Tyler Combs Shares Insights on Creative Financing and Real Estate Investing

Welcome to the Cedar and Porch Real Estate Investment Podcast. I'm the host, Shona Lepis. Follow along as we unpack and demystify real estate investment strategies through expert interviews and personal experience. From how to find off-market deals to creative financing to long-term and midterm rentals, our goal is to educate and inspire others to gain financial freedom and generational wealth through real estate investing. This podcast was brought to you by the Midterm Rental Playbook course. The Midterm Rental Essential Method teaches real estate investors how to set up and fully book your first midterm rental with great guests so you can have the 2x your cash flow. We cover the basics from planning and how to set up your first midterm rental, how to self-manage and get direct bookings and keep more profit, how to launch your first midterm rental. Learn more and sign up at themidtermrentalplaybook.com. Welcome everyone today. I'm so excited to chat with Tyler Combs. He's the co-founder of Rare Bird Brokerage and the founder of Investor Lab. He is definitely really well known, very accomplished, really into creative financing. So I'll just let Tyler take it from here, introduce himself and what he's up to.

Thanks. Yeah, so Rare Bird's a brokerage, a property management company, and a development firm. Started out flipping houses, got into lot splitting and developing in Portland, and then started picking up properties to hold as rentals. And then Investor Lab is a really collaborative group that meets locally in Portland, and we do some online stuff as well, but a group of collaborative real estate investors that are invested in each other's success. We have speakers and education, but the big magic there is the networking and collaboration that can happen. And I think that's how we connected was through Investor Lab.

Totally. Yeah. No, it's definitely one of my favorite events. I never miss it if I can. So if anyone hasn't checked it out, it's just really educational and inspiring and great crowd. Yeah, I'd love to hear, I feel like a lot of times people are like really successful, but you started somewhere. How you came to where you are, a little bit about your journey in real estate.

Sure. Uh, I started in 2009, right after the crash. Everyone was running away and it seemed like a good time to get in because labor was cheap and houses were cheap. Banks had a flood of inventory. They didn't know how to handle their REOs, so you could get some really good deals and So I started just buying REOs and flipping them. Quit my day job probably too soon. That's a whole nother story. Made some mistakes along the way, but it wasn't until a few years later that I stumbled onto seller financing, and that's really what allowed me to get into the rental game of actually being able to hold them. And then ever since then, probably like 2013-ish, I've been able to flip a few, hold a few, My rule of thumb is usually hold the multifamily and flip the single family.

That's smart. That's where you're— that's where the, the cap— just the volume, right? With the multi. Yeah.

The economy of scale works out. If you have multiple properties in one location, maintenance is easier. Everything, accounting, everything is more consolidated, but there's pros and cons. That's a whole nother debate between single family. The appreciation and the value works really well with single family. You can force appreciation multifamily a lot faster, but in a market like this, we see that it's a lot harder to sell multifamily than it is to offload single family. So you have to be in it for the long haul.

No, that definitely makes sense. And I love that you're— I think a lot of times when you get into the industry, it's all about flipping and wholesaling because that's quick great capital, but people get into the industry because they want that, that quote-unquote passive income, right? And you have to hold to do that. So I think that it's not stressed enough. Flip or burn, but keep something, right? Because otherwise, what do you have to show?

Yeah, flipping is a full-time job and a stressful one at that. One of the riskiest ways you can invest in real estate is flipping. The, the returns are great. It's a great way to get started to build a little, uh, nest egg to start your portfolio so you can have down payments. And that's how I've done it is take the money that I make in flipping and turn it into down payments for, for holding properties.

Yeah, no, I love that. It's a great capital building, but yeah, no, flipping is definitely not for the faint of heart, especially these old houses that we have.

Oh yeah. I'm in the thick of it right now with a few.

Oh, so you have your own, you have the kind of, I don't know if it's advantage, but having your own build, not building company, construct or development company. So does that help with flipping? You have a team that you trust?

We used to, like a construction company, we used to have like a full-fledged construction company with a bunch of trades and laborers. And we decided that we hated doing that. It was, it didn't, we didn't really figure out that model and it was different type of labor force to manage that we weren't good at. So we shut that department down and went back to using general contractors. So we are a developer, but we still hire GCs to do any major project.

Okay, interesting. That makes sense. So I'm curious, I feel like the real estate GC relationship can be tricky sometimes. Sometimes their sense of urgency is different or they don't, they're not investor friendly. Do you have any, I want to get another step, some kind of tips when you're talking to a GC or doing a flip, what do you look for? I'm curious.

With investors are cheap bastards, right? So you don't want to pay for the back office, the experience, the, the white glove service that you'd get with a really good GC. You want to get it done quick and dirty and pull the right permits, but you're really trying to get in and out of there for as cheap as you can. And so you end up working with— you have to find that sweet spot of a contractor with integrity that's reliable, that can get you bids on time, that keeps track of their books, but also can give you that investor pricing that you need to make flips work, especially in Portland.

Mm-hmm.

