Real estate investing is not just about buying properties. It is also about identifying profitable opportunities, building a solid foundation, and leveraging investments for long-term success. Don Costa sits down with seasoned investor Eddie Speed who shares his cool strategies in real estate. As someone who has weathered the market’s ups and downs, Eddie’s advice and insights are truly valuable in building confidence when negotiating and closing deals. He also shares his experiences navigating multiple marketing cycles, the anatomy of a good note, and his investing strategy for the current market.

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Understanding The Real Estate Market Cycle And Identifying Profitable Opportunities With Eddie Speed

I have some cool stuff to talk about with an amazing guest. Before we jump into that, I want to talk about what’s going on in the Flip Talk universe. We have some amazing things from some mini-immersion events to our mastermind community and everything in between. We also have a ton of free stuff over at FlipTalk.com, so make sure you’re going over there and checking out what we have to offer and getting ahold of that free stuff. Also, check out upcoming events and make sure that you’re in the know and have an opportunity to become a part of what we’re doing. With that said, I have Eddie Speed. Eddie, how are you doing?

I’m good. How about you?

I’m doing good. I’m interested in this conversation. You have some cool strategies we’re going to discuss, which I’m sure is going to be exciting for the readers. You also have a tremendous amount of experience and have been with us for a while. With everything going on in the market, it’s always good to talk to somebody who has been through 1 market cycle or 2, or a few issues in their life and business so that we know that the advice they’re giving is coming from a solid foundation. I appreciate your time and looking forward to it. Let’s get into when you started and how you started in real estate investing. We’ll then go into the rest of the conversation.

I started in 1980. I started because there was a gigantic market interruption, and interest rates rose to be at a point to 20%. Seller financing became mainstream, the rescue plan or filling the void that conventional lending couldn’t fill. I entered into the business of not buying houses, but I entered into the business of buying notes. It’s funny when I started in the business, my father-in-law got me started not as young and didn’t know anything.

Does any of us?

 

 

It’s all of us when we start. I was calling realtors and home builders, both of which either had clients or they had carried seller financing to make a deal work. I realized I was walking in with a business that was a bonanza and it felt like I was walking into a funeral home every time. They were scared to death. The answer was I had a piece of information that filled a puzzle that they didn’t have.

I wasn’t more experienced than them. What I had was a piece of information that made a puzzle work. When we talk about this is when we can get your readers feeling good. People are worried. “Eddie’s been doing this for many years. He’s closed 50,000 deals,” but that doesn’t mean you have to have all of my experience or your experience in order to fill a void that the market doesn’t know how to fill.

You said something that I want to hit home. When you started, the interest rates are 20%. Pricing properties were different back then. Being able to buy a decently nice house for about $30,000 versus a decently nice house now and most markets can be somewhere around $200,000. 20% is significantly different than what we’re dealing with right now in the roughly 7% range and so on.

There are still things that affect the causality of those interest rates that are very similar to what we’re going to be seeing now in the market coming up as things progress. Talking about some of that is going to be a good tool to have in your arsenal moving forward to your real estate investing career. You got into investing in notes. What does that look like for somebody who maybe has heard about wholesaling or flipping houses, but hasn’t heard about that?

For an owner finance note, somebody’s carrying paper and they’re collecting payments over time. They can sell that note. That’s what I did. I worked as an acquisitions guy like somebody that’s out there buying houses, but instead of buying a house at a discount, I bought a note at a discount. It progressed and we figured out courthouse research. By 1982, I’d been to the Dallas County Courthouse and figured out that I could go index the records and find people that were carrying a note and mail them a letter and say, “Did you know you could sell your note?”

I started doing direct mail from courthouse research in ’82. House buyers did that. It wasn’t brain surgery. It was just, ” I can find them.” I’ve done a lot of that over the years and by the later ’80, I found a few real estate investors that were creating notes on a recurring basis. In fact, I met a guy in the ’87 and that guy’s name was Ken D’Angelo and I bought some notes from him. Ken D’Angelo was the guy that founded HomeVestors.

