244: Compress Time with Eddie Speed

23
Sep

Eddie Speed, Owner of Colonial Note Funding Group and Founder and President of NoteSchool, is driven by a passion to help people compress time by teaching them how to invest in mortgage notes effectively.

We learn about Eddie’s journey from entering the note investing industry at a young age to becoming a leading expert. He explains his framework for evaluating mortgage notes, which focuses on assessing credit, qualifications, and property type. Eddie emphasizes the benefits of being “the bank” rather than owning rental properties, offering practical strategies for individuals looking to achieve higher returns and cash flow through note investing.

—

Listen to the podcast here

 

Compress Time with Eddie Speed

Good day, dear listeners, Steve Preda here with the Management Blueprint podcast. And my guest today is Eddie Speed, the owner of the Colonial Note Funding Group, and Founder and President of the NoteSchool, teaching people how to invest in performing and non-performing mortgage notes. Eddie, welcome to the show.

Thank you so much. I’m glad to be here.

Oh, it’s exciting to have you and to learn about this whole piece of the capital markets that seems to have been off limits to retail investors and mainly dominated by banks. But let’s start with your personal “Why,” what drives you as an individual and how are you manifesting that in your business?

Well, the first thing I would say about my “Why” is I’m blessed to do something that I actually love to do. That’s a blessing. I know a lot of people can’t say that with integrity, but I’m blessed with that. And so part of my “Why” is, I’ve been doing this now for 44 years. So my “Why” today is to compress time for people, to show them a possibility in a way compressed period of time, because I think I can get down to, in the military they call it the hot wash. The quick accelerated version of how this works. And so, that allows me to be a go-giver. That allows me to build legacy. That allows me to go show people a lot of things. Share on X But really, you know, my “Why” today has become focused on, if I know this and I think it’s good, how can I show you much quicker of how it might be good for you?

So is it compressing time to learn notes investing? What’s your answer?

Once you learn note investing, then implementing the business and all that becomes part of what that is. The “Why” is the end result. And so I look at it a little differently. My “Why” is casting a vision.

Okay. Why is this important?

I think we have a secret sauce in the industry. I really do. I think we have something that is really terrific for people, particularly people that have an interest in real estate but don’t have an interest in the pain of owning real estate.

Okay, all right. So tell me a little bit about how this whole business of investing in notes, how this thing evolved and why is this an opportunity, a good opportunity, and how should people think of it as this whole asset class of notes. How does it fit into the big picture of people’s investing and retirement planning?

Well, I was 20 years old when I started. My father-in-law and a partner that he had at the time were pioneers in buying discounted notes. They were doing it because of high interest rates in 1980. So a lot of people sell their finance properties other than going to the bank. And so we saw this big acceleration in people doing this. And all of a sudden they woke up and figured out, whoa, there’s no secondary market. If somebody wanted to sell this note, where would they go? And so they were guys with real estate backgrounds and banking backgrounds. So they had a vision for this and they brought me in as a very young guy, 20 years old, and showed me this business. Now clearly at 20 years old with not a significant business background before me, it was a lot of different things to learn, but I, within a couple of years my wife and I had married. So we went and targeted and moved to Dallas-Fort Worth because that seemed to be a very opportunistic market to do this. We’ve lived here ever since. I could live anywhere in the world and do this today, but back then you needed to be a little more local to the market. And so I don’t believe I would have figured this out. I don’t believe I would have gotten all the way through it, or at least I wouldn’t have done it in a timeframe I could afford to pursue it, had I not had some guidance.

Okay. So, but why is this a good market for someone, a business owner or a mid-level manager to look at as part of their investment portfolio? What makes it interesting and attractive?

Well, market cycles tend to be either market cycles that are really good for renting or really good for notes. In 2020, it was really good for renting. Rents were going up, 2020 and 2021, rents were going up. The bank was charging 3% interest. So you could net a lot of money out of properties because the bank wasn’t getting a lot of your money. 2024, rates have gone from 3% to 8%. The bank is getting your money. They’re earning more than double the interest and they’re getting your cash flow out of a rental property. Expenses have gone up by about 60%. Rents have gone up by about 20%. So all of these things have meant that the rental cycle has changed. Now, this is true both in multifamily as well as in single family. But wait a minute. What if you looked at it and said, I could be the bank, I could own the mortgage that’s more profitable than owning the rental?

