They say the only thing that never changes is change itself. And that seems to be the truth and the whole truth when it comes to real estate. To thrive in this industry, you need to learn how to pivot with the times. Joining us in this conversation to show us the way is Eddie Speed. Eddie explains why the surge in rental property investments is now facing challenges, why note investing may be the next big wave to catch, and what strategies you can employ to be able to make informed investment decisions. Tune in to discover the secrets of successful real estate investing and stay ahead of the curve in this ever-evolving market!

—

Watch the episode here

 

Listen to the podcast here

 

The Insider Real Estate Power-Pivot Strategy For These Economic Times With Eddie Speed

I’m glad to have you joining us again. We have an exciting episode here for you. I have Eddie Speed. How would we describe Eddie? King of Notes and King of the Marketplace because this man knows how to pivot based on what’s happening in the market. I brought him here for this episode because he’s going to give us a state of the union, what’s happening in the market, why people have been doing what they have done in the last few years, and why they’re moving toward the advantages of moving toward notes in this particular environment.

—

Eddie, welcome. I’m glad to have you on my show.

How are you, Merrill? Thank you very much.

I’m doing great. We have known each other for years. We have been doing this together. I’ve had the pleasure of being on his stage in some wonderful events for his groups. Nobody knows this market as well as this man. Some people like to read a paragraph of an introduction. I want you to tell my community who you are and how you got to be the doctor who has the pulse on what’s happening in the real estate investment sector.

I’m a specialist. I know everything about real estate that is known to man. I started buying real estate notes in 1980. I’ve closed over 50,000 real estate notes. This is my sixth real estate cycle. I wouldn’t tell you that I’m smart, but I am seasoned, and I couldn’t be smart because I couldn’t have made as many mistakes as I made and be smart, but sometimes the lessons we learned the hard way are the ones that we own better than the ones that we accidentally missed the bullet.

Sometimes the lessons we learned the hard way are the ones that we own better than the ones where we just accidentally missed the bullet. Click To Tweet

The other thing is I had a training business. I train a lot of people about things in the market, and we spend a lot of time scraping data. We spend 10 to 20 hours per week reading everything from where commercial real estate is going to residential to mortgage rates to the inflationary factors, what the Fed is going to do, and what the bond market is doing related to mortgage rates and stuff. We have a lot of focus and energy about trying to know that we have the right answer. We read the weather forecast, the market, and the forecast ahead of us.

I am wildly in favor because I do similarly with my community. I’ve called myself my crash test dummy, but not where we’re throwing a car against a brick wall to see where the impact points are. It’s an intelligent and capable way of analyzing what’s happening and making the best choices. When we fail, those are lessons that we can then train our communities not to make because we did it ourselves.

I know that you have great expertise and seasoning. What would you say has been the big trend in the past few years? What have people been doing? What are the popular real estate investing strategies? Where are they going, and why? Where would we come from? Where are we headed? Why are we headed in that direction?

If you look at every stat out there, we had this great insurgence of people buying rentals. In the whole single-family residential world, we doubled the amount of properties that were owner-occupied going over to rentals. There are a lot of reasons for that. You look at the other side, which is people investing in syndications and apartments. Multifamily is the topic of the decade, not that people don’t invest in other syndications of other commercial asset classes.

Usually, in people in our audience, storage is the second-biggest. All of those factors were a trend in the market because of market timing. We saw historic low rates. Money was free. We saw an escalation in rents. People said, “Why wouldn’t you do this?” You have giveaway money and an increase in rent. A lot of people race to that market at a rate we have not seen.

It’s a rate that I’ve not seen in the past. Here’s what happens because this is a long history, and I’ve lived through high-rate cycles and economic cycles. I have to look at what that does to the cost of financing and availability of financing. I have to look at that and then read that before we get clobbered. I know that the train is coming down the track before it hits me in the nose.

When we saw inflation, we instantly understood that we were naturally going to have a pretty drastic increase in rates. Call that Captain Obvious. I don’t know why some people didn’t know this but they didn’t. We saw an increase in inflation. We’re going to see an increase in rates. We called that in the early fall or late summer of ’21. Sure enough, we started seeing rates by the time ’22 came along, and people were like, “Oh my God.”

Why didn’t you know this was coming?