By the time he had developed HomeVestors, he came back to me in 1990 or 1991. You never write these dates down because you don’t know if it’s going to be the whole thing that changed your life. He says, “I got this franchise. I want to do houses, but my franchisees can’t survive over years and years unless they have a creative finance strategy.” That was my first introduction to go be on the offense and show real estate investors a blueprint of how to create the financing, either when they’re buying or selling.

I did that and set up the note system for HomeVestors. In that era, because of some of the similar market conditions in the ’90s, then seller financing became a big thing. That’s how I bought so many deals. I created an avenue. In other words, “Create the note to this specification. We’ll help you do some things and then you can sell us the note.” That’s how it started. Since the early ’90s, I’ve been in the business of showing real estate investors creating finance strategies.

You started out searching for homeowners who had seller finance the property and you were buying those notes on a discount and then turning around and essentially reselling those notes. You were flipping paper instead of properties. That’s how you started. Did you get into the creative finance side of talking to the homeowner who had property and then buying those properties that way?

I didn’t do it back then. Once again, the easier volume by the ’90s became, “I could go show HomeVestors, Mitch Stephen, or whoever.” I could go get a guy that could create 100 deals a year and buy his loans way more efficiently than I can go pick off one little note at a time, while we continued to have what we call a retail operation, buying notes from mom-and-pops.

I then became the guy known as, “We bought portfolios of notes. We bought flow of notes and stuff.” I bought 2,000 portfolios of seller finance notes. Where I don’t buy 1 note, I go buy 50 notes. The biggest deal I ever did probably was 1,500 notes. That led me to the real estate investor and I got to know a lot of guys like you. From that, I started understanding what else they needed. I spent a lot of time with them and become friends with them. That’s what led me to, “Let me show you how to structure a killer good deal when you’re buying and get the seller to agree to terms.”

I’ve taught that for years. I told somebody, “I never think of a good idea quickly.” This idea is several years in the making. I have been aware of both tax laws that become an advantage when you marry them together. I’ve been aware of those tax laws for years, but I never thought about how to go melt them together. What does that mean? How does that work? The most solicited audience for real estate investors to flip houses are targeting burnout landlords. Do you agree with that?

The most solicited audience for real estate investors to flip houses is burnout landlords. Click To Tweet

Yes. Absentee owners are probably the primary source that everybody goes to. It’s on everybody’s list or at least one of their lists.

I’ve worked with a lot of high-volume guys and guys that run training or coaching programs, particularly acquisitions. Those guys have a lot of things because they’ll do training for guys at the top 100 house buyers in the business, like Steve Trang. I know Steve very well. I say, “What percentage of those landlords don’t convert?” “A pretty high percent.”

I said, “High like 40% or 50% don’t convert?” He says, “High like 80%.” I’m like, “Really? What’s the number one reason the landlord doesn’t sell? We know he hates his rental.” He responded to the marketing because the rental has not been good to him. He said, “I would say taxes. He doesn’t want the gain on the taxes.” “That’s the easiest thing in the world to fix.” He said, “What do you mean?” I said, “It’s nothing to it. I can show them a tax deferral or even a wipe of their taxes.”

People go, “There’s no way. You couldn’t possibly come up with a deal with some guy that had a liability of capital gains meant that he could configure it using a couple of tax loopholes and make the liability go away.” I said, “I can.” “What?” “The first one is that he takes his payments over time. The IRS calls it installment sales.” It’s been around for years. Every super-season guy like you know what installment sales are. Let me ask you another question. Are you familiar with capital gains laws?

 

Absolutely.

When does the tax for capital gains kick in?

Capital gains are paid by an individual who does not live in that property as their personal residence for at least two years. If you buy that property and immediately resell it, whether you’re owner-occupied or not, you’re going to get capital gains in that property and make a profit.

If you sell that property and only make $20,000 in capital gains, that $20,000 is not taxable. There’s a threshold. Do you know what the threshold is?

I’m not as seasoned so you go ahead and tell me.

It’s $40,000 for a single filer and $80,000 for a joint filer. If I said, “You have a huge capital gain on your property, but I’m not going to pay you $40,000 any given year. You got to earn that capital gains without paying tax on it.” Do you believe that?

I take your word for it. I believe it. I’ve always operated as a dealer. There’s another way you can do it as a flipper you operate as a dealer. I’ve never dealt with real estate capital gains in my entire flipping career. I will admit I don’t go down that rabbit hole because it’s not something I have to care about, but I do love listening to people talk about it and know.

