You just hire a servicing company at 15 to $25 a month, collect payments and then wire the funds from their account once they receive the check or money orders and stuff like that, straight into your IRA account. And we've got a ton of students, investors out there that are doing that. And of course there's funds you can buy and buy into 50 to $100,000, invest in those type of funds. There's also crowdfunding platforms too that allow you the opportunity to invest in performing notes. That's another thing to look at. And of course people think you have to need to have a lot of money if you want to do this yourself. You can also go out and buy individual one off notes to 25, 50, $100,000 can get you into one, two or three of them depending on at in the country. Obviously 100 grand in California might buy you a doghouse, but that might buy a really nice house in like Cleveland or someplace like that too, right?

Yep. No, that makes sense. You know, one of the things you mentioned is servicing. Servicing. It's my understanding there's a whole bunch of rules and regulations relative to residential single family conventional loan servicing. Is that fair to say? And then maybe talk about if you don't do it, you just go out and hire it. Is it pretty easy to get that serviced?

Yeah, it is really easy to find a servicer. Most states want you to be a licensed debt collector if you're collecting any type of mortgage debt. Well, the get out of jail clause, if you don't want to go and get the license from the state and pay them, is to hire a servicing company who's already licensed in that state to collect. And not every servicing company is going to be licensed in all 50 states because they may not be collecting in New York or New Jersey, which is expensive to get a license there. They may not be collecting in other states. But you need a servicing company if anything because you don't want to be dealing with a paper trail that having to create these documents and make sure that every penny is accounted for and counting. That's what the servicing company is there when they get it in, they adjust it, they have a payment history, payment trail, stuff like that so that you don't have to worry about it. You just collect your monthly payment. But yeah, it's pretty easy. Like a performing note will run you 15, $25 a month depending on who the servicer is. A non performing Note, maybe from 25 to 95 bucks a month because they're going to be doing more work on that asset for you. So that's the great thing about it is there's a few states that want you to be separately mortgage broker, license or separate license on top of your servicing company. I'm not buying a lot of states because there's not a lot of good stuff. We're talking like on the west coast, like California, Washington State, Oregon state want you to do that. I know a lot of investors aren't buying there because it's not very lender friendly in those areas. And they also want. It's expensive to get a license there, so we just don't buy there. Georgia is a state that wants you to be a licensed mortgage broker, so that could be an expensive license to get. Unless you're using your self directed IRA to buy the note, then that's the exception to the deal. I don't know how they track that, but if you're using your self directed IRA to buy it, you're okay. We also will partner with an existing investor buddy of ours who already got a mortgage broker's license and we'll just pay them a 10% cut of the cash flow that comes off that to basically run it through their llc. Basically, sure.

Yeah. Interesting. All right, so you've done a ton of these. Give me. There's certainly a lot for somebody to learn, especially if they go to get real active. Maybe give me the top two, maybe three red flags when it comes to underwriting. When it comes to buying one's first note, what should send them running for the hills?

Never buy a note you don't want to end up owning the property on. Okay. The cash flow can look great on paper. I mean, that's what we're looking at in spreadsheets most of the time. We call them a tape in our industry, but a spreadsheet which will have like 60 cells across it from the address to the borrower's information to their social to 12 to 24 months of payment history, plus all the terms of the notes and other stuff like that. If it looks great, I mean, if the cash looks great, obviously, then look at the property. If the numbers don't make a spreadsheet, I don't mean go looking at a property. So the first thing is a numbers look good, but the house is a piece of crap. It's in a rough area. Don't buy it because if you've got to take that property back, it now becomes a pain in the ass. And you don't want to do that. Okay. That's the first thing. Secondly, don't fall in love with equity. A lot of investors, real estate investors, getting the business, they look at the equity and they're like, oh, there's a ton of equity in this deal. Well, you're the bank, you're not the property owner, so you don't actually own the equity. And I see investors that get into this and they overbid because they're used to bidding at 70% of MAO minus repairs and that formula. Well, you're buying the debt, the equity actually doesn't belong to you, it actually belongs to the homeowner. And so you have to keep that in mind when bidding. Another thing is always check taxes. That's a big thing that can trip people up. If you're not checking how much is owning, back taxes or if there's a tax return certificate sale or tax it like that. Know your foreclosure time frames. Each state's a little bit different. I mean we do things fast here in Texas, like 21 days. I mean fast foreclosures, fast highways and fast executions, you know what I mean? And then you look at like New York, New Jersey, New York can take you three years to foreclose. It doesn't make any sense to buy up there unless you really live there. And it still doesn't most of the time. So know that I always like to tell folks if you're starting off, avoid the rural properties. Stay in a major city, usually 50,000 or greater. Gives you plenty of realtors to drive by or rehab people if you got to do or anybody, buyers potentially or borrowers and get in the property. So those are just a couple of our, our quick high item things that we kind of look at due diligence wise on the front end to help us eliminate a lot of stuff.

