Making Money with Real Estate Notes: An Interview with Loc Rao

TL;DR

Interview covers basics of real estate note investing.

Transcript

hey everyone its Josh dorking from BiggerPockets comm here with locro from sunny Southern California loke can be found on bigger pockets at bigger pockets calm slash users slash solid returns look what's up man it's good to see you again yeah same here thanks for having me that's my pleasure man it's my pleasure so what you're uh you're you're down... Read More

Key Insights

• Loc Rao transitioned to real estate notes from traditional real estate due to market conditions and found it more manageable and profitable.
• Real estate notes involve buying private party origination notes, not bank-originated ones, providing more control over deals.
• Investors can purchase notes at a discount, offering sellers immediate cash instead of waiting for long-term payments.
• The note market is substantial, with estimated annual transactions between $800 million and $1.2 billion.
• Networking and building relationships with brokers and investors are crucial for finding quality note deals.
• Different strategies in note investing include buying performing notes for yield or non-performing notes to potentially acquire properties.
• Self-directed IRAs can be used to invest in real estate notes, allowing for tax-advantaged growth.
• Due diligence in note investing involves assessing the note's legality, the payer's creditworthiness, and the property's value.

Questions & Answers

Q: What motivated Loc Rao to start investing in real estate notes?

Loc Rao began investing in real estate notes because he couldn't find suitable real estate investments during the market peak in 2006-2007. He started with small loans to friends and family and gradually learned about the secondary note market. This experience, combined with the flexibility and profitability of note investing, motivated him to focus on real estate notes.

Q: How does the purchase of a real estate note work?

Purchasing a real estate note involves an investor buying the right to receive payments from a borrower. For instance, if a seller finances a property sale, the buyer makes monthly payments to the seller. An investor can buy this note at a discount, providing the seller with a lump sum while the investor collects the remaining payments, often at a higher yield.

Q: What are the main factors affecting the grading of real estate notes?

The grading of real estate notes is primarily influenced by equity and credit. Equity can be determined by the down payment or the seasoning of the note. Credit refers to the borrower's creditworthiness. These factors determine the risk and potential yield of the note, with notes graded as A, B, or C based on these criteria.

Q: What strategies do investors use in real estate note investing?

Investors use various strategies in real estate note investing. Some buy performing notes for steady income, while others buy non-performing notes to acquire properties through foreclosure. Another strategy involves buying sub-performing notes at a discount and modifying the loan terms to improve performance and increase returns.

Q: How can self-directed IRAs be used in real estate note investing?

Self-directed IRAs allow investors to hold alternative investments, such as real estate notes, within a tax-advantaged account. Investors can use these IRAs to purchase notes, potentially growing their retirement savings without tax implications until withdrawal. It's important to choose a custodian that supports self-directed IRAs for alternative investments.

Q: What is the importance of networking in finding real estate note deals?

Networking is crucial in finding real estate note deals as it helps investors connect with brokers, other investors, and sellers. Building relationships within the industry increases the chances of finding quality deals and staying informed about market trends. Networking can also provide access to off-market deals not listed publicly.

Q: What due diligence steps are necessary before purchasing a real estate note?

Due diligence in purchasing a real estate note involves verifying the note's enforceability, ensuring it complies with state laws, and confirming it was created with a proper broker if required. Investors should also assess the payer's creditworthiness and income, and evaluate the property's value and equity to ensure a sound investment.

Q: What is the future outlook for seller financing in real estate?

The future outlook for seller financing in real estate is positive, especially with current lending challenges. As bank lending remains difficult, seller financing offers an alternative for closing deals. This trend is expected to continue over the next few years, providing opportunities for investors to buy discounted notes and achieve attractive returns.

Summary & Key Takeaways

• Loc Rao shares his journey into real estate note investing, highlighting the advantages over traditional real estate. He focuses on buying private notes, offering flexibility and control over transactions. The interview provides a primer on how real estate notes work and the potential benefits for investors.

• The discussion covers how investors can purchase notes at a discount, providing sellers with immediate cash. Loc emphasizes the importance of due diligence, including evaluating the note's enforceability, the payer's creditworthiness, and the property's equity, ensuring a sound investment.

• The interview explores different strategies in note investing, from buying performing notes for yield to acquiring non-performing notes for property ownership. Loc also discusses using self-directed IRAs for note investments, offering tax advantages and long-term growth potential.