A small landlord is not a dealer. He does get to use the capital gain strategy, which is a lot less tax, but understand, when you’re doing this, you’re showing a guy that was fretting and not selling his property and his rental wasn’t being good to him. There are a lot of people that think that we’re at a turning point in the market right now. We can argue about what it is or what it isn’t.

I’ve dealt pretty extensively with probably 70% of the biggest 200 or 300 house buyers in the business and they think there’s a turn in the market. How bad, how low, or whatever, affordability is the problem we all get that. The hedge funds have choked off and they’re not buying the way they were. I had lunch with the biggest guy in the business and he’s telling me the hedge funds are not showing up for the party. Those are all market conditions.

Once again, when that happens, that’s when the small landlord goes, “If we don’t sell now, we’re not going to get what we want.” Now, you’re fearful if I buy it. “Eddie, you dummy, you’re buying at the top of the market.” “I’m buying it under favorable financing terms.” The reason they’re willing to do that is not that I’m a nice good-looking guy. The reason I’m willing to do it is I’m pointing out a tax strategy they would never have thought of if I wouldn’t have brought it up.

We talk to landlords all the time about the issue of not wanting to pay taxes. A lot of the conversation leads towards, “I’ll carry the note. You seller-finance us to avoid that capital gains,” but I never even thought to talk to him about the threshold, the $40,00 or $80,000 situation. That’s a game-changer for us in our operation.

That’s what the deal is. I’ve had knowledge of both of those tax scenarios forever, but I did not glue it together until the last few months. Why I didn’t figure it out? I don’t know, but for guys like you, I’m now giving you the silver bullet. That’s what we help people do. We help people with what I call financial modeling, creative financing, or deal architect.

I don’t know what’s the best word for it, but right now it matters because it didn’t matter months ago. The guys that are telling me, “It matters a lot,” because it’s given them a closing that otherwise, they wouldn’t get and a customer that would’ve never converted for cash. They’re sharing, “I don’t know what your offer sheet looks like but for most people, their offer sheet is less than it was several days ago.”

We’re getting more conservative. We’re adjusting. We talked about I lost everything in 2008. I’m super conservative when it comes to doing anything. As a real estate investor, I always have been. I haven’t been through multiple market cycles like you. I only have the experience of 2008. Whatever happens, it’s not going to be that bad. It’s hard to predict how it’s going to flush out. There’s going to be turmoil.

Somebody says, ” I’ll buy it. What am I going to do with it?” Most guys are going to rent it. You’ve structured a debt service that says when you rent it, you’re going to be able to do well with it. You’re not forced to sell it. You can rent your way out of it. Even if the market goes down a little bit, you’ve got very favorable terms of financing. You could do a lease option. Texas is not a great state for that but other states are good for it. A lease option would be another option.

Another strategy is you could turn around and sell it on a wrap note where you pay the underlying mortgage, the guy that you bought it from, and collect a payment every month. All of those things are going to give you wealth. They’re going to close deals that you wouldn’t close. You can’t go sweet talk mortgage company right now and get them to give you a cheap rate because they don’t have a cheap rate. You’re going outside of the traditional mortgage industry to go get favorable financing. It’s pretty cool.

Let’s say I sell the property on owner finance and now I have a note. Now, are you somebody that I can go to and sell the note to?

I’m not only a guy you can go to and sell the note. That guy that you bought the property from and carried your financing is going to want to cash in and get some money early. I don’t know what month but I bought 50,000 notes from individuals that collect payments on notes. I can buy his note and you can make a fee flipping your debt to me.

I can structure a note with him and tell him, “This is however many months. We’re going to go ahead and exit this for you type of situation?”

No, you tell him, “If you ever decide to cash you in earlier or want to lump some money, let me know.” If you keep reminding him of that, I don’t know what month it is, but I guarantee you this, he’s going to call you one day and say, “Tell me more about what that looks like.”

Let’s talk about what a good note looks like. If you’re going to underwrite something and look at a note, what are you looking for? Are you looking for a certain percentage of the notes’ overall value as the buy? Are you looking for a certain interest rate? Are you looking for credit? What are you looking for?

