Tax Advantages of Real Estate vs Notes | Real Estate Notes Show

Episode: Tax Advantages Real Estate vs Notes | Mathew Owens Dave's Goals and Plans: - Attended Tony Robbins Business Mastery event for 5 days - Took vacation on the beach after Tony Robbins - Seeing supply tapes coming in inbox every day from note creators - Ran into sellers finance space participants at Tony Robbins who had compliance concerns - Encourages people to consider selling property on terms instead of traditional sale or rental Nathan's Goals and Plans: - Receiving two different tape emails per day with note opportunities - Seeing increased non-performing notes coming to market - Open to working on non-performer deals despite additional complexity - Willing to have free conversations with note creators about underwriting and compliance Key Recommendations: - Create notes legally and make them sellable - check the 14-step process on website - Consult with foreclosure attorneys, not just real estate attorneys, when creating seller finance notes - Use licensed servicers and perform proper RMLO if needed - Implement proper underwriting before creating notes - Consider seller finance/notes as strategy to leverage equity instead of only selling or renting - Cover cash flow expenses first before building long-term wealth Topics Discussed: - Tax advantages of real estate notes vs traditional property ownership - Home rental strategy - renting your home to your business for 14 days annually for tax deductions - Increasing supply of notes and non-performing notes in current market - Legal and compliance issues in seller finance and note creation space - Comparison of selling vs renting vs creating notes with equity - Non-performing note handling and recovery strategies Guest Insights: - Matthew Owens is a CPA who quit firm in 2006 to invest in real estate, flipped over 1,000 houses - Has $35 million lent out to flippers and uses seller finance strategies with various client types - Raised over $200 million in private equity for real estate and business projects - Notes provide consistent cash flow while real estate builds long-term wealth through depreciation and inflation hedges - Portfolio of $20 million in notes ($200k each) provides insulation against defaults if done correctly - Experienced investors gravitate toward note space as advanced strategy tool If you own your own home, you can rent your home to your business for 14 days a year and your business gets a tax deduction and now you uh can don't have to claim that either because it's it's got to be at market rates.

It's got to be, you know, reasonable. But a lot of people rent their property out for $500 or $1,000 a day times 14 days a year. That's 7 to$14,000 of an additional deduction that you just get out of the blue, right? So, there's some really cool stuff like this out there that if you knew all the little tools and you keep educating yourself on the >> Welcome back to Real Estate Notes Show. We're here with Matthew. But before we introduce him, how you been, dude? >> I've been doing well, man. >> Good. >> It's been good. It's been good. Yeah, it's it's September in Canada, so it's getting chilly.

>> Yeah, it's amazing how this stuff has been quickly changing, >> right? The weather shift. We went from pool weather to everything else going crazy. So, it's been a whirlwind to say the least, right? >> Yeah. >> So, >> kids back in school, getting back to schedule. >> Yeah. We went from the whirlwind of some summertime to the whirlwind of school starting, you know. Um, didn't want it to end and it did on us. Um, August was a very busy month for me, travel and all stuff. How was your August? >> Same busy. I uh actually I I did a post about this a little while ago, but I got to go to a really cool youth camp I was volunteering at and it was for youth entrepreneurs.

So like it was the whole week and you did something similar for adults, but this I did the thing for kids where uh we came together, the kids had to decide on an idea, create a business plan, uh pitch it to a bank. They actually had bankers come in and give them real money to go and buy products so they could make whatever they were going to make. And then on Saturday, by the time that rolled around, we had all these stuff for all the stuff for sale to all the parents that came to pick them up. I mean, it was fantastic. What a great experience. >> Wow, that's awesome. Um, yeah, we were at Tony Robbins for 5 days of business mastery.

