Notes and rentals offer distinct advantages and disadvantages, making it crucial to carefully evaluate your investment objectives before making a decision. Join Derek Dombeck as he sits down with seasoned note-buying expert Eddie Speed, founder of NoteSchool. Eddie highlights the benefits of note investing, including greater cash flow and fewer headaches than traditional rental properties. He shares invaluable insights on navigating the note market, emphasizing the importance of education and training in making informed investment decisions. Don’t miss this opportunity to learn why note investing might perfectly fit your financial goals.
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Notes Vs. Rentals: Which Investment Is Right For You? With Eddie Speed
Introduction
We’ve got Eddie Speed. If you’ve never heard of Eddie, I’d be pretty shocked, actually, but Eddie has been in the note-buying business for over 40 years. He’s also been running NoteSchool and teaching people about buying notes for a long time. Before we bring Eddie on, though, I just want to throw a couple of things out there.
First of all, if you are just finding the show, welcome. Thanks for finding us. If you’re coming back show after show after show, we appreciate you. We’d love for you guys to share this, spread the word. Let’s grow the Generations of Wealth family as much as we can. Give us all the likes, the thumbs up, and the five-star reviews, all that kind of stuff. Really appreciate it.
Also, get involved in our Facebook group. Go to Facebook or go to the website, and you can get a link, but go to Facebook and join the Generations of Wealth Facebook group and start interacting. The last thing I’d like to mention is Eddie and I have known each other for quite a few years because we’ve been involved in other events, masterminds, and things of that nature. My mastermind, the REI Circle of Trust, has got a few spots available. If you are looking to really elevate your game, elevate your business, and learn how to live your vision and love your life, go to REICOT.com, fill out a little bit of information, and you and I will jump on a call to see if you’re a fit or if we’re a fit for you. With that, let’s bring on Eddie Speed.
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Mr. Eddie Speed, welcome to the show. It’s such a pleasure to have you. We’ve crossed paths at other people’s events and mutual friends, but we’ve never had a chance to just jam about notes. If you wouldn’t mind, just introduce yourself to anybody that’s living under a rock and has never heard of you, which is crazy. Let’s just jump in.
How are you? First of all, I’m glad to be here. I’m the old guy in the note business. I entered the business as a young guy. I was twenty years old, but that was in 1980. I was deep in the note-buying space for twenty-plus years before I ever had any form of training. I built the training business to figure out how to go do business with people. It was a little bit different angle than some other people who said, “I’m going to go focus on my income being just in training.” We are still deep in the note-buying space, but we train people how to do it. We think the cycle is definitely an advantage and in our direction.
Why do you think that is? After many years, you’ve been through up and down markets and seen all these different cycles. for those that are brand new, why do you think now is a great time?
One thing we’ve tried to do well in the training side is listen to our customers, listen to their pain, listen to what questions they have, and listen to what is driving their motivation. A lot of people who have rental properties all have the same complaint, “I don’t make any cashflow. I don’t get rewarded for my investment until, quote, later.”
A couple of years ago, real estate was going up by 20% without you having to do much for it. That was a great idea. As we’re flatlining in the business, people are like, “I’m not so sure that that’s going to, what history did 3 or 4 years ago is not necessarily going to happen again.” I’m frustrated because I’ve got something that takes up a lot of time and causes a lot of aggravation, and I don’t feel like I’m getting well-paid for it.
If they’re investing in syndications, you know the deal. If you’re going to invest in syndication, you need to do some serious investigation because the industry definitely has issues. I’m not saying every deal has issues, but there’s definitely some smoke over there. Can we agree on that? The market timing is that people are looking for something to invest in, and they tell us all the same thing: “I want less time commitment and more cashflow.”
Getting Started
Compared to the person who goes out and buys a duplex, a single-family, or a small multifamily, and we all know, or most of us know, how much work that can be depending on the quality of tenants, a lot of people, I think, get intimidated by notes. Years ago, that’s how I felt before I started a lending company. I realized I love notes, but if I were brand new and saying, “Okay, I’m going to either go buy a duplex or start small in notes,” what’s the barrier to entry? What does it look like?