And so we've found it takes a lot of babysitting of contractors. We have a, a project manager on staff. That's their whole job is to keep contractors on track. And then on top of that, either Mike or I are also involved in, uh, kind of making sure the projects stay on track. And we found that having our own, uh, construction management, project management, task management system. And is really important because a lot of times that discount contractor is not very organized. So we make it mandatory for them to join our— we use Basecamp. So we make it mandatory for them to join our Basecamp. They interact on that. We train them. It takes a few sometimes a few months to— but we really force that communication to happen all in one place. All the bids and change orders go in one place. All the messaging about the property, pictures get updated weekly, tasks are on there so that we are all on the same page. So having a system to manage the contractors is essential. And then you just have to try them out on a few projects. There's really, I can't tell you how many contractors I've gone through where they seemed like they were an answer to prayer. And by the end of the project, I didn't, neither one of us wanted to talk to each other again. And that's, you just have to do a few projects. The other thing you have to watch out for is you have to figure out what amount of projects that contractor has the capacity to manage at once. Because we've had projects where the first project that went great, they managed it, they were solely focused on that, it was so smooth. And then we say, great, let's hand them 3 projects at once. And, um, that then they fall apart. Uh, so you have to understand their crew and their capacity and how many projects and go real slow. If you want to grow, uh, in the amount of projects you're using one contractor for, go one at a time. Debrief after every project with them and before you hand them another project on top of what they already have, talk through with them to make sure they have the capacity in the crew because hiring construction is still a nightmare and it's really hard to find good people.

I love everything and I'm personally, I absolutely love Basecamp. I used to have a design agency and we lived in it. It's like, if it's not in Basecamp, it is the most intuitive for anyone out there. It's the most intuitive. Like I just onboarded a VA in it and she picked it up like that. It's just, I've never thought about that, actually making your contractor use it. I kind of love that.

Yep. It's been a game changer for us.

That is so cool. Yeah. Our first contractor was like, we've got an app and then the app never appeared. And it was just like, I call it cat herding. It was me over there just, and then me being over there and the electrician showed up. I'm like, glad I was here to show you where the lights went. I love that you're actually, I don't know if it's forcing, but That's really smart because there's otherwise you run text threads and you don't know the paint color and you're just kind of—

Yeah, we also use our own interior designers and stagers. We bring them in at the beginning of the project and we have them do all the design selections, material selections. Sometimes we have them do ordering, sometimes we have the contractors do the ordering. And that is essential to get that all lined up upfront. And then we have it all documented. So the accountability is there.

I love that. So you have this team and they're not coming in or the stager's not coming after everything's the finishes have been chosen. And it's like this very, that's really, I think I saw on Instagram on that. So who is like your core team? You've got your GC, designer.

It depends if we found the deal off market through our own sources, then our brokerage is going to be the one that lists it. If a broker brings us the deal, then they usually get the list back. And so we, it depends on who, how we found the deal. It depends on how we're going to dispo it, but we have, we have a fairly large team of, we have acquisitions, we have project management, and then we have, we outsource our accounting. We outsource a lot of stuff. And we found that the more we can outsource and just keep our keeping our team of employees really tight, that has worked best for us.

So are your designers and stagers in-house or are they contract?

No, they're independent contractors. They're really professional and they, we're not their only client, but we, we try to give them enough work that we are a priority client.

I love that. So I personally, like, I love design. Do you, is there, do you weigh in like they, are they no that you like these finishes? Is there a shorthand that you guys have now that you've done so many?

Yeah, we have a pretty consistent palette.

Mm-hmm.

And then we have different kind of design packages for different finish levels. So if it's a $30,000 budget in a D-class neighborhood, then we're not gonna be putting in super high-end stuff. So we, we can point to a project we did recently and say, let's do the same quality level as XYZ. And then if it's a higher-level project, then we usually can point to a different project. So we have a bunch of different examples that we can build off of and tweak each house, especially in Portland. One thing I love about flipping houses in Portland is there's so much uniqueness, variety, historic aspect, but that's also a lot to juggle. You have to really make sure that you're matching the quality consistently and the the historic age of the house consistently.

I love that. It's one of the few flips I've done. We've tried to keep some of that historical integrity, but modernize it. I don't know. Do you guys have a similar, how do you approach like keeping some flavor but modernizing it?

Right?

Because there's no dishwasher half the time, or there's one bathroom, right? I'm just curious.

That's the kind of thing I leave up to the designer.

Designer.

Okay. The first few I did myself, real proud of them. And I decided to meet a designer and I just had her go through pictures and walk through the last 3 or 4 of my flips. And she gave me, and I said, "Just rip them apart. Tell me what I did wrong." She gave me a 50-page report of how badly I designed it myself and all the design rules I broke. And from that point on, I've just hired professional designers.

Oh, no, that makes total sense. Focus on what you're good at. And I have to ask, I'm sure there's— I don't know if there's a measurable ROI, but by hiring that person, that expert, is the ARV like higher? Do you think you sell? I'm curious.

It depends on what your base level is. So, okay, I don't really have that. I've been using designers for so long, I don't have a base level of, oh, the ones we don't use designers on. If it's really simple, just carpet and paint, then we know what we're going to put in there. We don't need it. But if there's any major design changes, we're changing out a lot of fixtures, even if it's no permits required, we're still going to use a designer to select all the materials. And the cost savings comes in, they have relationships with material suppliers. They're going to get it on site much quicker. We don't have to have spend our time finding all this stuff and sourcing it. So they're definitely worth every penny.

No, I'm, I guess I'm, I love design. I think it's so important. I think that's what makes you fall in love with the house when it's done. Awesome. That's really, I love that hearing about your team. So I guess to switch gears, you said that you got started with flipping and that gave you the capital to get into like buy and hold. And I think you've really leveraged or cracked the nut on owner carry. And I think it's like this a lot of times, like this unicorn thing. And I think it's out there, but I'd love for you to speak maybe just— let's just explain it for someone that hasn't come across it or how it works, because I know you're an expert on that and it's my favorite topic.