Are you a passive real estate investor seeking financial freedom? Well, today's market's unique and it's ever changing. Now is the time to get educated on how to strategically invest in commercial real estate for long term financial freedom. Grab your copy of how to Passively Invest in a Changing Economic environment. Go to www.mavericksinvest.com Talk to me about, you know, you and I are, this is the last one that I'm doing for this year. We are taping this just at the end of 2023. So this will roll out here in just a month or so. So for everybody listening, I'm curious for you, what are you most excited about 2024?

So it's everybody's word is so excited, oh there'd be more foreclosures or more distressed assets, distressed property in 2024. And I'm, I've already been seen up for six months if not a year now. I'm most excited that I think lenders and banks are going to have to come to the determination that they are going to have to take a bigger discount to sell the debt off. You're not going to see this huge wave of foreclosures that everybody keeps talking about just not going to happen because the banks know that they can sell a debt off six to 12 months ahead of a foreclosure sale to investors like me or funds like what we do. And they can get their money in and go out and lend that all out and how they leverage that, we're seeing more stuff. It's always interesting, Anil, when I get phone calls or emails from banks and asset managers ask me when I'm buying, it's usually the other way around, me reaching out to them with an email or LinkedIn. But when you start getting people, hey, can you give me a bid on this? Or oh, we can't take that. I'm like, well, you can take that now what I'm offering you, or it'll be less than in 90 days or less than six months. And so there's been this gap kind of between what banks and lenders have wanted to sell, stuff that was distressed versus what investors want to buy and that gas beginning smaller and smaller as we get to the end of the year. So as we get into 2024, I expect us to see a lot of stuff hitting the markets. A great thing that I look at too, that might be funny is I look at job openings and banks and the internal departments that handle the note sales are like the special assets managers or the secondary marketing managers. Those are the two big job titles. We've seen a huge dramatic increase in both those job openings at banks in the last 12 months. So it tells you that banks are staffing up because they see the tsunami of distressed debt coming down that pipeline.

Are you seeing that in more in residential or commercial?

Both. We see them both, actually. Well, obviously commercial has been hit hard depending on the asset class. Obviously office been hit hard. Multifamily has been hit hard because of the interest rate hikes and people not being able to refinance after they regentrify the assets. That's a thing that's been going on for a little while now, the surprise with that. But we're seeing that on the residential side too of just defaults people. When you look at the numbers and economics and the recession we've got and inflation and stuff like that, say somebody needed an extra 12 to 15 grand a year just to pay for the basics of what's going on. And so while people have low interest rates and all this stuff and they've got a property, they may not necessarily want to sell that property because they can't move in anything else. So we're starting to see more defaults on people that just Aren't getting by now. It's not going to be in, like, places like hot in a lot of cases. Austin is one of the hottest markets where I live. I don't see much Nashville I was just in. But you will see some stuff in those areas. You'll see stuff more in tertiary markets and stuff like that, for the most part, but make great investments. But we're seeing increase in tapes, as we call it, or spreadsheets that come out from these banks or sellers.

Yeah, interesting. Let's do this. I want to move on. In the final segment, what I call the final four, what do you think holds most passive investors back from hitting their personal next level, whatever that next level happens to be?

Confidence and knowledge. I would say that the two are directly related. The more knowledgeable you are, the more confident you are in a thing. I think one of the biggest fallacies that investors face these days is, and we see this everywhere. I've traveled the country and spoke at investment clubs across the country. And you go to your local, like, investment club, and every month or every other week there's some new guy or some new strategy coming through. And a confused mind is a mind that says no in a lot of cases. So I'm always laughing because I see investors that I'm going to take this new class and put this new tool in my tool belt. I'm going to this new class. And they literally got like a tool belt full of like 50 different strategies, but they never implement one of them or never give enough time for the marketing and one of these strategies to work. So that's the. That's the big thing is you got to have patience. You got to stick with something for a while. You also got to realize what's truly working in your market that you're buying in or the markets you're looking to buy some stuff in. So that's the biggest thing is investors want to do something. And now that this is coming out in Q1, I mean, you're going to see investment clubs that are just going to be always the busiest time of the year as a Q1, people going to do something, right? Here's the biggest thing. Before you ever spend a dollar on a class or an education, ask people that are closing deals, hey, when was your last deal that you closed? Is this so relevant for my market? Will this work in my market? Not everything works in every market out there. And what are your goals and what is the time commitment that you have to achieve those goals? If you're working 50 hours a week. You don't have lot of time to go knocking on doors or dealing with turnkey rentals, stuff like that, unless you hire property management in a lot of cases. So you got to keep that in mind. You learn to delegate and outsource the things that you can't do. And that's the hard thing I think a lot of investors get into is that we are such control freaks. I want to touch everything. Well, you don't need to touch everything because you're just going to screw it up in a lot of cases. So that's the thing. Focus on one or two strategies that are working in today's market. Like notes are great and that works in up and down stuff. A big thing could be like subject to taking over properties with existing financing, investing in some funds. Just know what's going on the market. Talk with folks in your local market that are closing deals and then give it time. They say you got to be perform 10,000 hours something. Being an expert, you don't need that much my time. But don't be afraid to get in and market for deals. Spend a little bit of money, whether it's whatever marketing aspect it is, give it time and realize it's just going to take a little bit time for the seeds to germinate before you can start harvesting. Don't be impatient. Like most people, they don't give anything, an opportunity and they just run from one thing to another thing and another thing. That's why you have frustrated investors because they spend all this money and never really invested their own selves into that process of finding deals.