So what you’re saying is, or what I’m hearing is that in 2020, a good investment was to buy rental property and rent it out to people because there was a high yield on that investment. But in 2022, because rents didn’t rise, but property values rose substantially or at least much higher than rents, it’s no longer an attractive yield on buying property for renting them out. It’s much better to be the lender who collects variable mortgage rates perhaps or even fixed because you can buy these notes at a discount and you can get a higher yield.

That’s great. In 2024 today, right?

Today. So if I want to get exposure to the real estate market, I’m better off investing in mortgage notes as opposed to real property.

Absolutely. And once again, that’s a challenging statement, except we can prove it. We do a lot of financial modeling and we lay this out and then we let people draw their own conclusions. Share on X But, I can tell you that on the same property today, let’s just pick Dallas-Fort Worth, where I live, which is a middle market, right? Not the highest rent, not the lowest rent. $350,000 house is going to rent for about $850, right? Half of that money is going to go towards expenses, taxes and insurance and maintenance and all those things. That’s a gold standard in modeling rental properties. And so I’m going to net, well, call it 950 bucks, easy math, right? But wait a minute. If I own their finance the same property, I could get a payment between $2,200 and $2,400 for an owner finance payment. $950 for rent, net income, $2,400 in net rent for owner financing it. Which one would you do?

Okay. So, I’m just trying to reconcile the terminology. So renting is the income I would get from a renter.

The net is…

And owner financing…

…and there’s a net, right?

I would, it’s the income that I would get from the owner who’s paying the mortgage payment.

Correct. I can owner finance it and get a market payment that mortgage banking is proving is a real model. I can get a market payment of $2,400 on a $350,000 house. Right? And that didn’t include taxes and insurance, right? But if I’m renting, the rent is not near what the rule used to be, the 1% rule, right? Property values have risen above rents on the same property type. Now, by the way, you know where I got these exact numbers from? I got these from BiggerPockets. Their numbers. It’s not my numbers. I just analyzed their numbers and said, oh, wait a minute. What if I don’t sell the house and get a conventional loan? What if I decide to be the bank? This is an example of rent versus note market cycle of where we’re at right now.

Okay. All right. So let’s talk about this idea of buying notes and investing in notes. And this podcast is all about framework. So if someone wants to invest in notes, you have developed like a 7-step acid test to ascertain whether this is a good thing. And actually there are two things to discuss. So we talked about investing in notes or we’re talking about building a business as well. So maybe let’s talk about the notes part first. So what is your framework for potential investor into ascertaining whether these notes are a good asset to invest in or not?

I do help people with buying defaulted loans too, but let’s stay focused on at least the performing note classification for a moment. If you’re looking at a note, what is the buyer’s propensity to pay, right? If you’re going to buy a note, which is a cash flow that sends you a check every month without your having to manage a lot of stuff, pretty simply, what’s the odds they’re going to pay? Well, that can obviously depend on the buyer’s credit, their qualifications, what kind of property they’re buying, do they have any kind of measurable track record, in other words, have they been paying on this loan in the past? All of these things, after closing 50,000 of these, we have learned that these are the things that let us look into the future with confidence and say, the likelihood of this loan is going to pay is this. There’s never a 100% chance, but there is certainly a risk management analysis that you can do that will make you write a pretty crazy high percentage of the time.

So it’s all about the owner’s credit profile?

Credit, qualifications, even what kind of property they’re buying. And so all of these things are things that we’ve learned that measure into… It’s not any different than what Fannie Mae, Freddie Mac, FHA does, but let me say that it might have a little more common sense application to it. In other words, underwriting is underwriting. People’s credit score is an indication of how they’ve paid other creditors. People’s qualification says that they can afford to make the payment on a long-term basis. All of these things are underwriting the same, whether it’s a car loan or a house loan or whatever. So some of those things are common threads. But after many years, we’ve looked at this business and said, over a lot of loans, many loans, we’ve looked at it and said, what did we learn after we looked at the performance of these loans for a period of time? And then we’ve sort of added those dimensions to it as well. It’s a checklist. We’ve just documented things that we’ve observed so somebody can go back and measure that off against any particular asset they’re looking at.