So yeah, so it's called several things, first off, right? So you just said owner carry. Before you mentioned seller carry, and a lot of times people call it installment sale. So the terms are interchangeable. But what we're talking about is Instead of paying a seller the full amount of the purchase price, you are paying them a small down payment and then you are paying them over time for that house. And that can be a combination of principal and interest or interest only. But the key is that you are not paying them all up front. Typically, if you're doing seller carry, then you don't need to have a bank or another lender come in. That the seller is acting as the bank. And what that does for the seller is that it allows them to only pay taxes on the money they're receiving. So they're paying taxes on the down payment, and then they're paying taxes every year on the interest they've received and any principal reduction payments they've received. But they do not— if you are doing an interest-only loan with them, that means that they— the— you had the down payment, that was principal, that gets taxed as capital gains. And then if you're doing interest-only from there, they're deferring all the rest of their capital gains until you pay off the note with some sort of balloon or maturity.

Okay. No, I love— and that answers so many pain points because often if you are self-employed dealing with banks, they want your firstborn, they want— it's just, it's such a nightmare. And I feel like the other, I think, misconception is, and I know you've spoken about this, is that you have to convince someone to do owner financing. And I, I don't— I think it's really a win-win.

Yeah. And sometimes I wouldn't call it convincing. Sometimes it takes a lot of education. I think if you are coming in with that being your only model and your only acquisition strategy, then you're going to apply way too much pressure on someone to do seller financing. And even if it is a good fit for them, they're not going to feel that way because they feel so much pressure from you. So I think that the key when you're pitching seller financing is that you are giving them several options and seller financing, it just has to be one of many options of the way you can structure the sale. You can use their support team, their professional service providers, as your allies. A lot of times, the first time I bring up seller financing is through their CPA, and I ask, hey, have you talked to your CPA about the consequences for taxes on this that will come from this sale? And if— a lot of times they haven't even thought about it. Other times they will make some statement like, I'm afraid to sell right now because I know how much capital gains I'm going to pay. And then You can say, I'll have you talk to your CPA about an installment sale. And CPA is like the word installment sale, because that's the like technical IRS term. So that's what I use when I'm talking in context of their taxes and their CPA or bookkeeper.

I love that. And then it's leading them to that. They come to it on their own versus being like, this is your best option. When I have pitch that I presented, cash is this, and then all the options. And I love that you're not just coming at it with— you have a toolbox and it's one of your tools that you can offer. So do you— I'm curious, what are— I think, what are like the signs that you can look for when you're talking to a seller and you're just having that initial conversation and kind of building that rapport? How do you start that out or what are you looking for?

I call them green lights, right? So you're looking for green lights to figure out where you're going to take the structure of the deal and what really best solves the problems that they— everyone is selling for a reason. So first you have to find out what is the reason. If they're selling because they need all the cash for— to say they, they live in the house and they need to move and buy a new house, they're probably going to need a good chunk of that cash to be able to move to another house. So that's one red light. If they live in the house, they need another place to live and they need all the funds to be able to move to a new place. That's a red light. If they don't owner-occupy it, that's a green light. That means that they probably don't need that fund, the proceeds for a new house. If they are selling because they have any sort of cash, you know, like a medical condition or helping a family member out and they really need that cash right away, they're probably going to be willing to pay the capital gains just to get access to the cash. They'd rather take the hit now than deferring it down the road. So the green lights are someone who doesn't need the cash. They have lots of equity. They bought it a long time ago. So these are all things that help you realize, all right, they are probably facing a big tax consequence and we can structure something that allows me to not have to put as much money into it, and it allows them to not have to lose so much to Uncle Sam right off the bat. Uh, the other thing is, if they are renting it out and they're used to an income stream from the property, then that's another green light, because once people get used to an income stream, they don't like getting rid of it. And if you can provide a solution that allows them to collect the checks without the hassle of the property management and being a landlord, then it's a very appealing pitch to make to somebody.

I love that. And the way it also feels when you say your landlord, it's not passive, right? We own— even if you have a management company. But I feel like an owner carrier installment plan is truly passive because there's no leaking toilets or roofs to replace, right? It's purely just collecting on a note.

Correct. They're taking a very active, headache-ridden asset and they're turning it into a pure note. So they're just— it's just on paper. If the whole thing burns down, they're going to get an insurance check, right? They're covered in every way. And we set up our loans so that it is very passive. There's a lot of protections for them. And even if they pass away, we, we build in the beneficiary so that it goes straight. The checks can come to the beneficiaries. Without any interruption.

That's— and you're the other part of that. I feel like you're leaving a legacy without the headaches, right? Because I've talked to landlords and their kids have seen how hard they work and their kids don't want the properties, right?

That is true.

They're just like, they want nothing to do with it. Yeah. All right. So many questions. So you said structure of a note. I'm curious if you have any tips on that. I think you go through escrow, but do you have any tips on how you guys are structuring it?

So it's really So there's two, two popular ways to do, to structure a seller carry, and that is through a trust deed and promissory note, or to do a land sale contract. They're very different. Land sale contract does not transfer the title into you as the borrower or buyer's name. It stays with the original seller until you've paid off the full contract. So it doesn't allow you to encumber the property. It doesn't— you really do. You own a right to the property. It's like an option, but a little different. So, but it's, you own the right to the property, but you don't own the title to the property until the deed, until you've paid off the contract. Now, if you're trying to do something like a sub-to deal or there's underlying debt that you don't want to have to move, then a land sale contract can be a good way to go. But if their property is free and clear and they— and you want to be able to do more with it in the future in terms of maybe putting a second position note on it, adding the debt, investing a lot of your money in improvements, then promissory note and trust deed is the better way to go. You have more control of the property as a buyer. You own the title. And they are literally the same as a bank that you would loan— you would get a money loan from.