It’s funny that people perceive that something that has a lot more commitment and a lot more details, like owning a rental property, is easier than something that you can have 90% of it done for you. You can have a loan servicer to service the loan. We have things that we help people do, like locate notes or help them even underwrite notes. Somebody who comes to NoteSchool goes down a path, not just someone that calls us and says, “Hey, I’ve got $2 million. I don’t want to know anything. Just deploy my money.” I’m like, I’m not your guy because I’m not.
Some level of knowledge is important because it’s your money. It’s okay to look over our shoulder and see that we follow the checklist that we talked about. A lot of it can be outsourced, as you know, so there’s a perception that rentals and flipping houses are easy and notes are difficult. If people think flipping houses is easy, they might want to call some of the biggest operators and hear their tale because those old boys are doing hat tricks to keep making it work. On the other side, are notes easy? The answer is I’ve bought 50,000 notes, so I can drive the race car. You can drive the race car. There are driver-training cars, so to speak, that offer a much easier path to start with, and you don’t have to begin with the most complex transaction in the world.
Explain a little about what you’re looking at when buying a note, because there are performing notes, non-performing notes, first position, and second position. What would you say to somebody who doesn’t know any of that?
First thing, I’m going to start somebody doing, probably with not a heavy background in notes, is buying performing first-lien notes. Seconds are probably risky. It’s not likely that’s where a beginner should start, and so, first-lien real estate notes. I’ll tell you this. We looked at over 1,200 notes last quarter of seller finance notes in our shop at Colonial, not NoteSchool, but the note-buying side of our business, Colonial.
We get a lot of looks. We didn’t bid on 1,200 notes. We bid on about 750. Literally, we called out and wouldn’t even price 500 notes. You’re saying, “Well, what do you look at?” We look at the property. Is it a good property? Is it land? Is it a house? Does somebody want to own it? If somebody didn’t want to own it, can they sell it?
If it’s a swamp lot in Florida or a sand lot in Arizona, it may be junk because somebody bought it who maybe bought it more on emotion than really on facts or circumstances versus twenty acres of nice property that you and I, who like the outdoors, would love to go to on the weekend. Do you see the difference? That’s good land. What about houses? It’s the same thing. Is the house in good condition? Is it in a desirable neighborhood? Is it going to make their life better to own it? I always look at it and say, “If the note doesn’t make their life better, it’s probably not a good note.” I start out with a filter. The second thing is the borrower. Not everybody needs home ownership. As non-PC as that may sound, not everybody’s in a situation in life where home ownership fits them.
You’re not running for president, then?
Yeah, that’s a whole other subject right there. I’ve bought 50,000 seller finance notes. I have a little experience in what actually works over time and what doesn’t work over time. Mine is not a theory anymore. I teach that. What have I learned in 50,000 notes? I look back over time and say, “These are notes I would spend time on. These are notes I wouldn’t spend time on.” It’s just a risk management system. It’s not brain surgery. We’re saying, “Is it complicated?” It probably could seem complicated if somebody didn’t teach you how to break it down into a simple evaluation process. There’s nothing I’ve said so far that sounds complicated, is there?
No, absolutely not. You have said specifically seller-financing notes, so you’re not targeting paper that was originated by institutions?
I’m very connected, you know that. I have everybody’s phone number. Institutional loans are too pricey. You’re competing against Wall Street, and Wall Street is sitting on a bunch of cash, and they’re wanting to buy what the industry calls scratch and dent loans. In time, they’re too pricey. I’ve got my ear to the ground. I’m focused on it.
I talk to all the people that trade these things every day. I’m very connected with the biggest firms in the country that run these trades on scratch and dent loans. At the moment, compared to what I can go find in the marketplace somewhere else, they’re too pricey. I’ve bought more portfolios direct from sellers, and more portfolios of seller-financed notes than anybody in the United States. I’m fairly comfortable in saying that, probably times two.