What are you passionate about outside of real estate?

Oh man. What am I passionate about outside of real estate? Last year gotten very passionate about my health. Dropped 60 pounds.

Good for you.

Basically kicked diabetes. Took my A1C, my blood sugar from where it was full blown diabetes down to normal levels in the last year. So that's one thing I've been very passionate about. Passionate about animals. Enjoy travel as well too like that. So just really I don't have kids. I have the four legged kind, the furry kind, you know what I mean? Yeah. But I love helping people close their deal. I love helping people and that light that goes off when they get a little conf and say hey, I can do this, this is easier than I thought it would be. Or hey, I can raise capital. This is easier than. This is the stuff that really drives me wild and gets me excited about things during the day.

Your favorite book?

Oh, easy, Hands down. Outwitting the Devil by Napoleon Hill and rewritten by Sharon Lecter a few years back. If you haven't read it, it is a story of Napoleon Hill, who's author of Think and Grow Rich, sitting down with the devil to ask the devil how the devil is successful. And he responds back, well, I throw things in front of people. I give them that shiny object syndrome where they. Things are thrown in their face or they cause them to drift off their main focus. And basically, those that are most successful in life, in anything, are the ones that are most focused and direct. They say no to say yes to their dream. They say yes later on to things, but they're very focused. And that's. That's one of the big things about if you want to find success, be focused on what you want to do. And sometimes to find that success or hit that rhythm or that income or whatever you're looking for, you got to say no to other things that are taken away and distracting you from your main goal.

Your favorite way to make an impact in the community.

I think it's just giving, and it doesn't matter whether you're giving a time or giving money or just showing up. I think that's the biggest thing is thinking. I live here in the north part of Austin, and I get up and I walk in the morning every day, and a lot of people, nobody knows their neighbors anymore these days. You know, I mean, we were all kind of inside hiding out because of COVID Well, with me getting out and walking a couple laps a day, I got to know my neighbors. And at Christmas time a couple weeks ago, instead of gifts and stuff like that, I make cobblers. Christmas cobblers. All right. Yeah. And so I started making a list of people that I've gotten to know in France. Like, oh, it went from like four a couple years ago to now it's like over 20. So making cobblers and just showing up in people's doorstep say, hey, I know that. You know, we've got quite a few elderly folks that live here in the area that live by themselves. And seeing them smile because they don't expect it. I'm not expecting anything in return except that smile. And just seeing people like, wow, thank you very much. It was on call for. People are like, what do I owe you? It's like, you don't owe me anything. It's just me trying to make a better day for you when you may have a rough day. And I don't think we see enough of that taking place in the world.

That's cool, Scott. This is a great Conversation. I know you're certainly a wealth of knowledge. You've got lots of years of experience, tons of reps, if you will, transactions below. Yeah. Or beneath. Yet say, for people who want to find you, they want to follow you, they want to connect with you, where can they go? What should they do?

Sure, it's really easy. I mean, if you go to weclosenotes.com that's we close notes.com, that's my main website on there. We've got a variety of classes. We've also got the number one YouTube channel, number one podcast for note investors known as the Note Closer show podcast with about one and a half million downloads and coming up on 850 episodes here in the next year or two. But if you really enjoyed this and want to learn more about it, I've got a one day class that I'd love for you take for free, no strings attached. It's me teaching the basics. Or guys, I call it the Cliff Notes version of note Investing. For about six hours you go to note weekend.com, that's noteweeked.com, no credit card. Just click on the RSVP link and it'll send you to our free one day class for you. But one of the most important things you can do if you're listening to this episode and listening to this podcast, Neil does a tremendous job and we as fellow podcasters, we love to hear from our audience. So do yourself a favor, do him a favor, hit that subscribe button and go on over and leave him a five star review. We want to hear from you. He wants to hear from you. And it's a little bit of saying thank you in the new year for all the hard work he's putting into this podcast. So do that for Neil and you won't be disappointed.

I appreciate that, Scott, and I'd appreciate that from you, the audience and the links. Scott, reference all below in the show notes for you. Scott, I appreciate your time. Thanks for being here.

Thanks for having me, man.

Happy New Year too to our listeners. Pat yourself on the back. You guys have made it to the end of the show and most people never finish what they start. If you receive value from today's show, be sure to share it on LinkedIn, your Facebook page or your social media platform of choice. Subscribe to Never miss a valuable episode in the future. And if you found value in today's episode, give us a thumbs up with a positive review. If there's a particular topic you'd like to hear about, well, I want to hear from you. Shoot me a message on LinkedIn. The link to my profile is below in the show Notes. You can connect with me there for more valuable content.