August 2014 Dinner with Damon

A few weeks ago I had my monthly dinner with Damon at the Chinese buffet. It’s interesting to note that, starting in September, these dinners will be the only times I’ll have to eat out. Ah, the joys of finally having a kitchen…

So Damon and I immediately started talking about a call I received from the president of the Investor’s Club, Carmella. She first informed me that I won the monthly raffle and will receive… something, I don’t remember. But it’s usually a stupid prize so I wasn’t all that excited. Then she asked me how I like the meetings and my thoughts on the subject matter. Carmella then started asking about what I did for a living (after I told her I work two full time jobs) and... even though I told her and it was perfectly reasonable for her to ask, it felt weird. We both agreed that she gives off weird vibes and I’m gonna be much more careful when either she or anyone at that club asks me personal questions. Anyway, she then talked about how she found a private lender at a seminar and is using them for a deal. If the lender works out, she will introduce him/her to the group and we can try to get more deals. She also spoke of a convention in November where there will be over 400 private lenders in one place. I like the idea of having relationships with private lenders because it’s just another option available to make money.

Carmella also talked about mortgage notes during the phone call, but I wasn’t really paying attention. I asked Damon what mortgage note investing consisted of, and he laid it out for me. Basically, it’s when a private lender puts the money down to buy a property for me. Now he has a note that I have to pay back. Once the note is paid back in full, the property is mine. In the meantime, I have to pay back his down payment, plus pay the mortgage for the loan itself. The advantage is that I don’t pay anything out of pocket, as the down-payment and closing costs were already taken care of. Example? Okay.

I want to buy Property A. Property A is $100,000. I get a private lender, Big Bob, to fund the down payment and closing costs. Big Bob pays $20,000 for the down-payment and another $10,000 for closing costs, for a total of $30,000. The property is now mine, but in his name. Big Bob and I enter an agreement where I have to pay the $30,000 back within 5 years at 15% interest. Meanwhile, the bank has a mortgage of $80,000 that has to be paid back (cost of property (100K) minus the down-payment (20K). So now, I basically have to pay two mortgages. The first is to Big Bob, which averages about $875. The second is to the bank, which is about $1,200. So the property would have to pull in at least $2300 per month to be able to pay everyone back each month, plus pay the water bills. As long as the property pays these two interest-loving bastards off each month, I will have purchased a property with no down-payment that pays for itself. And I should also make sure that the agreement states that I can pay Big Bob back sooner than 5 years.

On the flip side, I can be Big Bob. I can assume the role of the private lender. I take my $30,000 and use it as a down-payment on a property for some dumb bastard, making the same 15% interest rate agreement with him. As long as he makes his mortgage payments to the bank and monthly payments to me, I would make $52,500 off a $30,000 investment in 5 years. $4500 a year ($375 per month) in interest alone. And I don’t have to manage the place or deal with tenants. How awesome is that?

In my current situation, buying a property with a private lender would be absolutely awesome. I can own for Property A with no money, and then take the money I saved and use that as a down-payment for another property. I would have just bought 2 properties with one down-payment. 2015 could be the biggest year of my life! Sweet! There are risks, of course. If the person paying the mortgages defaults, then the private lender is stuck with the property and will now have to pay the mortgage and manage the property by myself. But if I’m that lender, I would have no problem managing the property on my own because that’s what I do! And I would have already researched it to see that it’s a profitable property. Damon definitely got me excited about mortgage notes, but we both agreed that we need more information before doing it in the future.

After that, we bullshitted for a while. I boasted about finally finishing my basement apartment, and he talked about finding ways to read about landlords’ experiences dealing with tenants. He said I can do a Google search for landlord and tenant forums, which I think is a great idea. It’s always good to stay connected to people who do what I do, and the internet makes it so that I don’t actually have to see them which is great. I also told him about the advantages of blogging about his real estate experience, and learning from these experiences by reading his blog over again. He seemed intrigued by the idea, and that was the end of our 3 hour dinner. It was a great exchange of ideas and information, and I’m really looking forward to next month’s dinner.