I know the product. I know how to filter it. I know how to do this stuff, and this is this rabbit’s briar patch. I can deliver a 9% to about 12% yield to investors that come through our lineage. This product, if I sold them scratch and dent loans, they’d be getting a 6% or 7% yield. Which one do you want?
I ran a hard money lending company. It was very much person-to-person. It wasn’t institutionalized, and I feel like you get more information when buying a seller finance note than buying some institutional tape of crap.
It depends on where you’re buying it. If you’re buying it fourth hand, and you weren’t buying it from the original trade, you could likely be buying tails, as we call it. There are heads and there are tails, but I’m connected with the heads. I can go get a first-line trade. That’s not an issue. It’s just that the market is paying too much, and our competition is banks and hedge funds. If you’ve been doing it, if you’ve got as many lines on your face as I do and enough gray hair, you learn when you’re not going to win. You learn quickly to adjust and say, “What can I win at?” We’re damn good at seller financing. That’s our game.
Market Insights On Notes
Before we started recording, we were talking a little bit about how you read the market, and you mentioned something about this being a great time for notes because it’s not a great time for banks. Can you talk about that?
Yeah. Let’s talk a little bit about historically where we are with banking. This is a great thing that the press has done to suppress this news. This is news to most people. You can do hours and hours’ worth of research, and you’re going to find out I’m exactly right. It’s not what they say on the nightly news. It’s not what CNN is reporting. There are two classes of banks, the top 25 banks and banks that are not the top 25 banks. Most analysis that is done is based on those two different groups.
The top 25 banks, that’d be Chase, Bank of America, and those guys, about 14% of their loan portfolio is commercial loans. These charts and all this information are available. This is all easily verifiable. I have my own podcast where we discuss this stuff all the time. I’m not promoting that, but you can watch NoteSchool TV. We talk about it very regularly. They are the top. There are banks other than the top 25, which include everything from regional banks to community banks. There are 4,800 FDIC-insured banks in the United States. The other banks, other than the top 25, have 44% of their loan portfolios in commercial loans. Do you think that’s a problem?
That’s a little top-heavy.
One-third of those loans are due for rate resets in the next eighteen months. Commercial banks represented 72% of commercial lending from essentially eighteen until now. All of the issues that you and I are fully aware of with commercial real estate, syndications, and all that stuff, guess who the daddy is that loaned more money to those operators than anybody? There is a significant issue with banking. There is all kinds of speculation. We know that the latest report identifies about 500 banks as really having an issue. Most people who call me, trying to sell loans that have previously been banking all their stuff, have said, “The bank said, ‘Get this stuff out of here.’”
Look at hard money lending. Look at how many hard money lenders have been walked because their bank says, “We’re not playing like we used to.” That’s because of the banking industry and the pressure from regulatory supervisory-level folks. That’s what the problem is. When banks are struggling, they’re not as aggressive in doing everything they can do, and then there becomes a void. Hard money lending and note buying became popular because they became the alternative to what the banks were solving. That’s what’s caused the opportunity.
Even pretty liberal news sources are saying in the next five years, 40% of the banks will be merged with other banks, 50%, 35%. Nobody’s saying 10% or 80%, but 50%, 50%, 40%, 60%, 50%, 50% seems to be the number that most people agree on. Is there an issue with banks other than the top 25 banks? The answer is yes. What is their biggest problem? It’s commercial loans.
In commercial loans, when you talk about syndications and the backlash that’s going to have on raising private capital, whether you’re a real estate investor raising private capital to buy deals or you want to raise private capital to buy notes, there are so many people. You and I could both go on a rant about this for a while, but there are so many people who went into these syndications. I don’t think they understood that they’re in second position behind an institution, and that institution will wipe out all those syndications. there’s another opportunity.