Okay. I've heard, I've definitely heard of land sale. I understand the other. Can you just unpack that a little more? Maybe I've just never done one. So it'll be an example where you would do a land sale.

Think of it in like a physical terms. It used to be that the physical copy of the deed was everything, right? And if you lost that, then who knows who owns the property? So. Think of the deed as the title to the property, and that gets put in a safe and by an escrow company, and that escrow company locks that deed in the safe, and then they start collecting your payments, and you pay that seller every month and say it's a 10-year term. And at the end of those 10 years, when that final payment's made, the escrow company unlocks the safe and hands you the deed. That's the land sale contract.

Got it. Okay. Okay. That makes sense. Thank you. So I guess going back, there's clearly, I think the light bulb moment was for me, it's really, it can be a real, for the right situation for a quote unquote tired landlord, it's really a very, it helps both parties and it's really a win. So I guess the next question is how are you marketing specifically to free and clear properties with that they've owned it for 10 years, or are you How are you, how are you finding these people that are maybe more open to that type of a creative deal?

So when you're trying to build your marketing list to find off-market properties, the easiest thing to do is go to a title company and say, hey, I'm an investor, I'm looking to buy properties. Can you give me a list of this zip code with these parameters? And one of the best parameters to find high equity properties is the transaction date. So when you get a list from title, you say, I don't want any transaction history for the last 15 years. That means there's no sales and there's no refinances or anything on the property. And so if, if there's no recording activity, meaning there's no encumbrances that have been recorded that show up on the title report, that's going to give you a very good indication that they have a ton of equity in the property. And those are the people that I love working with because they're usually really smart and sophisticated. They understand what they're doing with their property. They understand the tax ramifications and they have, they have a lot of options when they have a lot of equity. So I like working with those people more than I like working with, say, a distressed seller. Where they're highly motivated, but their options are really limited. So both have their place and you can offer a service to both. But it's a lot more fun to work with someone who's played their cards right over the years. And now that they have this property with a lot of equity and you can help them figure out— especially sometimes they have a lot of properties, right? And then you can help them figure out a way to offload those properties over time strategically as part of their estate planning.

Yeah, I love that. And I have to, I've done, I've never done so many courses in my life. And a lot of the gurus teach like you target to very distressed motivated sellers and that feels a little predatory. Like I know they need help and you can come at it with kindness, but when you're talking to a landlord, they are just much savvier and they get it. It's like you, you can, yeah, you're not, they're not under duress. They have options and it, Yeah, to me it just feels more genuine for what I'm trying to do, right?

You're not being like, yeah, there's still with the distressed sellers, they still need to sell it. It's just not as fun because you're not, the end is you're getting them out of a really tough situation, but they're not usually getting a big chunk of money at the end. And so you're helping them out, but they're not being able to cash their chips out of the casino and walk away. Way up. They're usually pretty beaten down at that point. So it's just, I think it's still fairly ethical to go after distressed sellers because they need help. It's just a lot of work and no one's happy at the end versus the other route. Everyone feels rewarded and happy and it's just a more feel-good situation. Yeah.

And I think they, when you get those voice, I got a voicemail and it was like, I will only sell with like owner carry. I about fell out of my chair. I'm like, there's people out there. And he was surprised that I was even interested. So I think there are people out there. So are you just circling back to marketing? Are you like, I've tried everything and I've got back to letters because I feel like that's the only way to really get in front of those tired landlords. Is that what you guys— I know you have different strategies to find these.

We're always trying new things. The— everything's evolving, but direct mail is our tried and true bread and butter. And we have made the mistake of turning that tap off in the past when we have a ton of projects. And one of the biggest lessons I've learned is do not turn your marketing tap off. Even if you have your hands full with projects, keep those leads coming in. Because even if you don't have the capacity to do the deal, if you are friends with other investors, then you're going to make a wholesale fee or assignment fee or a realtor referral fee. There is no end to ways you can monetize good leads. So don't ever shut down your lead gen once it's started. Direct mail is great. We do a lot of cold calling. The cold calling has a really high response rate. Mailers tend to have a lower response rate, but it's cheap and easy and it can go on autopilot. I would recommend refreshing your list. At least every year, refreshing your messaging every quarter, and send multiple mailers out at least once a quarter, if not more. I know a lot of people, really successful mailing campaigns that, that send out once a month. That's more than we do, but you've got to have a lot of touches before you get those responses.

And just to touch on the messaging, obviously that's such an important part of marketing. Are you, when you're selling this or targeting someone that the transaction date is, say, 15 years ago, are you saying, hey, like you've owned the property a long time, have you thought, I don't know if you thought about selling, are you like being really upfront about kind of the capital gain stuff or more hinting at it when you're—

Like the first conversation?

Yeah. Or like in a direct mail piece.

Yeah, we've tried hinting at it in direct mail and I don't see any big difference in response rate. I try to— like, anytime you're trying to narrow down the solution that you're trying to hint at, you're narrowing down your demographic of possible responses. We try to keep that, the options, very open because we want— no matter what, if they want to sell, we want to talk to them, right? We don't want just seller finance. We want anything, anyone that wants to sell. We don't really get into hinting at any options, even though we take our criteria and we tailor our criteria to, to specific types of acquisition strategies. We try not to limit— the messaging may be tailored, but it doesn't narrow down what kind of responses we get.