The number one thing that affects the value of the note is the person that owes the money, how qualified they are or their credit. It’s a promise to pay. What are the odds they’re going to pay? The number one way that you can know that you can market a property to the best potential buyers is don’t start out with a piece of crap property. I don’t tease seller financing on real low-end junkie stuff. It’s not that I’ve never seen it. Trust me, I’ve seen tens of thousands of them. You can’t go sell that piece of junk property to a great buyer.

 

If you start out with the right property type, then you can work backward and go find the best buyer and then the terms of the loan. Now, rates are going up and the Fed Chair made that clear that this is where we’re going. With that being said, you can carry seller financing at anywhere from say 7% to 9% interest and not be out of the market.

By the way, everybody quotes the 30-year mortgage rate. You hear this all the time like in the news and these real estate reports. Who are they quoting? What mortgage rates are they quoting? They’re quoting Fannie and Freddie. Do you know that Fannie and Freddie have lost 20% of the market share in the last several months? At the rate that everybody says hitting, that lender is not getting market share. They’re losing market share to FHA and to what’s called non-QM or non-Qualified Mortgage. Both of those rates are higher than Fannie and Freddie.

You can carry mortgage rates. This is a very typical hypothetical story. A guy sells you a house and finances $200,000 for you. You did some creative deal and your interest rate was 2%. I can get long into how you would position that and do it. There’s a lot to be said about how that could be done. If you do a wrap note at 7% or 8%, you’re making the difference between the 2% interest you’re paying on $200,000 and the 8% interest you’re collecting. That’s a heck of a cashflow.

We use a lot of private money to buy properties. We’ll buy the properties and do a note deed of trust with our lender. Most of them we flip and someone we hold onto. A lot of the guys BRRRR through banks and different things like that. I have a lender that lends me money for a property and they’re ready to cash in. Instead of going to a bank and refinancing, I go to somebody like you and have you buy them out of the note. How would something like that need to look and make something like that work?

The lender is not going to take a payoff at a discount. The individual that carries financing will take a payoff at a discount. The BRRRR model is awesome, but it’s going to have a hard time working when rates are 7% and 8%. It’s a math thing. Have rents gone up? I’m not arguing any of that, but I’m saying that when you run your model out, you’re going to be like, “I can’t do a BRRRR because I bought the property at some crazy deep discount in order to make that math work.” This is the whole thing.

If rates are cheap and money is loose, who needs creative financing? Not many people. If credit is tight and rates are high, then people are forced to alternatives. Now, all of a sudden, some people like me that have many years of track record figuring out how to use seller financing at its highest and best use. By the way, mortgage credit availability is 35% down from what it was prior to the virus. That’s not a debt-to-income ratio. That is 100% credit qualification standards to get a conventional mortgage. They have an index and it was at 185. The index last time was 120.

If rates are cheap and money is loose, not many people need creative financing. But if credit is tight and rates are high, people are forced to find alternatives. Click To Tweet

Let me pivot a little bit. 2008 is the market cycle I went through. It’s probably unusual because it was one of the worst market cycles since the Great Depression. Hypothetically, that happens again. A lot of people that are new in the business are running around saying, “Rents won’t go down.” We know that in 2008, rents did go down in some markets because people couldn’t afford to rent. They went and moved in with family and took advantage of government programs. There are a lot of things that happened that affected the market.

I hear a lot of people talking right now that creative financing is the way to go. I feel like they’re being irresponsible because they’re talking about overleveraging properties to do creative finance as long as they cashflow. What’s your take on that? Do you feel overleveraging a property that’s cashflowing right now is worth the risk, considering what could be happening in the market? How would you approach it as somebody that’s a seasoned investor right now that does a lot of creative stuff and buys notes? Does it make sense?

First of all, who’s lending you the money? If I’m buying a deal and the burnout landlord is loaning me the money, I’m going to buy it in a trust or LLC. Eddie isn’t going to sign a personal guarantee. This is a lot of different elements of risk and borrowing money from the First National Bank that will come hunt you down personally if you can’t pay. We’ve done a fair amount of research and comparison. We’ve looked at rate analysis and inflation analysis. This is more of the ’70s or ’80s market. The 2008 story was a different story.

