INTRODUCTION TO NOTE INVESTING by Dave Van Horn President, PPR Note Company TABLE OF CONTENTS 1. From 100 Houses to 100 Notes 3 2. Why Invest in Notes? 12 3. How Notes Work 22 4. Where to Find Notes 26 5. Due Diligence 31 6. Profitable Note Investing 37 7. Recapitalization 45 8. Sources of Capital for Notes 50 9. How to Get Started in Real Estate Notes 54 10. FAQs 59 11. Note Investing Glossary 63 Introduction to Note Investing by Dave Van Horn 2 PART 1 FROM 100 HOUSES TO 100 NOTES “100 Houses.” That’s the answer I often hear when I ask real estate investors new and old: “What is your ultimate investing goal?” Believe it or not, I actually used to have the same response: not 100 notes, but 100 houses. That was my original plan for building wealth, and by the age of 45 with 40 units to my name, I was well on my way to getting there. At the time, I was a seasoned investor, who had tried everything from stocks and bonds to precious metals, and, with real estate, I thought I finally had it all figured out. My plan was to reach about 100 properties or units, ultimately getting as many as possible fully paid off. Doing so would allow me to have versatility with my holdings with the ability to buy, sell, or borrow against properties to generate income or to acquire more assets. More importantly, my debt-free portfolio would also provide me with more than enough cash flow to finally be financially free, especially in retirement. After all, isn’t financial freedom what we’re all after? My Early Days as a Property Investor When I first started investing, the idea of financial freedom wasn’t even on my radar; I just wanted to “get ahead.” At the time, I had Introduction to Note Investing by Dave Van Horn 3 just started a family and was working two jobs, just barely getting by. I was also looking to move out of our apartment and upgrade into a house of our own. So, I thought the best way to solve both problems was to buy a multi-unit property that I could live in and rent out to make extra money on the side. And guess what? It worked! It was a great first step and one that inspired me to keep going. Like many investors reading this book, this is how I started my investing career. I eventually moved onto purchasing buy-and-hold rental properties as well as flipping houses. And, like most people, I was using traditional bank financing and personal income (the extra money I made in commissions from my second job as a realtor) to buy my first few properties. Implementing both of these things was what got me over the first hump of buying my first few houses, but it didn’t last very long. One problem was that it was a get-rich- slow model, especially when working two jobs just to save up for a down-payment. The other problem was, after buying my first few houses, I started to look for more properties to rehab and couldn’t always qualify for traditional loans. I was running out of financing options, or so I thought. Trying to figure out my next move and still unsure of my investing future, I decided that maybe the answer (or at least more income) lay in becoming a real estate broker. The teacher of my real estate brokering class was an old realtor/broker, who had seen and done Introduction to Note Investing by Dave Van Horn 4 it all. On the first day of class, he took out our textbook and said, “There’s nothing in here that I can teach you,” and he threw it in the trashcan! Everyone was speechless, including me. He then exclaimed, “But what I can do is show you how to buy a house with none of your own money.” Needless to say, all of us were skeptical, but we listened. After that day in class, I went home and thought over what he told us, finally deciding that what he said could really work. So, without any disposable income left to invest or a bank to turn to, I found the only thing I had left was good credit and the ability to take risks. At the time, cash advance fees didn’t exist like they do today, and credit card companies would provide customers with credit card checks for cash advances. The strategy was simple: I would write a credit card check out to myself, deposit it, and then obtain a certified check from the bank to pay for a house. I’d essentially pay cash for the property (allowing for me to negotiate a better deal), fix up the house with another credit card, then find a tenant and refinance to pay off all of the credit card debt I accumulated.I’m working to quickly go through and break up the longer paragraphs where it makes sense. Sometimes I would pay off the credit cards and still have some refinance money left over (tax free because it was technically a loan), which I could then use to reinvest. So, I basically got the house for free, had tax free cash in my pocket, and the tenant would pay back the refinance loan while I would still be earning positive Introduction to Note Investing by Dave Van Horn 5 cash flow. This is how I got started on my path to financial freedom, and this strategy exemplifies what I learned in class that day: that leverage is the key to building wealth and that it can be applied to nearly every business in a multitude of ways. Something Happened On My Way to the Local REIA Group It wasn’t until I discovered notes, mainly by accident, that I realized how cumbersome and time consuming my goal of 100 houses would become. After getting to 20 units by utilizing bank financing and my credit card strategy, I hit another wall when looking for capital for my next project. The banks would no longer lend to me because I had too many “doorways” or mortgages in my name, and credit card companies became stricter with their cash advances, eventually raising the fees so high that my old model wouldn’t work. I thought I was finished, but then I remembered hearing about a local REIA (Real Estate Investors Association) group holding meetings in my area. It may seem like a no-brainer today to join a real estate networking group to find a hard money lender, but I was a bit of a lone wolf when it came to my properties and actually had no clue how hard money worked. I went to my first meeting just to network with others and hopefully learn how they found capital for their real estate deals. I’ve since learned that networking isn’t just crucial to the real estate industry, it’s crucial to every industry. After I attended a few Introduction to Note Investing by Dave Van Horn 6 meetings, my network started to grow, and this new network of mine taught me something the bank never could: instead of saying “I can’t,” they taught me to ask “How can I?” Turning to Private Money and Private Notes It was at a meeting of this group that I was first introduced to private money. Through one of the speakers at the event, I learned that just as a bank can issue a loan and make a profit through the interest payments, so can an individual investor or hard money lender. It was this speaker, who personally introduced me to a private money lender, who lent me the capital I needed for my next purchase. So, just like that, I was back on my feet purchasing properties, faster than ever. Using private money, I was able to obtain my highest number of real estate rentals ever, 40 units total, all in the span of a few years. I even started managing other investor’s units as an agent alongside my own since most of the properties were located in the same area as mine, it was an “easy” way to make some extra money on the side. Everything was going great, and I was busier than ever. I mean really busy... so busy that I didn’t have much time to spare between the management of my own properties as well as other investors’. Then one day it hit me: between the maintenance, tenant complaints, inspections, and constantly going to eviction court, I realized I was working for my money rather than letting it work Introduction to Note Investing by Dave Van Horn 7 for me. I was squandering my greatest asset of all: time. It was at that very same moment when I figured out who wasn’t doing any of these things for their investments but still making a profit: the private note owner. That’s when I decided for a bit of a career change, and became a private money lender myself. With many of my properties having risen in value in recent years, I had built up quite a bit of equity. I refinanced this equity out of my properties and started lending it to other investors I met at networking groups, again utilizing leverage. This is what is known as a private note, and it’s how I first got started in the note business.