That makes sense. Yeah, no, that's great. I don't do that. I was just curious. Sometimes I'm like, should I hint at that?

And I have a very general kind of message, but I'm sending A lot of people do that. They really try to put all their cards on the table in their first letter saying, "Hey, we are a new investor. We're looking for seller financing. Is that something you'd be interested?" And they're going to get such a lower response rate for doing it that way. But if that's the absolute only way they're willing to acquire properties, then I guess that helps save them time. But for us, I just, I know of so many other ways to acquire properties. If they don't want to do seller financing, like I mentioned, even if you don't buy it, you can still make some money off of that lead.

No, it's true. That, and that's, I think it is, this is such a creative industry in that toolbox. If they don't, you can wholesale it, you can assign it, right? There's, you're limiting yourself even if you can't, acquire it yourself, there's ways to help out that seller, right? Which—

Yeah. And partnerships is a big one that I don't think gets talked about enough. And that's something when you're connected to a community like Investor Lab or any other small, tight-knit community, then you should be— if you don't have the capital to do the deal yourself or you don't have the lead gen coming in to look at enough deals, you should be talking to the other half of that. Someone that has a lot of leads or has a lot of money to spend, and you should be partnering with people to get these deals done. You don't have to do them all yourself. And I'd say a good chunk of my portfolio came from at least initially collaborating with people to get it going.

I love that. Yeah. So are you like long-term partnerships or short-term, or just depends on like project base? Is it just depend— you clearly have a great partnership with Mike and you guys figure that out.

Yeah, but then we also partner with a bunch of other people, right?

Yeah.

So we partner in our brokerage. Our brokerage is just investors and they are building their own portfolios. And when they come across a deal that they, that they can't take down themselves, they bring it to us, we'll partner with them. So we have a lot of partnerships with our brokers. We have a lot of partnerships with, with people that have the money, but not the time. To, to go out and find the deals. And those can be long-term or short-term. I like the long-term partnerships way better because partnerships, you have to do a lot of vetting. You have to do a lot of conversations about what the exit strategy is, make sure you align on ethics and, and strategy. And that's a lot of work to do for a short-term flip. So unless you're going to be doing multiple flips with someone, I, if I'm doing a flip, I do just a joint venture. So I don't do a partnership with LLC. I just do like very short document joint venture saying, this is how we're going to split it up. But even then I would rather pay them for the lead than, than do some sort of profit split in the back because everyone runs their flips differently. And it's, unless they're bringing some very unique component to the deal, I'd rather just pay them for the value they're bringing up front. When it's a hold on the back end and you both are putting in money or you're getting the loans together and they help qualify, then there's a lot of value everyone's bringing and it makes sense to do a more formal partnership.

Yeah, no, I think there's a ton of value, but I think really vetting and sometimes you don't get to, you don't know people until you're really in the thick of it. And so, yeah.

And I cannot stress enough the importance of dating before you get married in partnerships.

I've been there. Um, all right. So I, this is so fun. I want to circle back to a little bit of one of the things I love if owners, if owner, owner carrier installment plan makes sense, kind of the terms like the interest rate, the down payment. And I, something I come across a lot is sometimes I'll, if the conversation makes sense, so like I want this huge down payment because of the skin in the game thing. Right. And there, I think. Ways to navigate that, or I just sometimes that is a big, they want 30% down, which is great and that's reasonable, but sometimes you don't have that, or that's more of a capital gains issue. So I'm curious how you structure, you know, rates and terms and all that stuff.

It all starts with listening to the seller, right? So if they have a specific number in mind they want to sell the property for, then you can reverse engineer the terms, the interest rate, the down payment, everything to get that number for them. If they care about matching the income stream that they're used to, then you reverse engineer the purchase price and the interest rate to get them that number of the income stream they want. So it really has to start with the seller. And asking some really pointed questions about what their goals are with selling the property. Sometimes they don't know, and it's just a journey you take with them to figure that out. Some trial and error, testing the waters. Sometimes you don't get enough access to that seller to really figure it out. Sometimes it's through a broker or another third party, an attorney, and you just have to throw some stuff out there to see if they bite, but the, their motivations are everything. And if they are really trying to avoid capital gains, then that down payment by their own goal setting is going to be low because if they have a high down payment, they're going to be paying capital gains on that right off the bat. So a lot of times they have— they don't have it completely free and clear. They have a loan they've paid mostly off, but there's still a remaining balance, say $100K or $200K. And then that is what determines if you— if no one wants to do sub-2 on the deal, then that, that remaining loan balance is the starting point for the down payment. And sometimes you say, okay, how much do you want in your pocket? And then you add, say, $20,000, $30,000, $50,000 on top of the loan balance, and that ends up being your down payment. Other times, if they really want to limit their capital gains, then you're making that down payment ridiculously low so that they don't have to— they can defer all of it. It really just depends on what they want. And you can get around that idea of the skin in the game. A lot of times the property has deferred maintenance and some capital improvements. And so a lot of times I start talking to them about those improvements. And structure it or frame it, the conversation to say, hey, I'm going to be putting $60K, $100K into this property that you— that is your security. So it benefits you that I have the capital available to improve this property. And it— and sometimes I even structure that in the agreement that I'm going to be putting this amount of money into the property over this period of time. And that's just part of the loan agreement.