So when you say qualifications, what kind of qualifications? Is it the person Is a professional, is it a doctor, a lawyer, an engineer, or is it about having a builder’s license? What kind of qualifications do you look at?

Well first of all, when you say are they qualified, first of all, how are they paid others? So that’s credit. And then the second thing would be their income and the stability of their income. In other words, somebody might be in sales and they were in a terrific business, and now all of a sudden those sales have really diminished. Let me give you an example, Loan Originations. That business, they might have been killing it three years ago, but they’re probably not killing it today. Not that we’re picking on them, but that’s a good example of an industry that has had a dramatic decrease in sales commissions that have been paid. So that’s stability of income. Not just what have they earned, but what are the likelihood that they’re going to earn that in the future?

Okay. And the other thing you mentioned is the property type. So how does property type inform the decision?

So at the moment, we are focused on more residential loans or land loans. People that are working class will buy some land that they’re going to put then a manufactured house on, they’re going to put a barn on, maybe they’re self-employed, they’re going to store their equipment there. They say they want to raise their kids on the dirt versus a concrete parking lot. And it’s a lifestyle. And so we have a lot of experience in buying that kind of loan and we have a lot of experience in buying residential loans. And so right now, we’re not so much chasing the commercial side of the business. That market has, there’s still a fire happening there and we’re not sure where it’s going to land. So we probably generally are going to tap the brakes on that asset class at the moment and see where the values land and the stability lands in that area.

Okay. That’s interesting. So basically, you look at the credit score of a person, then you look at the income and their stability. Are they in a profession that is going through good times or are they in a profession that is facing headwinds? And then you look at the property type. You want residential and land loans rather than commercial.

Land they’re going to do something with, right? They have a purpose for the land.

Yeah. So essentially, they buy it because they want to build a house on it so eventually…

It could be a future home, it could be a retirement home, but they have a… that land is sacred to them I like to say.

That’s interesting. So they don’t want to let it go, they want to protect it. So they have the motivation to pay them off.

Yes.

That’s good. That’s good. You also talked about non-performing notes. So what are the situations where a non-performing note can be a good investment?

Well, a non-performing note is the analysis of that is kind of like a pawn shop. We’ve all seen the TV shows at the pawn shop, right? You have something that’s worth $5,000 and the pawn shop is going to give you $2,500 or $2,000. They hope you come get it back. They kind of position it like a pawn shop is just to go buy something so they can resell it. But the real pawn shop business is you want them to pledge something as collateral that’s so good, they want to come get their loan back and you’re going to earn money on it. But if they don’t come back and you end up with a collateral, you’re okay with that too. And that’s exactly what a non-performing note is. If a property is worth $400,000, we might pay $200,000 for the non-performing note. We’re going to buy that note in many cases at a deep discount. We hope that we can get them paying again and get them on track. We hope that’s what we can do because we have a low cost basis then and a loan that’s now paying again. But if they don’t, we’re okay too.

And then you go through the foreclosure and you realize the property.

About 2 million residential mortgages are delinquent today.

And the individual investors, can they handle this or they would have to hire someone like you who would help them foreclose?

One of the things that we’ve learned along the way with the school is we started offering done for you services. So we started helping people with management services to do the things that they didn't want to go do. Share on X A lot of people that come to NoteSchool are looking for an investing strategy, not a business. We help them with what it takes to run the business so that they can implement an investing strategy. And it’s optional. They can do none of that. We have people that show up at our doorstep that’s bought 2,000 houses. They don’t need our help. And then we have people that are not so experienced. Maybe they’ve tried rentals and they found out they weren’t as good at managing them as they thought. And so there may be things that we can help them with. So we just try to make it at their option.