This is my capital stack. My two fingers represent the value of the property. This is leveraged at the bank. They’re in first position because they have a mortgage on the property. This represents the equity. If the property goes down by 20%, there is no equity. It’s just that simple math. By the way, a year and a half ago, the banks changed their loan-to-value from 20% down to 40% down. Am I right?
Yeah, absolutely.
What do the banks know that the other people who were invested in syndications didn’t know?
The truth, and they know that they’re fine. They can reposition. Not all of them are going to be fine, but a lot of the banks will be fine if they’re at 60% LTV. They’re not taking any losses, but the syndications are going to have to do cash calls or just have a fire sale, and the investors are out.
That industry, once again, this interview I know is not about commercial syndications. It is understanding that when there’s turmoil in the market, there’s opportunity on other sides of the market, and I believe that’s what we represent. We represent understanding what’s happening in the market to point to an opportunity and clarify whether it’s rental houses or syndications and multifamily. Whatever it is, nothing is going to be good for twenty straight years.
When there's turmoil in the market, there's an opportunity on the other side. Share on XThat’s what is messaged to us on Facebook. Syndications were good five years ago, so they must be good. Rental houses were good four years ago, so they must be good. You see what I’m saying? I’m going like, this is my sixth real estate cycle. I’ve never seen anything good for twenty straight years.
We need those cycles, but cycles are great when you are positioned and educated properly. There’s opportunity in all these different cycles, and I love it. I was hoping that this cycle would have happened several years ago.
It was set to happen, as you well know. You and I have been in masterminds together, and we’ve seen people like John Byrne speak and that kind of thing. It was set in 2019 to really happen in 2020, and then something crazy happened that should have never happened in real estate. It makes no sense whatsoever. People are all going to get locked up in their house with a mask on, and real estate’s going to double in value. That’s about as illogical as anything I’ve ever heard. What happened in the virus? There was a FOMO to people to buy property.
They bought houses. A rental house in 2019 was pretty balanced. It was a good investment. It was going up in value, had decent cashflow, and had a lift in value and tax advantages. Let’s go through the cycle from 2020 all the way through, call it the beginning of 2023. Expenses went up by 60%. Rents went up by 20%. Expenses went up 30 times more than the rent went up. Everybody on Facebook talked about the rents, but what they failed to mention is the expenses were far surpassing that. A rental house had more cashflow in 2019 than it was going to ever have in January of 2023, right?
Right.
All of a sudden, you had this big lift in value. You had this $320,000 rental house that rented for $1,900 a month. That’s bad math, and all of a sudden, because of expenses, nobody is netting more than 50% of their gross rents. All of a sudden, you’ve got $1,900, which is $950 a month in net rent on a $320,000 asset. You like that math?
I don’t like that math. I don’t think anyone should.
If you bought a note for $320,000, you’re going to get $3,500 to $4,000 in income. If you pay cash on a rental house for the same property, you’re going to net $950. Eddie, I don’t get appreciation. I’d argue you probably are getting it. You’re just getting paid.
Appreciation doesn’t feed the family.
It’s like the stock market. When the stock goes up, does somebody mail you a check?
No.
People like notes because they get recognized income, a recognized return of their capital. They like notes because it’s hard to deny that for my money, I’m getting a check every month that represents success. Other investments in real estate are struggling with that very fact. You’re making an investment, but you’re not getting paid for it, only with hope and a promise that you’re going to get something later. Does that make sense?
To you and me, we know all these different aspects, but to the people that, and I’ll be honest with you, I just interviewed somebody who was also on the show who started when he was 21 years old, and he’s still in his 20s. He’s buying rental houses, and he’s doing good. Everybody can read that episode on TheGenerationsOfWealth.com
As we started talking, he’s never been through a cycle yet, and that was part of why I wanted to have him on the show to compare. Just the mindset of a twenty-something versus a couple of generations ahead, and a lot of mistakes ahead. The time to learn about alternative ways to get quality returns is not when your back is against the wall because your rental properties are failing. Notes and NoteSchool and what you’ve been doing for all these years, that should be in everybody’s toolbox.