No, that's interesting. And that, that asset is securing the loan. So as you improve it, it's really to their benefit if they ever had to re— didn't work out or something. So you're really improving an asset that's securing the loan. That's a really interesting take on that. So the other thing along these lines, I think is also not talked about a lot is separating the financing and the real estate, and they can be separate things. And I think that's not that talked about that much. I know that you're, that you've done a lot of that. Does that make sense? Kind of the terms and like kind of an SOS and separating the buying terms and the asset and how creative you can get with that.

So SOS means substitution of security. So some people like to put that kind of stuff in the original note right off the bat. I've found— and, and to explain what a substitution of security is, it's a clause in your loan agreement that says that you can move the debt to a different security if it meets certain requirements. So if it is the same value or more is usually one of the basic tenets of that. And you can put that up front, but that can scare a lot of sellers because One of the biggest advantages of pitching seller financing to a seller versus trying to go raise money from Joe Blow off the street is that they are comfortable with the security. They've owned this property. They know its value. They don't look at it as trying to vet and underwrite a new loan. They look at it as just delaying their payments. And it's a big difference in the way they are thinking about it in their mind. And if you, if you right off the bat talk to them about moving to a different asset, then they usually get very uncomfortable and scared of what would that look like? And how would I know if it's the right value? So I like to just leave it out of the original documentation and then just continue to build rapport over a few years. Pay them on time every month, send them Christmas cards, send them a bottle of wine every year and build that relationship. And then a few years later, when I'm ready to sell the property, I give them a call up and I say, hey, I got good news and bad news. The bad news is that I'm paying off your loan early. So all that capital gains that we're going to defer, it's all coming due because I don't want this property anymore. I got to pay you off. Good news is I have another property that has a ton of equity in it. It's in a better location. I think you would love the property and love being a lender on that property. So what we can do is we can modify your promissory note, reconvey your trust deed, and resecure this promissory note on this other property. And I will take care of all the paperwork. I will send you all the comps and the value proposition for this new property. So you have all the data. We can even drive by it. And that way you don't have to interrupt any of your payments and you don't have to pay any taxes. So I lay it out for them after I've built the rapport and after I have an actual physical example. And if they don't like that property, then I'll find another property. But I like to have it all laid out when I approach that with them. And I have a probably a 95% success rate moving their notes using that approach.

That makes sense because you've built that know, like, and trust and you've been consistent and you've had good communications and good service. So there's—

that's the hidden, like, superpower of seller financing is almost all of my original sellers that I started a seller financing relationship are still with me 10, 12 years later, still lending me money on— and we've changed their notes countless times as I've upgraded their— upgraded the properties. Just did another 2 of those this week where I moved their notes to different properties. And it's— it provides tremendous flexibility for you to kind restructure and optimize your portfolio when you have people that, as you said, know and trust you and are willing to be flexible and let you move their debt around to, to optimize your portfolio.

I love that. And I think, yeah, you're making sure that there is like enough equity and cash flow on that property to— that the note is safe and all that stuff. It is like when you— I think for someone that hasn't come across the strategy, it's like this huge, like, game board or chessboard. And it just— it's a really cool strategy. It takes a little bit to get your head around it, but—

and some people get overwhelmed with that, right? And so I say start with— that's why I don't want to put those clauses in the beginning, right? Because then you have to really know your stuff to be able to explain them. And so just start with it simple. Start with an interest-only payment on whatever terms they want. The longer the better, because you don't want a note coming up in the middle of the turmoil we just had, right? The turmoil we are and still are in, right? That's what you don't want to be forced to sell a property when it's not a good time to sell it. And you don't want to be forced to refi when it's really difficult to refi because sometimes you just can't do it. So you want to have as long of a note term as you can, and then you want to have consistent communication with your, with your seller finance lenders to find out if they are interested in replacing that money on the next cycle. So I just had a conversation with one of my lenders where he said, okay, yeah, you can move the note this time. But when this note cycle, this maturity comes due in a couple of years, I'm done. I want to cash out my chips. And because I'm getting old and I don't— I want to just put it all in one place that a money manager can, can manage. So it's great. Now I have a timeline. I know how much time I can play with his money for and when to start queuing up to either refi or sell the property so I can pay him off.

And you have a huge kind of heads up on that. And you've communicated so well and Yeah, I think the other thing that's not super well known, and I think especially in a very expensive market like we're in Portland, Oregon, interest only can make deals work where if you're paying principal, it's hard to make cash flow work.

Yes, interest only makes it simple. Like you don't have to deal with an amortization schedule. The downside though is that you get a bunch of those in your portfolio and you have the cash flow, but you're you're not building this massive amount of equity, right? You still— you're only getting equity from appreciation. You're not paying down your note. So you have to be careful because those notes, that's a balloon note, right? So that's the same amount of principal is due at the end of the term of the note. And so you're either going to have to lose the property by selling it to pay it off, or you're going to have to refinance and just bank on that appreciation. So interest only is great, but there's a downside that I don't think enough people talk about that is, that can be pretty problematic if you, if that note comes due at the wrong time.

Yeah, no, it's very, you really have to be strategic with it and know because it could really bite you for sure. One more thing on the structuring. Do you add the first right of refusal if someone chooses to sell their note? Is that something that you add in or do you just keep the communication open?