Anybody that goes and says, “I said so and I saw them on a show. I saw them on BiggerPockets. They said this. Nothing’s going to happen because it’s not 2008.” I agree that we’re not like 2008. Most real estate recessions are triggered by economic recessions. 2008 real estate recession triggered the other recession. First of all, is it a safe bet we’re headed for a recession?

Yes, if we’re not already in one.

Technically, we’re already in one. Technology is so good in communications and stuff. You pay any attention to the Fed Chair and where they’re going and stuff, they’re being abundantly clear. The issue with the rent’s going to take care of my inflation issues, you better have a good cushion in there. If you buy on terms and you get the seller to carry you get very favorable terms, the reason they would do it is because of the tax strategy. All of a sudden, you have insulated yourself where you can ride a heck of a storm. If you’re an apartment guy and have a variable rate mortgage on a multifamily deal, which about a third of them are variable rates tied to crazy stuff like silver futures. I’m in full agreement with you on the caution flag.

The question is, how are you approaching your investing strategy right now? What things are you doing differently than you were doing a few years ago to make sure that your business is in a good spot?

I’m getting financing where I’m dictating the terms. That’s it. They were giving money away a few years ago. You could go borrow money from a bank or a mortgage company where it was cheap and who cared, but now all of a sudden, the mortgage got inflation, raising rates, tightening underwriting, and all that stuff. The key to it now is how you source your capital.

On Wall Street, they call it the capital stack. All that simply means is what an apartment syndicator does. He borrows 70% of his money from a conventional lender and raises 30% of his money from investors. That 100% is his capital stack. Part of it is private capital and part of it is conventional financing. All you’re saying is if you can control the capital stack, essentially you can control how you borrow money. You then can write your ticket to go do things in this market that other people can’t do. That’s the trick.

 

We have fried some brains. What advice would you give somebody that’s starting a business or brand-new?

You could be a young Eddie Speed. You could go into the market with a specific strategy that you became clear about. We just struck the match or had 1 spark or 2, but you could become clear about how this works and it would give you a unique advantage in the market. There are so many real estate investors in the market right now. If you’re going to go out there and do what everybody else is doing, it’s a pretty crowded field.

Tell everybody how to get ahold of you if they want to reach out to you.

You’re going to go to NoteSchool.com/FlipTalk. I’m going to give them a book because I guarantee anybody that is interested, they’re like, “I wonder about this, how that works, and if this matters.” I’m going to give them access to register for an hour and a half a little workshop where I’m going to go through and explain this tax strategy a little more clearly in a little more time. We’re going to talk about how that works. By the time they leave there, they’re going to be like, “I like this.” They may say, “I don’t care for it.” I think they would like it, but they get to decide.

If you’re looking for the tax stack strategy to kick butt in a market that’s coming up and get some money in the bank, go to NoteSchool.com/FlipTalk. Grab the book, get the questions answered, register, and get some knowledge about this avenue. With the market right now and the conditions changing, having all the tools in your arsenal ready to go and ready to deploy is the best bet for making sure that your business is going where it needs to go. Eddie, I appreciate you being on with me. Thank you for your time.

Good to see you, sir.

 

Important Links

• Eddie Speed
• NoteSchool.com/FlipTalk

 

About Eddie Speed

Eddie Speed knows how to architect a deal like the back of his hand. For almost 40 years, he has purchased more than 40,000 notes and the NoteSchool executive team has bought 3.5 billion dollars in notes. As an esteemed teacher of all aspects of real estate notes, Eddie’s innovative methods have earned him multiple industry awards and inaugural induction into the Small Balance Real Estate Hall of Fame. He has spoken at events across the country–teaching people how to find freedom and flexibility through a widely untapped and extremely profitable area of real estate investment: Creatively buying and selling notes.

At his core, Eddie is a problem solver. He is skilled at identifying roadblocks most investors couldn’t work around, and in finding solutions to creatively close in a way that’s exponentially profitable. In 2003, he founded NoteSchool, a real estate coaching program that teaches students to buy and sell performing and non-performing notes, as well as other alternative purchasing strategies like seller financing. Over the past decade, he has helped countless investors expand their portfolios by the millions using his out-of-the-box techniques.