If it’s not what you do all day every day, or you’re busy from 9:00 to 5:00, I don’t know what you do every day. I only know that this is our specialization, and because we have a lot of people that we’re accountable to and responsible to, we feel like we have to know that. That was the obvious, but here’s what happened. Generally, nationwide, there are micro markets. This is a little bit different, but this math is pretty much going to be true in any market that we live in here in the United States.

We did have an increase in rents, sometimes as low as 20% and sometimes as high as 35%, but we had a higher increase of real estate values and expenses. Expenses outpaced the increase in rents. The cost of property meant that you had to pay more for it, financing at a high rate with a higher percentage of the rent going into expenses, “You mean my calculator won’t work the same.” That’s as true in multifamily as it is true in single-family.

Everybody said, “What you do in inflation is you invest in rentals.” I said back then, “It’s not anything I’ve ever experienced,” but you know how Facebook is. If it’s on Facebook, it has to be true, and just because you say you’re an expert, you have to be right. I saw a lot of armchair quarterbacks reading the market, and I’m going, “That’s not how it’s going to work. I’m pretty sure.”

We had to sit tight a little bit and let that thing play out. All of a sudden, people are coming to us and saying, “What is the alternative to the normal alternative investments of rental properties and multifamily? What is the next alternative? That math isn’t working well.” If you’re investing in the syndication, a guy might say, “It’s working great.”

Have you read the mid-year multifamily report from Fannie and Freddie? Have you read the Trepp report? The experts or the real placeholders in the game are looking at the same thing, and it’s inflation, affected rates, and also affected expenses. It affected the income but didn’t affect the income to the same level as the expenses and the rates.

They’re smaller margins.

When do people invest in notes? People invest in notes when they’re trying to increase their cashflow and have a true inflationary investment strategy.

 

I’m way your junior when it comes to the math here. For those who are unaware of my community, will you please walk us through that?

Here’s a simple example. Take a rented house. John Burns is a very renowned real estate economist. His client list on the residential side is anybody you’ve ever heard of. He spoke at a lot of big masterminds that I’ve been involved in. He’s a regarded guy in the industry. He’s one of the clients of Fannie Mae, Freddie Mac, FDIC, and anybody. They use him as an advisor in giving them data and market trends.

He came out in the summer. He says, “If you’re in a starter home, your mortgage payment is $1,000 more than you pay for rent on the same house.” I read that and said, “That’s the best news I’ve ever heard in my life.” Most people would laugh and say, “Why could you say that?” That means I want to be the bank because why do I want you to go the bank and pay more in rent when you could pay me more than rent and no expenses?

I could seller finance my property and get a way bigger payment than rent. With seller financing, I’ve got no expenses. I’m the bank. I’m not the landlord. Being a landlord, half of my income is going out the window to expenses. You could more than double your income by seller financing your rentals. That’s solving one problem that people have in the market. That’s not every problem we solve, but it’s a great example of how we’re in a note cycle versus a rental cycle.

Let me break this down so that I can understand. What you’re saying is that if I have a third-party bank, and part of my expenses is I pay the mortgage. I have PITI and everything that goes with it. Someone pays me rent, and my margins have collapsed because I’m paying this note to the bank as my chief expense, but if I buy a note or if I am the bank, then I don’t have to pay the largest expense in the entire formula because I’ve already owned that note. I bought that at a discount because people are trying to move those particular notes.

In this example, you are simply choosing to be the bank versus a landlord. You’re choosing to seller finance your property because you can net more than double the income than you can by keeping it as a rental. Not only did interest rates go up, but also taxes, insurance, maintenance and repair costs, and other stuff. All of a sudden, those expenses mean that I’m responsible for those as a landlord, but when I’m in the bank, I’m lending my money at a far better rate than other investments so that I can earn a return. In the note business, an 8%, 10%, or 12% yield effectively on your investment is the norm. You’re not netting that with rental properties.

For most people with rentals, income has gone way down. They say, “My rents went up, but my expenses went up higher than my rents.” The expense side outpaced the rental raise side. People come to us and say, “When I run the math, you’re telling me to run or showing me how to run it. I’m making way more income on seller financing my rental than keeping it.”

The answer is I already know that. People say, “I don’t get the appreciation.” You get it upfront. You don’t wait for your appreciation. You’re getting paid your appreciation now. Here’s the thing about it. What if I own a note, my work, my labor factor, my work factor, and my headache factor? I can own 1,000 notes for the same labor factor that I own 100 rentals. Why wouldn’t you do that? Some people want their time back.