Yes, I do the first right of refusal for if they are selling the note. One, you have to be really careful who you're in business with, and a lending relationship is a partnership. And if you have someone who's very unpleasant and unreasonable to work with, it is a nightmare. If you have someone who's flexible and pleasant and trusts you, then it's a very pleasurable experience. And there's just— I have been offered seller finance from people that just seem like they're assholes, and I just say, no thanks, I'll just buy it cash from you. And so I want to make sure I know who I'm getting in business with. And I don't want— that's how I explained the first right of refusal is I don't— I am vetting you just like you're vetting me, and I don't want some stranger that all of a sudden I have to deal with. I do allow for a transfer to beneficiaries and heirs, but not assigning it. The other thing that does for you as the borrower is that if you have control over that note and they do want to sell early, they do want to get out of the note early, then you can negotiate a discount on the remaining balance in order to pay them off early. And if they have an assignable note, then you have no leverage when it comes to them asking to pay off early because they can just sell your note.

I really like how you frame that. You want to know who you're doing business with because if they sell it to someone that, to your point, is an asshole, is difficult, you want to do business with someone that you knew and you built that rapport. So that's another good point why that's an important clause to include. I've never quite heard it framed like that. Because that's true.

You can, um, you don't want someone that is unpleasant to work with. Life is too short.

Yeah, for sure. Have you ever, I have to ask, I'm so new in my journey. Have you ever had that happen where someone chose to cash out their note earlier or are they always in this to avoid the capital gains, all the stuff we talk about?

No, there's a few times where people do want to, that something comes up, right? They have a medical expense and they want to sell early. Um, I make it a, a rule, if you will, to do whatever I can. Even if I'm not contractually obligated to cash them out, I'm going to do whatever I can to sell or refi for them. Because the last thing you want is someone to feel like, uh, they can't get their money from you. And it doesn't matter what the legal documents say. If they start going around and telling people that, oh, I lent money to him, but he wouldn't give it back to me. That's not the full story, but that's all people hear. And so I, I try to, anytime someone wants their money back early, I try to bend over backwards and move heaven and earth to make it happen. And I also will negotiate with them and say, hey, what do you really need this money for? And if it's only they need only $30,000 for something, then that's a lot easier for me to deal with and scramble to make that happen than the full note amount. So I, I oftentimes dig into the underlying reasons and then make sure that we just do a principal reduction instead of a full payoff. Or if they do want the full payoff, then we figure out a way to bring another lender in and happen.

I think that is so important, right? Just doing the right thing. And I think you take that very seriously. And I think that's really just speaks to your integrity because, you know, it's all about doing the right thing and that is a loan and it's their money. So if things come up being, yeah, that's really—

and you can educate them as much as possible to say, hey, this is not a liquid, this is not a CD, this is not a money market, this is a hard asset.

And yeah.

And so. If you want to get paid off, it's going to take me time. And sometimes people are very like, they're okay with doing, say, a 15, 20-year note term, but they're concerned about what if something does come up. And so I put into my contracts in the past, okay, we will treat this as more liquid than normal, and we're going to give you a 6-month lead like you give me 6 months and I'll, I will cash you out at any time. And so I've put that into notes before that so that they feel like, okay, this is a long-term note, but if something comes up that is unexpected, I know I can get out within 6 months. And then I just have to set aside the reserves or, or have a lender already lined up on backup to make sure that I can honor that promise.

I love that because it gives them that flexibility and probably peace of mind to know, hey, if something came up, a medical thing, a family thing, That's right.

And obviously I don't want to do that normally, but that's just, that's another tool in the toolbox I can use if I have to.

Yeah. Again, it's so creative, right? And that's why I feel like we covered all— is there anything else on installment plan owner carry that we haven't talked about that you get questions on or is an important point? I feel like we didn't—

no, the— we talked about the benefits of it, how to pitch it, and then the details. Promissory and trust deed is the two main instruments. There's a lot of other documents that go along with it. And I would just say hire an attorney to do the first few. And then once you get really comfortable with the documents, you can start editing them yourself. But I would just work with an experienced, experienced real estate attorney. To get that deal put together at first. Don't try to use some sort of template cookie cutter thing because the terms, the way that it's written, it means everything. And then the other piece that is a big part of any sort of debt is the guarantee. Is it recourse or non-recourse?

Is—

are you having to give a personal guarantee and basically collateralizing your whole life against this note? And obviously, as a borrower, you don't want to have every piece of debt that you are building your portfolio with to be recourse, meaning that they can come after all your assets. Part of the reason is, as you grow your portfolio, you're going to have to get more bank loans and they're going to be looking at every piece of recourse debt under a microscope. If there is no personal guarantee and there is no recourse clause, then, then that debt is basically off of your credit report when the bank is looking at it. You have to strike a balance of if that's something that they really want, that's a very reasonable thing for them to ask for. But if it's something that you can avoid giving, then it makes building your portfolio much easier because the more recourse debt you have, the more it counts against your overall DTI.

Yeah, no, that makes a lot of sense. Yeah. Getting bank loans is not easy. I just wanted to— so the attorney versus an investor-friendly kind of title company, I've always done it through title, but obviously an attorney is going to tailor it more.

So the title company, some of them will do— they have standard cookie-cutter, just little 1 or 2 page seller carry term. Right? And then you have— if you're using a broker, you have the OREF seller carry disclosures with also a term sheet. Those just don't do it justice. If you are in this and maybe if you're doing it for a short term, like a 1-year type of bridge loan, that's fine. But if you're in this for years, the clauses and the language really matter. And so invest upfront. And, you know, our, I don't even know how, like our promissory note is probably 6 pages long. Our trust deed is probably 12 pages long. And it's been carefully crafted to be fair to both sides, to give me everything I want out of the debt and to secure them in a way that makes them feel safe. And I'm really happy with my package of documents that I worked with attorneys on over the years. And it makes a big difference because even if they don't have an attorney or realtor that they're dealing with at the beginning, I guarantee at least 80, 85% of the time by the end of the transaction, someone's going to be coming in and it's— and should come in to review the documents for them. Right. They should have some sort of advocate or professional person that's reviewing them. And so you want to make sure that those documents are going to hold up under professional scrutiny.