Then we shifted over and did actual vacation on the beach, enjoyed some sun, um, and did that kind of stuff. came back to lots of great emails, but a whirlwind. Anyone who emailed me in the last three weeks or messaged me, I have not been there. But what we're seeing in the note space is shifted a lot. I'm seeing supply tapes every day coming in our inbox and note creators out there. I'm seeing note creators start doing the right stuff, which is shocking. For those who are creating notes, we encourage you guys to do it correctly, which means make them legal, make them sellable if you ever have to.

We have a 14st step on our website. You can always check that out. But making sure you do it legal is a very, very big key here because legality means everything. And being in the space for 15 years, me and Nathan each, we see all the problems that you may have never heard of. We want to encourage you to do that kind of stuff. But there's a lot of people out there now that have a ton of equity in their property. >> They're like, man, what do I do? >> The first thing people think about is either sell it or rent it. >> We want to introduce this whole idea of maybe doing a note, right? Because then you can leverage stuff like that.

Before we bring our guest on, Nathan, what are you seeing in your inbox and whatnot in the market? >> You know, same thing. I just this morning I had two emails with two different tapes. Um and like like you say like pretty much every day now I'm seeing more product coming across more non-performers which are coming. >> Yeah. >> Which is interesting and predictable. We've been talking about this for a while and I think we're going to see that continue to grow and so >> we'll see as time goes on. We'll kind of keep an eye on that and see how that changes. Um, I don't mind going back and doing some non-performers, but uh, it's more work and it's more more to do, but man, there's some good opportunities there.

So, we'll see. We'll see as as time goes on. >> Yeah. Um, non performance is a very weird animal, right? What most people don't realize that not performing could be a headache or successful. And I think a lot of >> not originers weren't used to non-performing. They're they're used to constantly moving on and getting our money which is great. I get all that, but it can be very devastating when you get an outperforming and that's where we come and save a day, right? But if you are a beginner's note space and I've gotten a million messages recently about being a broker, we we did episode 133 a couple months ago.

Please take a look at that. Um I have training Nathan has some education. We have a beginner series. We have we've done podcasts. Um I also have some note calculation trainings. Take a look at the website. Take a look at the podcast. all the shows and start doing it the right way because you're gonna get yourself in trouble. It's a killer killer space right now. Um, they'll eat you alive. >> Um, at the Tony Robbins event, I won't name names. We did on a private call, but I ran into some people who are in the seller finance rap space. I know you guys are watching us and listening to us. Just be smart, be careful.

Talk to your attorneys, making sure you do the underwriting, make sure you do the the actual RMLO if you need to, and use a licensed serer. There's we're us note buyers are waiting for the field day to happen of your notes exploding. And it's scary because some of the bigger players were actually Tony Robbins and they shared some of the same concern. >> Yeah. and it's coming and and for us that represents bunch of opportunity. But the other side of that is there's going to be some people that are hurting and that's not going to be a lot of fun. But yeah, if you have questions, if you're creating notes and if you have questions on on what to do, you know, what we're looking for, please reach out.

We're more than happy to have a conversation with you and talk through what it is we're looking for. >> I have no problem in a free conversation with you, right? And if you get a group of people, we'll be more ecstatic. Please put a basic together and we'll talk about it. >> But absolutely >> with the equity that's out there right now, most investors are probably going to do one or two things. Sell it and dig the equity out or they're going to go ahead and rent it. >> And we want to talk to them about doing something just slightly different >> and yeah, >> sell it on terms, create a loan, create a note.

We're learning some verbiage you guys used on the other side of it. or trying to learn your way of communicating it. Any way you think of it. Yeah. Creating a loan and creating a note is way the bank makes their money. They don't do rentals. >> Yeah. >> They don't sell property. >> They are the lender. >> That fascinates me that people don't get that in the beginning. And some agents don't know about it. >> Yeah. There's a lot of power in that. There's so much flexibility and creativity that you can do with that. So, it's it's so powerful. So, I highly, highly, highly recommend it. >> And for people out there, and this is one of the reasons I want to bring Matthew on is someone said to me, what is the advantage of selling it as a property and as a note? I just let my accountant do that.