Whether you want to do notes as a full-time business or you just want to dabble, that should be in everybody’s toolbox, and that’s where I screwed up years ago. Until I got into the lending business and learned the note business, specifically originating notes, I was just under the impression that it was complicated, and it’s not. It’s just a procedure like everything else.
Here’s the thing I would say. There are two reasons people would do notes. Less headaches and more cashflow. That’s what people are complaining about. That young man, who I guarantee is a hard worker and grinding every day, and I don’t know who it was, but I can imagine he’s smart. A lot of people aren’t buying into that. That dude’s working every weekend, fooling with those rent houses. We know he is.
A lot of people who have investable capital are like, “I’ve already tried that. My wife told me buying rentals wasn’t the hobby that we thought it was.” You could own a thousand notes for the same labor factor of owning probably 60 rental properties. That is the truth. It’s way less work. The second thing is it’s got way better cashflow. I will run anybody’s math on any rental they want to put in front of me and say, “You’re going to get more income from the property on a note than you are in rentals.”
You say, “What about Airbnb?” You’re running a hotel. I don’t know what to say. How much of that is a business and how much of this real estate we could argue? If you want a passive deal, a far more passive deal that does have cashflow, then you and I would say notes are a good thing.
Seller-Financed Notes
Absolutely. Can you touch on a little bit about when you buy these seller-financed notes? What percentage are you able to buy them at below par or any of that?
Everybody’s first thing that anybody asks when they say, “Buy a note,” is, “What’s my yield?” I can take an audience, not you, Derek, because you’ve run models and do this every day for a living, but the typical pretty savvy investor has owned some properties, understands math, and is educated. They’ll say, “What’s my yield?” I’ll say, “It’s going to be 10%.” They say, “10%? I’m really wanting more like 11.5%.” I’m like, “Really? How much interest income would you make on an 11.5% yield in the next eighteen months versus 10%?” Derek, you are not going to believe this, but they can’t answer the question 99 times out of 100.
I know there’s the one percenter out there. I got it. Congratulations. The answer is the returns are probably from 9% to 12%, depending on the deal, the time that you buy, the risk, the collateral type, and a lot of different variables. I try not to trade loans with a high chance of default. If that’s what you’re buying, you’re buying a foreclosure with potential incubation. That’s not why people are doing it.
I try to buy loans with a low chance of a problem of default. To do that, you’re going to go down in the yield ranges a little bit, but running yield on money you’ve never collected yet is a joke anyway. People tell me all this money they’re going to make. I’m like, “Have you got it yet?” I like to say that when you look at a note, what’s their propensity to pay? What’s the likelihood that that note is going to pay the way you think it’s going to pay? That’s how we gauge it and look at it. Somebody really advanced like you, I could take you to a different level, play the odds, and build a war chest to cover for problems and all kinds of stuff.
That’s not where people are going to want to start. Most of the people on your podcast are not going to be in that situation. For those reasons, people are going to probably be in around a double-digit return, 10% to 11%. I can show people how to make an amazing return. This is what I draw on my computer with. This is a timeline. It’s not a drawing pencil. It’s a timeline. It represents twenty years. There’s $1,000 a month coming in for 240 months. That’s twenty years. I buy that note at a discount. Let’s just say I buy it for ¢85 on the dollar. It’s a $100,000 note, but I don’t pay $100,000. I buy it at a discount, and I buy it for $85,000. It has $1,000 a month coming in.
I have an $85,000 investment. Let’s just say I did it in my Roth IRA account or my Coverdell education account. You’re talking about wealth and legacy and stuff. We’re all pretty good at that. I sell half of that note. I sell the first ten years of that note for not $85,000 but $80,000. I got all of my money back, but $5,000. For a $5,000 investment, I’m going to collect $120,000 in payments on the backside of that note.
What’s the yield on that? Call it enough. There are modeling techniques that we’ve become very good at, learning how to take somebody without a war chest of millions but a war chest of a little money and how to go trip it up and turn it into a lot more money. That’s how we would take and make investments and build retirement accounts with notes.