That makes a lot of sense. Right. And it's going to come up when they meet. Yeah. No, doing it the right way versus on the back end and realizing you left a clause out, it could really be, yeah, challenging. That's really good advice. Yeah.

It's not like the, if you use a trustee, the title company is the trustee and the title company's giving you the form. It's just, it's not incomplete, but it's leaving a lot of things out. So it, like, it will work, but if you get in any sort of lawsuit over it, then there's going to be so many unconsidered questions that are now up for debate and negotiation instead of having it all lined up out front and you know exactly what to do in every scenario. That's the benefit of having a more thorough promissory note and trustee.

That makes so much sense. Yeah, no, thinking around the corner. So once you've developed that, your personalized template, can you then take that to title once you've worked with an attorney, or do you recommend always going through an attorney? Or obviously when you're—

after you have the experience. Yeah. So I create the docs myself every time. In fact, I just have it This is in the weeds, but I have a system where you just put it into a spreadsheet and it just pumps out all the documents because I do so much of it.

Yeah.

If you just have a, like a Word document template that, that, that you make sure you change the terms and conditions every time, that can work as long as you are really careful to make sure you change all the right things and you have someone else review it before you send it out. For the other party to review.

Okay. No, that's really, it's in the weeds, but it's very helpful. I think that's also not just get investor-friendly title company. It's like attorneys are there for a reason and it's better to pay them. It's going to be probably way more cost-effective to have them draft something than to have them represent you if you get into a legal situation. Yeah.

And sometimes the other party has their attorney review and then they want to use their own form. And then you just have to— now you are both using attorneys to review back and forth and it just adds up the cost. So if you can get your documents really thorough and really fair for both parties, then it, in the end, it does cut back on costs because there's a lot less back and forth.

And I think the key point too is you're making it both parties. You're not just making it so it benefits you. You're protecting the lender too. I think that's important, right? Right. Because Yeah. Tyler, this has been so fun. I feel like we could talk another hour about this, but I'm gonna be mindful of time. Any, anything else before we do our wrap-up questions that you wanna mention or anything on the subject?

No, it's a great subject and I love talking about it. So if any of your audience has any questions for me, they can find me on Instagram or you can shoot me an email and I'm happy to and people give me a call all the time and just ask to walk through the deal with them so that I can help them figure out how to structure and frame it so that their seller's going to be more comfortable with the deal structure. I'm happy to help people out as they have a— it's a lot easier to have that conversation when they have an actual deal in front of them. In front of them because then we can actually talk about it. But when it's hypothetical, we've, we've pretty much covered all the bases here.

No, I love that. And that's something just in general, I love how you built Investor Lab. It's a very supportive community, and I, I don't know if that's just Portland, but I feel like it's just, it's a great community for anyone that hasn't gotten out there and network. Definitely check out Investor Lab, and everyone's really friendly and willing to collaborate. Yeah, it's really— I don't know if all communities are like this, but It's really great. Okay, so a couple quick questions. You can take this a couple ways. I always like to ask any life or business advice to live life on your own terms.

Hmm. Live life on your own terms. You probably sent this to me ahead of time and I just didn't read it.

That's why, don't worry about it.

I just say like simple thing we touched on before, your reputation is everything, right? So do structure these deals, do your business in a way that you would want to be treated, golden rule, and then don't burn any bridges. Even if you have a fallout with a contractor or a seller or another agent, treat everyone as kindly as you can and don't burn any bridges. And I've had so many scenarios where that has come back around in my favor when I couldn't see an obvious reason to not burn that bridge or to, to take the high road at the time. Later on, it, it turned out to be very beneficial for me that I didn't. So I just say be nice, do business with a smile, and it's— it'll serve you well.

No, I, I try and live by that too. It's not easy sometimes, but I think it's definitely in the long run. Okay, I think great answer. And then clearly you guys are a resource, you have Investor Lab, a book or a resource that you'd recommend for people just in the industry?

When we're talking about pitching seller financing, one of my favorite books about framing and pitching your idea to someone is called Pitch Anything by Orlan Kloff. And that is such a fantastic book for, for understanding how to sit down ahead of time before you meet with someone and map out how you are going to approach the conversation.

Love it. Because that is so important, right? Understanding that stuff. Okay. I will add all this in the show notes. And then again, last question, how can people learn more about the brokerage and Vestra Lab or chat with you or anything like that? And I'll put in the show notes as well.

So my Instagram is @iamtylercombs. Easy to remember. That's the easiest way to get ahold of me if you don't already know me. And then Investor Lab is @pdxinvestorlab on Instagram. And you can go to investorlab.com to see all of our upcoming events and then rarebirdrealestate.com for our brokerage. If you're an investor that wants to grow their portfolio with their real estate license, or you're a realtor who's got experience as a realtor, but you want to start using your license to grow your portfolio, we're a great fit. If you just want to do the commission game and work for other people, then we don't have as much to offer. But if you are really working on your own portfolio, your own deals, or you're representing a lot of investors and you want to learn how to underwrite better, then we're a great brokerage. And if you have a deal that you're looking for a partner on, then definitely reach out because we love collaborating with people on projects, um, both in Portland and beyond.

Awesome. I appreciate that. Thanks for taking the time and just unpacking this really awesome topic a little more. I really appreciate it.

Absolutely.

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