SPOTLIGHT: Landlording vs Owner Finance Note Holder


Hey, gang, this is Mike with my Real Estate DOJO and today’s talk is about being a landlord versus being a note holder. Let’s dive in and get started. Welcome back gang, so today’s lesson is about should you be a landlord or should you be a note holder. What is the difference between them and the benefits and the cons. Let’s go ahead and get started and go ahead with the landlord situation.

seller phone script

I love being a landlord, because it shelters me from taxes, it hedges me from inflation, it’s a foresavings and what I mean by foresavings is that I can put money into it and take it out, it’s hard to sell it, its going to take 40-60 days to sell the property traditionally, so it s a foresavings. There are a lot of reasons why I love being a landlord, guys. Now some of the reasons I don’t like being a landlord, is the A/C may break or the plumbing may go out, or my renters won’t pay. Those are the things that I don’t like about being a landlord. Now let’s talk about being a note holder. The great thing about being the note holder is that now you are the bank, you’re just like the bank of America or Wells Fargo you know, you are able to lend out money or not even your own money.

For example when it’s not even your money, for example in a situation where it is a subject to and you buy the property with an existing mortgage, and you are able to lend out money and sell the home and have buyers in the property that are going to have a higher level of responsibility and a higher level of care, because they have deeper skin in the game, they have more money at the down payment of the property. So what is a note, let me explain what a note is. A not is basically like an “I owe you”. For example, when you go borrow money to buy a car, like this or you go buy a house, you are going to end up signing a note to the lender and it basically says that you as the borrower are willing to pay the lender an x-amount of money for an x-amount of months at this much interest. It is basically like a contract, but a contract is based on the performance, whereas a not is based on the amount that is owed, the financial amount.

The great thing about owning a note, for example, when you do owner financing, as an investor, you buy a property cash or you buy a property owner financed, or buy the property subject to existing mortgage, you can turn around and wrap that under mortgage and then turn around and owner finance to a retail buyer and now be the note holder. In this situation, being a note holder you benefit from no dealing with the A/C breaking, because if the A/C breaks the buyer in this case has to fix. If the plumbing goes wrong, the buyer has to fix it. And if the buyer does not make payments to you, you basically foreclose on the buyer just like Bank of America does and take the property back, turn it around and resell it to a different retail buyer that will qualify. You don’t want to foreclose on them, but I am just giving you the situation.

You really want to work the deal out, you really want to make sure they qualify, but I am giving you the worst case situation. If you are a landlord, you have to pay for the eviction, where if you are a note holder, you have to do the foreclosure. There are three cool things about being a note holder that I like besides not having to deal with toilets and getting better people in the property that actually have skin in the game and care for the property and they are trying to refinance the property.

Three things that I love about the notes besides the points I just mentioned is 1). Whenever you do an owner financing, you are able to get a large down payment from the retail buyer- 10%, 20%, 30% whatever, that depends on you and the property. The second thing I love about the note is you are able to get a monthly cash flow from the property. Let me explain to you: if you a buy a property subject to its existing mortgage from a motivated seller and you the investor, you can turn that property, wrap it around and sell it to a retail buyer. Could you not only get your down payment, a large amount, but let’s say your interest rate was 3-4% now you wrap that note up and you sell to that retail buyer at 5% interest rate or 8% interest rate depending on the credit etc.

You can see the difference between what your underlined note is to that motivated seller, let’s say the 3% and you turn around and sell it for 6%, you are getting that 3% difference which creates you the cash flow. You got to pay attention right here, because it is very important. In a situation when it is ‘subject to’ you don’t have to use your own money, you have to use the motivated sellers mortgage. What you do is the property ‘subject to’, let’s say they have 3% interest, you turn around, wrap it and you sell to a retail buyer at 6% interest and you collect the difference and that’s the phase 2 of why I love notes comes from. Not only you get the down payment, but you also get the monthly cash flow, which is the difference between spread between your motivated sellers original underlying note and what you wrap the property for and give it to the seller, which in this case was 3% You are going to get that monthly cash flow. That’s point number 2. Now point 3 of why I love notes is you have that big back in profit. For example, you are going to sell that home for a $100 000, the seller is going to give you $20 000 and you are going to get a back in of $80 000.  Meanwhile, you are getting the number 2, which is the monthly cash flow and at the end the seller is going to cash you out and give you the $80 000 or whatever the principle balance is, depending on when he cashes you out.