Okay, so let’s talk about the business owner. So someone who runs a small to medium-sized business, their business is profitable, they want to take some eggs out of the business basket, put it somewhere else, that they’re building a nest egg of passive investments on the side. And what do they have? What are the options they have? They can go out and invest in public stocks, or they can buy treasuries, or they can put some money into 401k or mutual funds. How does investing in notes fit into a portfolio strategy? Is this something that people, it’s one asset class and alternative asset class that they will allocate 15, 20% of their funds into and spread the risk? Or is it something that you would recommend that they get to understand it at a deeper level and then use it as a vehicle to earn higher income?

So once again, I never try to overly persuade people into what the percentage of their business is. I’ve been doing this for 45 years. My wife and I’s retirement account is based on notes, but we’re very diversified in notes that we own. We’re very confident that this is a good business. And so, I don’t like debating the stocks and bond thing, it’s not my game. I know probably less than most of your audience about investing in stocks and bonds. I know real estate and I know notes pretty well. The problem people are having today with other investments, what became known as alts, which were rent houses and syndications, real estate syndications, is they’re not getting cash flow. They don’t like it. They invest their money and they’re like, I’m not seeing any return of either my principal or my interest until later. And they don’t like that. They love notes because they see the cash flow. Share on X Buy a note, you might get 20% of what you invested back in the first year to 18 months. Now, that’s not always the case, depending on the term of the note and stuff, but that’s an example of the fact that people say, I am seeing a return on my money. Problem with stocks and the problem with all this other stuff is the stock can go up in value and on paper you made money, but in reality, did you make money? Well, you hadn’t gotten the money yet. And so people like the fact that these investments are, because you’re the bank, because you’re receiving principal and interest payments, you’re seeing a return on your investment. And that’s going to be the best probably real estate, like if you compared all real estate opportunities out there in front of you today, it’s going to be very hard to argue the cash flow of notes versus anything else. We’re going to probably win.

So, just give me some big picture understanding. So, in the Dallas-Fort Worth area, I want to buy maybe multi-family rental properties. You say that you’re not getting distributions.

You’re not going to get a check. Most people in syndications today, the syndicator has cut the money off, there’s not cash flow. That’s not 100% of the case. And so if somebody is listening and, oh, I’m getting a check, okay, congratulations. But the majority of people that are investing in multifamily syndications today are not seeing a check.

Okay. So look at the other investments. So some people might buy single-family homes and rent them out. Is this a thing? Or are they facing the same thing?

And they are, and for their investment, they’re getting very little reward in the way of cash flow.

So what kind of cash flow return, cash on cash return would they get?

An analysis on that.

Investing, let’s, this example. They buy an $800,000 house in Dallas-Fort Worth. They rent it out to middle class family. What kind of rents would they be getting? $2,000?

Well, $8,000 house is going to make a terrible rental.

$800,000?

Yeah, it’s way too high compared to what it would rent for. Let’s use the BiggerPockets analysis, what I just did.

Okay.

This is their math, not mine. $350,000 house nets you $950 in rent.

Okay.

A $350,000 investment in notes would probably net you $3,000 to $4,000 a month.

So $3,000 times 12, that’s $36,000. So that’s a 10% return, a 12% return.

Yeah. And most of math is going to be a minimum of 15% in the first year up to could be. Now once again, some of that is principle. Some of that is returning your investment. What people tell us over and over, they’re frustrated with, is their investments do not produce cash flow. And I believe that is a reflection of kind of people, how people are feeling because of inflation. They want to see something like, it’s okay to bet on the future and I think in the future all the time. But if you don’t see some results, then people are disappointed. The number one selling feature that people tell us, what switched me from rent houses to syndications to notes? Cash flow. Measurable cash flow.

Yeah. So basically what you’re saying is investing in multifamily, maybe it’s a good way to compare because these 350,000 houses, they are really apartments. They’re probably part of an apartment block, a multifamily apartment block. And it’s not a profitable business for investor because most of the cash flow will be taken by the note holders, whether it’s a bank or an individual. And right now, the fixed income piece is profitable, but the equity piece is not. And maybe at some time in 2020, the equity piece was more profitable than the fixed income piece. And it’s a cyclical thing. So sometimes notes are the way if you want exposure and sometimes equity and this is a time for notes.