 

It’s time and money freedom. They have money, but they don’t have time because they’re leveraged to the hilt.

That market timing has caused that. Some people create their notes, and we help them figure out how to do that. Other people say, “I want to buy a note. I hear rentals can be a headache.” That’s a joke.

I’m not in the rental business because I had one rental. My community knows this story. I did it once. I will never do it again.

Some people have a tolerance for the investment, and some people don’t have as high a tolerance. I’m not saying everybody in your audience is the same because there’s going to be somebody who says, “I like my rentals. I like dealing with tenants.” I’m not kidding. Some people say that. It’s not a high-percentage shot.

I’ll let them. I’m just not one of them.

A lot of people don’t have a tolerance for it, or they don’t want to take the time for it. They say, “I want to learn how to invest in notes.” Let’s go back to the market. We have an excessively higher inventory of notes than we had years ago. Why is that true? Let’s look at the commercial sector. In commercial property, multifamily offices, warehouses, industrial, and all of that, loan production is down about 70%.

The lenders are bracing up for a bomb. They have doubled the down payment in most cases. They have doubled or tripled the net income they want to see their borrowers have after they have paid all their expenses. It’s called the debt service coverage ratio. All of that mass says, “The lenders are bracing up for a bomb.” I know that there are people on Facebook acting like there’s no problem out there. Those are promoters, though. They may not be operators.

There’s a massive problem out there. In every mastermind I’m in, people who are heavily invested in commercials are running for cover.

People think multifamily is not commercial. I’m going to say to you, “Wrong, kemosabe.” It is commercial. Fannie and Freddie, who do lend money on multifamily, which is the commercial asset class, their production is down 60% or 70% in 2023. Understand there are fewer deals happening, and fewer people can do it. The banks are taking cover. I believe 72% of all commercial loans were made by smaller banks, which are less than the top 25 banks. Regional and community banks are bracing up because they’re trying not to get shut down by the FDIC.

There’s a huge amount of press about this. I assume that your audience already knows there’s an issue there. Our bid list now is eight times higher than it was. There is a lot of inventory of notes, and we have a lot of people wanting notes. How many people have said, “Every time there’s a bad time, there’s somebody who knows how to make money in it.” That happened to be our specialization.

This is an exceptionally popular note time. For some operators, notes are always awesome, but now, you’re saying this is the wave to catch.

The Texas plate on my pickup says, “I love notes.” I’ve been doing it for a long time, and I’ve made notes work in a lot of different cycles, but there’s the influx of people who are trying to figure this out because, once again, they’re having to find another alternative investment to the more traditional alternatives. Alternatives are where people aren’t investing in stocks and bonds. They have moved away from that. They’re trying to have a little more control over it. They chase rental houses and invest in commercial syndications.

Thank you, first of all, for that. If you were to look at your crystal ball, what does the next 12 to 24 months look like in this cycle? How do we know how long we’ve got to play to catch this big wave on the maverick? I’ve done a little surfing in my day, and the Central Coast of California is widely known for some of these amazing waves. What does it take to catch this maverick? What do we need to do? What does my community need to do? What do all the random audiences who might find this show need to do to catch this wave?

I built a training business years ago because people don’t accidentally invest in notes correctly.

You don’t slip and fall into a note.

I built NoteSchool. That’s what we call it. I did that for the purpose of showing people how we do it, “How do you find a note? How do you identify the risk? How do you make a good decision? Should I buy this note? Should I not? Should I seller finance this property? Should I not? Who should I seller finance? What qualification standards should I do?” We put some tactical processes in place so that if you’re going to do it, you’re not a maverick. You’re not taking a wild risk, and you’re simply doing it.

Looking forward to the market, I’m very close with some people who run fairly substantial hedge funds with mega billions under management. Occasionally, they will share with me their forecast, which seems to all be matching, whether it’s Fannie Mae saying it or Goldman Sachs saying it. We’re headed into a recession. It’s not going to be super big. Rates for residential properties are going to be flat. We may see a decline a little bit toward the end of 2024. Real estate values in 2024 are predicted to be flat for residential properties.