Now don’t forget, being a note holder you are not dealing with the toilets, you are not dealing with that beat renters, you are not dealing with the A/C not working or the plumbing not working, because the retail buyer bought the property-it’s his property and he needs to fix that stuff up, which is a great reason to switch from being a landlord to being a note holder. Now I love being a landlord, because it saves me on taxes, I have a couple of businesses, it protects me from inflation, edges me against inflation it, I love buying properties subject to, because I am able to step into the seller’s shoes and he’s already made payments. Let’s say he’s been in the home for 6-7 years, he’s already made 5-6 years of payments on the property, so he has already made a lot of the amortization on the property and when I step into the loan and when I start making payments I’m paying more of the principle reduction rather than interest.

I love that part about it. There are so many reasons why I love being a landlord at the same time it has it’s headaches, dealing with the dead-beat renters that don’t want to pay, the ones that don’t know how to professionally dead-beat renters that just want to get something for free. I don’t like dealing with the court systems, because in Texas I feel like the judge is more in favor of the renters instead of the landlords and you know going through the evictions. You know, it has its pros and cons, I’m not complaining about being a landlord, I love it, but I just wanted to let you know that holding property costs money. Whereas if you are in the case of a note holder, your paper, which is that little note, is not costing you money, it’s not being a liability it’s actually putting money into your pocket. Where if you are the landlord and the A/C goes out then that property, which was income producing, is now becoming a liability.

The way I teach you is to decrease those chances of having a liability, because of the cash roll you need to have. It goes from being a very good to being an okay deal or if the renter is not there, the property is vacant, because he is just not there or you evicted him, now an income producing asset has now become a liability and sure, you can offset that from your previous income, but see if you are a note holder and something goes wrong, like the A/C, that’ s not your responsibility. The only problem you are going to have is if the buyer does not pay, then you have to do the eviction, I mean not the eviction, but the foreclosure. But on the other hand, that’s not a bad story. The seller is already giving you a large down payment, you are already getting if not months then years of cash flow, now you go to foreclosure, you take the property back, you turn around and be the landlord again or sell it traditionally or see you the flat MLS like we do at Plugin Realty. Or you go ahead and try to resell it through another owner financing process that you know. All right gang, this talk was about the difference of being a landlord and being a being a note holder and the benefits of each and the cons and pros of it.

I personally love being a landlord and I personally love holding notes and I am thinking in 2016 moving forward I will think more of being a note holder, rather than being a landlord even though I am going to do landlording, because that’s saves me a lot of money on the taxes. Not only do I get the appreciation, but I also get the interest that the renters are paying and I get the deductions for it, even though I didn’t make the payments for it. I love that aspect of the business, but again I don’t like dealing with shit breaking and vacancies, which in this situation I have a piece of paper that doesn’t have all the headaches and elbow sweat that is required. If they don’t pay, I will just hire and attorney. It’s a much cleaner business, as I like. My moving business is a real dirty business. The real estate business is a cleaner business. Being a landlord is clean business compared to the moving business, but it’s still a dirty business.

Being a note holder is like being a banker and you just relax. Alright gang, if you feel like these videos have helped you out, feel like I actually give value to your life, please share these videos, please like, please comment and if you want to go out there a fucking do deals, then join my Smart Coaching program, which is performance-based. You pay me when you do deals.  So listen up, I have a vested interest for you to succeed. If you don’t do deals I don’t get paid, so I want to make sure you fucking do deals. Now there is a small enrollment fee and the reason I had done that is to discriminate between the champs and the chips. I only have time to put into the champs and I don’t want to waste my time on the chimps. I love you guys, but I just can’t, because you are not going to do what is required, you are going to quit.

You don’t have the positive attitude and without that it is hard to succeed. Even though America is so great, you got to be a champ. If you are a chimp, you can become a champ, but I cannot hold your hand and help you transform. You got to do that yourself. If you are a champ and you want to do deals, come join the Smart Coaching program. I am confident me and you are going to do deals. As long as you are coachable, as long as you are willing to hustle and bustle and not take ‘no’ for an answer. This is Mike with my Real Estate DOJO, make 2016 your best year! Have a great day, gang!


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