Market timing. It is not market timing to go behind the multifamily. Like any level of research would tell you that at the moment. It was really good. It was too good, right? Now all of a sudden we’re in a declining market, which according to market experts, 20 to 25% decline in multifamily, depending on where you’re at. Most people believe it’s not over. I think it’s not over either. Here’s a truth. I think it’s a truth. It is better to do a good thing in perfect timing than a perfect thing in bad timing.

Yeah, true.

Your actions can be perfect, but your timing is wrong.

Got it. So how long are these cycles? Typically, I mean, the real estate, you’ve been 40 years in the real estate business. So how long are these cycles where how many years is when the equity is better than the debt and then that comes in? It’s like you’ve got recessions where investment banks, they do a lot of business raising capital for companies and then they do restructuring business for a couple of years, and then they have maybe six or seven years of upswing. So what does it look like in the real estate business in your forty-year experience?

Cycles can be as short as four years. They can be as long as eight years. So your math’s very good, and I think the runway in front of us appears to be there is a common thread. Like so many things are different. This is my sixth real estate cycle. So many things are different. What happened in the 80s is not like the 90s and so forth and so on, right? The common thread is this. When banks are in trouble, notes do really well. If this is news to your audience, the top 25 banks seem to be very stable and in very good shape. But below that, there is a lot of instability. About 45% of all of the assets in those banks less than the top 25 banks are commercial loans. Now, if that doesn’t make you uncomfortable, you probably want to do some market research. That is what’s driving the turmoil in the market, and the banks are making their clients clean up balance sheets, meaning, Steve, go sell your notes. We used to loan you money against those notes. Today, we want you to sell those notes. And so that is, we’re pricing literally five times the notes we were pricing 12 months ago.

So it’s kind of an arbitrage because the banks have to cover the losses on the commercial properties, they liquidate the residential business and that’s an opportunity for private investors to take advantage of.

The banks liquidate and also they make their clients liquidate. The barrel only holds so much water. And so this overflow is what we’re seeing evidence of right now. That has been a common thread since I first entered in the industry in every cycle I’ve seen. And so I’ve learned to really pay attention to that.

Yeah. But Warren Buffett says it, that be fearful when others are greedy and be greedy when others are fearful. All right.

It’s a pretty true statement, isn’t it?

Yeah, it is. It is. Okay. Well, Eddie, thank you. That’s great. So if you want exposure to real estate, this is not a time to buy. This is a time to loan. So invest in mortgage notes on quality people who own real estate, whether it’s residential or whether it’s a land that they want to build a house on or do something with. And you’re going to get much better returns, good cash returns. That’s very good. And if you’re private individuals, individual, then this is a stable form of investment, which is higher than your government bonds. It’s not as risky as public equity and it’s easy to understand. And then you can go to a NoteSchool and you can learn how to do that. So where do people turn? How do they get exposed to what you’re teaching? How can they connect with you?

So once again, we mentioned the compression of time. So I thought what would be fitting for that, Steve, is to have a special little class, a little master class that we could do for your audience, right? And that would give them a compression of time. Call it a couple of hours. In a couple of hours, you’re going to see, we’re going to be able to whiteboard things and work out case studies and show people math. Like show them why we believe what we believe. And then also kind of spend enough time with them to answer questions. Like hey, I got this question or this circumstance, and we’re real attuned to trying to listen to them. So that’s going to be at noteschool.com/stevembp, which is your blueprint initials.

Okay, sounds good. Sounds good. Okay. So, noteschool.com/stevembp standing for Management Blueprint. So, do check out that link and sign up and you’re going to get a really good value from Eddie Speed, who is the founder of Note School. He knows all about there is to know about mortgage notes, 45 years experience. Eddie, thanks for coming on the show and sharing your goodies with our audience. And if you like this interview, then please don’t forget to subscribe and follow us on YouTube and give us a review on Apple podcast. Thanks for coming, Eddie, and thanks for listening.

 

Important Links:

 

This entry was posted in . Bookmark the permalink.
kristine

Discover your WHy

Discover Your “Why”

Articulate the benefit to society your company can spire to deliver. Let your people join an adventure bigger than themselves.