We just got back from a 3 day event in Dallas with Eddie Speed and the guys and gals of Note School. I have to say this was a very well organized and informative event and you may want to put it on your calendar for next year.
Anyway, one person who took the stage is a fellow student of NoteSchool Ryan Parson. Ryan came from a background career in corporate America, to invest in notes on his own and found that raising private capital for his own investments was his expertise and soon he was working with Eddie and their private capital fund at NoteSchool.
Ryan is one really smart guy and as a fund raiser he talks to a lot of people and he listens to what they have to say.
So myself as a person who has sat in a few presentations about being a part of a fund, I often think two things to my self and I am sure others do as well.
1. Why would I want to invest in a fund, when I can do all the investments myself and make a lot better return on my investment!
2. I can’t invest in the fund because I am not accredited.
I am sure Ryan has heard those two objections many times and his presentation centered around these two issues. And I wanted to share what he brought to light.
First, Why would I want to invest in a fund, when I can do all the investments myself and make a lot better return on my investment!
Can I really? Think about it – with my little amount of money and your little amount of money, even if they seem like big numbers, they probably in the grand scheme of things are rather small and our buying power does not generate the huge discounts that a large fund can generate. Discounts and economies of scale, not just on buying the assets be they houses or notes, but in hiring things done for you. We all know that Wal-Mart can demand the best pricing on what ever they have in their stores because they have the biggest bank account and real estate is no different.
Ryan also shared his investing pie chart. I can’t remember the exact figures but he showed us a well balanced pie that was a large chunk of money invested in someone elses fund, just chugging away throwing off a return that he does not have to do anything except collect checks. Next he had another large chunk in performing assets. He had performing notes, but this could easily be cash flowing rental properties as well, that don’t take a lot of work to generate income, but do take some management and oversight. A little better returns than the fund, but more management and oversight. Then he had the remainder of his investments in active investments, in his case non-peforming notes, but could be rehab flips or wholesale investments. These were much more hands on and again better returns that the fund or the cash flowing investments, but more time invested.
By having a well rounded pie, Ryan is able to have income coming in at all times, not just when he works out a note or sells a house, but when he is on vacation or spending time with his family or spending time working on his business rather than in his business.
Moving on to my second thought, I can’t invest in a fund because I am not accredited. Well this is 100% true in my case I am not an accredited investor.
To be an accredited investor, we need to have One Million in net worth or earn $200,000 a year singly or $300,000 a year as a couple. And while we are not there yet, after hearing Ryan’s presentation, I have found I am much closer than I thought and well you might be too. Let me explain.
When we buy a house or a note we usually account for it with the CPA and the IRS at the value we purchased it for plus what ever we invested in it.
So let’s say I bought a non-performing note on a cute little ranch house in Raytown. The ARV of the house is about $80,000 and I get the note for $13,000. The borrower is long gone and the house is vacant. I spend another $2,000 to foreclose and now I own a house that needs some work. I did this exact scenario last year, and I sold it as is for $40,000. So at the time of foreclosure I was counting this asset for tax purposes with a value of $15,000 that included the $13,000 I paid for the note and the $2,000 I paid for the eviction. But for figuring out my net worth, as is this house was actually worth $40,000 as that is what the market paid for it. I could have spend another $20,000 on the home to fix it up and then rent it out. I would then have counted the asset at the value of $35,000 and rented it out, however if I would have had it appraised the value of the home was closer to $70,000 as a rental property and probably $80,000 if I were to sell it to a homeowner to live in.
Let’s recap
As Is I accounted for this house with a value of $15,000 for IRS and tax purposes. But if I were figuring my actual net worth with my CPA, we would want to have a bit different set of books that shows the property is actually worth $25,000 more at $40,000.
And if I had repaired and rented it out, I was counting the house in my books at $35,000 while it had an actual value of $35,000 more at $70,000.
Now this example does not figure in taking out a loan on these houses to make it easier to understand and I know many people are dealing in their own cash anyway . . but it does show you might go look at the houses and notes you current have and find you have a much higher net worth than you though.
In Ryan’s example he was showing how you could do 5 of these similar deals each year, and build up a net worth of over a million dollars quite quickly. His funding came from the retirement account he built up while being an employee. His turning point was at year 20 as an employee with all of his contributions and company matches and investments into this retirement account to find that in 20 years the value of his investments were pretty much the same amount as he had contributed over the years. Not a lot higher due to the company contributions and investment returns due to the huge fluctuations in the stock market eating his profits. He took his retirement account and converted it to a self directed retirement account so he could invest in real estate and notes. Something that many of you can very easily do.
Anyone else have a similar story or example, I would love to hear it. Please leave your comments.