We’re not in a growth mode. We’re not in a big appreciation mode. People are holding on. There’s a shortage of houses, but there’s a bigger shortage of people who can afford them. It’s supply and demand. If we didn’t have a shortage of houses with the economic variables in front of us, we would see a fairly substantial decline in residential values, but because of a shortage of houses and all the forces pulling back and forth, I believe pretty much all the residential experts are calling for it to be even. That’s what I see on the residential side.

Demand and supply are going to keep things pretty flat.

We’re deeply involved in buying defaulted residential mortgages. That forecast is good for us. We do not want a decline in values. We’re going to see more people doing private financing because bank rates aren’t affordable, and underwriting has gotten tight. About half the people who could have qualified for a mortgage before the virus can’t qualify now, excluding rates and just other underwriting standards.

Mortgage bankers generate a graph. It’s called the Mortgage Credit Availability Index. That index number is about half of what it was in February 2020. Not only have rates gotten high, but underwriting has gotten a lot tougher. Let’s look at the commercial side. Offices dropped substantially in value, according to John Burns and a lot of other sources.

The gold standard in commercial real estate is Trepp. Instead of listening to your promoter on Facebook telling you what the market is, why don’t you do your research? The Trepp report is considered to be the gold standard. Commercial offices dropped the most. When people say, “I know that office has a problem,” let’s call that Captain Obvious. Everybody knows that’s an issue. It dropped about 35%.

One of our strategies for our community is the most fundable business address, which is a brick-and-mortar office address. One of our strategies is going out and getting subleases for some of these terrified professional firms that could make a little money by having a little office there that we can use for our funding.

Make sure they’re making enough profit, though, to pay the expenses of the building. That’s an underwriting risk. Make sure they have enough money to pay the utilities, the yard, the maintenance, and stuff. Let’s look at multifamily.

We’re sending people in to sublease pieces. These guys have enough revenue. The lessee has more money or revenue. They’re willing to give up 200 square feet of an office to our people so we could be more fundable, but they get some cashflow because they’re getting killed.

That’s a great idea. Let’s look at multifamily. I was at some masterminds, and I hurt some people’s feelings. They’re some people that you probably know. They’re friends of ours. They were multifamily. I said, “The hockey stick is not going in that direction.” They go, “You don’t know what you’re talking about. You’re being a pessimist. You’re an old gray-headed guy.” It’s gone down 17%, according to John Burns, other real estate forecasters, and analysis. Statistics say they have dropped 17%. That drop is not over. There’s nothing that would say it’s over. There are a million multifamily units under construction at the moment. That’s according to the St. Louis Fed. Data screws up a story.

It’s interpretable by what story somebody wants to use the data for.

We see a big opportunity with that. At the moment, we have hit the pause button. We’re not playing yet because I don’t think the knife has dropped where it’s going to drop, but we will play in it. I’ve played in every distressed market that I’ve been in since 1980. Believe me, we will play in it. It’s just not time yet. What we are seeing, though, is a lot of people shifting their investing from those asset classes, coming to us, and saying, “What do we do?”

We’re seeing a lot of people with capital come into our world because of those variables. I’m going to take a gamble. I’m probably hurting one of your audience’s feelings because I’m not calling for it. It’s over. The little bomb happened, but it’s all going to be great again because that’s what a lot of people are saying. I don’t see the experts saying that.

When it comes to the bank underwriting side of this, no transaction occurs unless somebody qualifies. I’m watching constriction in that marketplace. If somebody isn’t what we call a bullseye borrower, if they’re out here in the ring, they’re not getting qualified, which is dropping demand or the transactions. I’m seeing myself from the bank side. I don’t think it’s done, and it will constrict further, which will reduce the number of approvals.

It’s back to this. You can make a lot of money in a tough market if you get on the other side of the market. The easiest thing in the world is the sports analogy. How come whoever won the Super Bowl two years ago didn’t win the Super Bowl last year and didn’t win the Super Bowl the next year? They have free agency, and those great players move around. Somebody else brings in all these great players or some coach leaves. Circumstances change, and not everything is going to be the same. In the rental property business, we somehow thought nothing could change.

You can make a lot of money in a tough market if you get on the other side of the market. Click To Tweet

The only thing that never changes is change.

Isn’t that the truth?