However, I know, which we'll introduce Matthew in a second, he knows the stuff better than anyone I know actually, which is why we brought the best. Um, I see Cody mentioning on LinkedIn, um, that many raps are going wrong and regulatories are going to get active. They are. So, if you're doing rap notes and you're thinking, hey, listen, I put in a trust, get around it. Just talk to your attorneys. Talk to your foreclosure attorney, not just your real estate attorney. Talk to a foreclosure attorney and say, am I in trouble? >> And yes, loans are becoming called due. Just be careful. We're seeing that.

>> Yes. So, let's bring him in because this is going to be a awesome conversation. Matthew, how are you, man? >> This is going to be good. I'm excited. >> Pretty good, man. Just just hanging out in Southern California, sunny Southern California, living in living in communism out here, you know, finding ways of not paying taxes, right? So, >> we like that good intro. >> Uh, so yeah, things are good, man. We got a lot of activity happening right now. a lot of lot of note plays, a lot of different real estate plays and other asset plays that we're we're we're uh you know playing with. And it's funny you guys talk so much about the note space.

And I feel like as you get uh more experienced in real estate investing, most of the really experienced guys start going into and girls go start going into the note space because there's some, you know, absolute incredible advantages to doing so. It adds such a great tool to your tool belt to understand that space on a whole another level because you can get absolutely creative with all different types of strategies because of your knowledge in that space. So, highly recommend like taking your guys courses, learning as much as possible about the note space to learn that tool because it's an unbelievably valuable tool to add.

>> So, before we dive in, >> at the very least, like you say, it's a tool. >> Yes. Right. >> Before we dive in, Matthew, who are you and why should we listen to you? You shouldn't listen to me. You shouldn't listen to anybody. You got to do your own homework on this. Talk to your attorneys, right? I'm gonna give you the attorney answer and it depends, right? So, um, so, so at the end of the day, I I'm a CPA. I quit my CPA firm job in 2006 to go into real estate. So, I was a real estate genius for about a year and a half before I got my ass handed to me basically by the real estate crash, of course.

Um, and thought I was dope and realized I was not dope, you know. And, uh, but since then, we've flipped a little bit over a thousand houses. We have about 35 million lent out to flippers in different markets. We do a lot of seller finance strategies to, you know, investors, to international clients, to IRA companies, to homeowners, all different types of strategies like that. We've done lots of wraps and all those types of strategies, too. Um, we also do a lot of private equity. We've raised over $200 million for uh different projects and, you know, private businesses as well as real estate as well as the note space uh that we focus on.

And I really like mixing the note space with the real estate space because, you know, real estate's great for the tax benefits and the depreciation and the inflation hedges and the equity growth over a time with the, you know, that inflation hedge and the decimation of that debt and your rent growth and things like that, right? It's has its place, but it a lot of times doesn't cash flow well in the beginning. And people need to cover their their expenses with cash flow. And notes is one of the best ways to do that where you got you're covered over here while you're building wealth over here. And really you should be covered over here first on your cash flow first before you start to really build that wealth to another level, right? So um so I I love both spaces and you know and it's a a strategy that should be implemented as part of your financial picture and your goals because it's like owning a bunch of free and clear rentals, right? You're going to get consistent cash flow if you have a portfolio of those things, you know, that you can count on, right? If you have $20 million worth of notes, and it doesn't need to be your money, right? All of your money.

It can be a piece of your money. But if you got $20 million worth of notes that are $200,000 a piece, you're very insulated. Unless you have a major spike in defaults and you did everything wrong, you know, so you're still going to make pretty good cash flow and be able to cover your investors and things like that. So, really cool stuff. >> Well said. I did notice the fact you were in episode 114 with us. So if you guys want to listen more about Matthew, episode 114. Matthew, what was your aha moment when you went and said, "I'm doing traditional real estate. This notes thing is Whoa." You know, I I got into notes because I was going through 2008 through 2012 and I couldn't sell a property to save my life.