For a lot of our lending, when we were originating notes, we were doing wrap loans, and there are certainly different ways to increase your yield, but you go back to yield, that doesn’t necessarily equate to high dollars. I can invest $1,000 and get a 50% return, but that wasn’t a lot of money.
You didn’t deploy a lot of money. You’re not getting paid on a lot of investment.
NoteSchool
When people talk to you about that stuff, not to you, but in general to people listening, it’s just like a stockbroker selling a stock. They can spin it however they need to spin it. They can talk about annual rates of return, or lifetime earnings, or whatever they’re trying to sell you on. You always have to look between the lines and get the real truth. Eddie, why don’t you just give us a little bit of information about NoteSchool and what you do over there? We’ll have it in the show notes, but anybody who wants more information can go to TheGenerationsOfWealth.com/noteinvesting, and that’ll link you right over to Eddie. Tell us a little bit about it.
We’ve learned that the best thing we can do to help people get started is to give them some good training materials and then spend some time with them to whiteboard out different financial models and what’s possible with notes. If we can do those two things, that’s the most time compression we can give them. We have a workshop, a masterclass. It’s virtual, but we’re on there with you, and we spend a couple of hours. We probably spend about half the time just pure teaching and about half the time answering questions. We want it to be very interactive. We love people to come on there and ask questions.
The best thing we can do to help people get started is to give them some good training materials. Share on XWhen you attend, we’re going to give you spreadsheets, Excel spreadsheets with financial modeling. We’re going to give you a book. We’re going to give you flow charts. We’re going to give you a lot of other things. If I did this, what would it look like? What would that checklist look like? What would the documents look like? What would be the order of events? What questions do people commonly ask about notes?
I’ve got a book that lists the 150 most common questions people ask about notes. That’s the fastest way I can get somebody to understand, like, if I were interested in notes, what would that be? That’s basically what we’re going to offer your audience because you can do all kinds of research, but we’ve probably already done that. We’ve figured out the fastest way to put it in your head for you to say, “I really want to go learn something about this.”
That’s fantastic. I appreciate you coming on and giving everybody just a glimpse into the opportunities that are out there because, like anything in this world, there are a lot of people out there selling, repackaging and selling. Go buy property sub-to and do this with syndications. I’m not saying it doesn’t work, you and I both know it can work, but to the masses and to the uneducated, it usually doesn’t. Notes have been solid forever. I don’t want to call it a boring business.
Boring and making money is a good thing.
Boring and making money is a good thing. Share on XIt doesn’t have the huge peaks and valleys. That’s what I’ve always loved about holding paper. The only downside I’ve ever felt is when somebody pays me off early, and I have to go redeploy capital. That actually sucks. not when you have a pipeline of new notes.
It’s not as bad when you have bought the note at a discount.
Closing
Right, then your yield goes up. No, that’s awesome. Eddie, I ask almost everybody the same question. What’s something I should have asked you that I did not? It can be about anything. It doesn’t have to be about notes.
I don’t know why. I’ve been doing this forever, and why do I keep doing it? The truth of the matter is I can truly tell you that I love doing this. This podcast interview has given me a lot of joy, and I love time off, but I don’t want to go rearrange my sock drawer every day. I got crazy lucky 40-something years ago and found a business that I love. It’s not really work to me like it might seem.
I can appreciate that because I have the same feeling. People don’t understand what it’s like to produce a show or to run an education company alongside running a real estate investment company and all those things. When you’re passionate about it, it doesn’t feel like work. I appreciate you coming on and giving us some of your time. I’m sure we’ll cross paths at an event somewhere down the road here in the near future, but until we do that, thank you very much.
It’s great to see you.
For everybody else, please help us spread the word. Like this, share this, tell everybody about Generations of Wealth, tell everybody about Eddie Speed and NoteSchool. You can get information directly at TheGenerationsOfWealth.com/noteinvesting. Until the next show, get out there, live your vision, love your life.