Always. I’m loving this. Tell me then for my tribe. How do they get a leg up? Where can they go to get to know you better and to get to know more about this? Our episode is only going to wet their whistle. Where can they go to find out more about this and see what possibilities exist for them to explore this further?

We put together a masterclass, and we wanted two things in this masterclass. We wanted some books, Excel charts, things people could use, flow charts, and good materials. We felt like we needed to teach people more about what the real deal looks like. We put together a masterclass that has those things. We answer a lot of audience questions. While they’re asking them, we’re going through and answering a lot of questions because if we don’t overcome the monster in their heads, they can’t see the opportunity.

Secondly, people want information. They want data. This is a very timely level of documentation that we’re giving people. We’re explaining, “This is what a deal looks like. This is normal in the note space.” We’re going to talk about buying notes that are paying and then buying notes that aren’t. There are two million residential mortgages in default. This is according to Black Knight. The average day’s delinquent loans in foreclosure is in excess of 1,000 days.

The only thing that never changes is change. Click To Tweet

We’re talking three years.

We’re going to talk about that. We’re going to give people what our normal looks like. If you are intrigued by what we have said, I’m fairly sure you will be intrigued by this masterclass.

How long is the masterclass?

It’s a couple of hours. We normally sell it. You and I go way back. We wanted to put some materials together so that we weren’t just talking heads up there talking. We wanted to put some things to give them some tangibles that they could leave there with and study later. We go through and talk about why this is an advantage at the moment, “Let’s look at a deal. Let’s look at the transaction itself. Let’s look at a note deal, how it works, and how this math is so unbelievably good in favor of what we’re doing, which is notes.” Virtually everybody who sees this when they leave there is like, “I see it.”

Where can they find this wonderful offer that you’re providing?

I’m going to send them to a special page on our website. I’m not going to send them anywhere because in this offer I’m making, I’m giving them some special things because of our relationship with you. They’re going to go to NoteSchool.com/Merrill, your first name. That takes them to a page where they’re going to be able to register for the masterclass. We will have some fun with them and stuff. If I look excited, I am excited. I’ve lived through a lot of cycles in the market, but this runway in front of us in this business is solid.

We’re ready for it. It’s always inspiring to talk to you. When we saw each other at the mastermind and reconnected, you were on fire with what was going on in your space, and your space is a component of the larger real estate space. That’s when I knew I wanted to get you back in front of my people and make sure that you were able to inspire and educate them on what’s happening.

I love getting ahead of the game, and my community knows we’re cutting-edge in fundability. There’s nobody else in the marketplace that does anything remotely close to how we prepare people. Our second-highest funding ever was Theresa out of your crew who’s taking notes to this day with a $500,000 line of credit. She had $100,000s, $200,000s, and $300,000s. She filled it with that $500,000, and she’s still using it to this day. Your people are very successful in doing what we do.

Thank you for being here. Thank you for educating my community. It’s NoteSchool.com/Merrill. Get educated. You know how important this is to me. Choose not to do it but only choose after you have educated yourself that this is something that you do or don’t want to do. Make that decision after you get informed. Thank you, Eddie, for being with us. You have a blessed rest of your day, and we will see you in our next episode.

 

Important Links

• Eddie Speed
• NoteSchool.com/Merrill
• https://Docs.Google.com/document/d/1PpaJ9gHMSwcrNLlUIS-pwcYUdAowvThs18eSYP9oBp0/edit?usp=sharing
• https://www.YouTube.com/c/NoteSchool
• https://www.Facebook.com/TheNoteSchool/

 

About Eddie Speed

Eddie Speed: Author, Teacher, Innovator, Visionary

Eddie grew up around horses, but in 1980, he learned there’s more wealth to be built with a pencil than a rope. That’s when his father-in-law, a pioneer of seller-financed notes, taught him the ropes of the note business. Eddie has been perfecting his craft ever since, introducing creative innovations that changed how note investing is done.

As the nation’s most experienced note buyer, he has closed over 50,000 note deals. He launched NoteSchool in 2000, where anyone can learn the art of creative financing for performing and non-performing discounted mortgage notes. He is the owner and president of Colonial Funding Group LLC, which acquires and brokers discounted real estate secured notes, and he’s a principal in a family of Private Equity funds that acquire bulk note portfolios.

Thousands of NoteSchool students have testified to the wealth-building, life-changing power of his tried-and-true, data-driven approach to note investing.