And I was trying so hard to save save uh you know to to sell these properties and they were good quality good quality properties. We would buy them and renovate them and tenant them and we'd try to move them to other investors or we'd try to sell them to homeowners and things like that as well. And it was just really difficult, right? The financing was stuck. There was all kinds of problems and you know I started getting creative. I created the OCG retirement program and I started doing seller financing with 30 to 40% down to investors IAS and 401ks where I created 15-year fully amvertised paper right inside their retirement account.

And then in 15 years that property is free and clear. And it's not cash flowing crazy because it's a 15-year amortized deal but back then the cap rates were 9 and 10% so it was pretty decent. Uh and then um you know they were the whole idea is don't deplete your retirement you know accounts have it cash flow enough when you retire to live off of the principle and not you know have to take it out right and deal with that and uh and then I learned through that process how to actually sell notes as well. I actually took a weekend course uh from a lady named Don Rickabah, the note queen, and she's a friend of mine and uh and she actually taught the structures of this and I just had this amazing like, oh my god, I can do all of these other things to try to liquidate properties in different ways and I had no idea about the note space.

I just was too new at the time and um I had quit in 2006 and was just adding more tools to my tool belt and that one was one of the biggest ones. And then I started learning about structures like helping investors with 1031 exchange packages and properties and being the lender and bringing that to the table to hit all their 1031 exchange goals uh and doing those strategies. And that's what led me in to the note space. And I don't think I've ever looked back, especially once you start understanding interest rate arbitrage. All of a sudden you're like whoa there's a whole another level of massive return on investment when you do those strategies.

>> For those who saying the arbitrage word is a big word, right? And all it means is the fact that you have an interest rate of this and you charge this and you have a separation. So if you're borrowing with eight and you're getting 12, you have a 4% return that's free and clear that you didn't pay any money for it. That's an arbitrage, which is amazing money. That's infinity return immediately. You're just paying back your heap%. So, and and I'll give you I'll give you one quick example of this really quick from the math perspective so people can see the power of it because they don't you know you can say interest rate arbitrage and you know making a spread that's cool but like let's put real numbers to it.

So I did a loan my my 401k did a loan to a flipper in a different market at at for $500,000 at a 14% flat interest rate. He needed it for the full year. uh he was doing a development play and all this. So, but it was at 65% of the value of that property and my 401k didn't have $500,000. So, my 401k sold off $450,000 of that note and kept $50,000 in the deal. And so, my investor now was at about 55% and I was at 65% loan to value on that note. And I paid my investor 8% but I was collecting 14 on the whole thing. So, if you do the math on the the interest rate I'm making on my 50 grand, it was a 68% return on investment.

So, I'm making like $34,000 a year off of my $50,000 investment, which is insane. And if you do this at a higher level, I mean, it's unbelievable what you can accomplish and the returns you can accomplish for yourself, right? So, >> I agree. Play with the math. Start playing with the math. Start looking at it going, "Holy goodness." Right? So yeah, I don't encourage people who are new to the space to do what Matthew's suggesting, right? Build up to that. Understand, hold a note privately and just get the return. Don't borrow money until you're comfortable with it. One of the big pieces of advice me Nathan was if you are creating notes, create a first, second, sell the first off, hold the second.

It's a strategy allows to buy. no buyers are buying it or if you need to sell it or you hold it for life and they have a first and second and you could do what you want with it and negotiate stuff. Matthew, when you first were doing your CPA work and you were owning real estate, what was your advice back then yourself or others? What to do to get out of that property the best 1031? >> So, so it depends on the situation, right? So, um, and I think I knew a lot of the tax strategies back then that you could implement, and there's even more now. Uh, but at the end of the day, there was it's a matter of analyzing the highest and best use of that asset, right? Does it make sense to sell it on the open market or, you know, to someone else and take the tax hit right now? What's that math look like on your sale? Right? Or does it make sense to do possibly seller financing and sell that note off or sell that sell that property off and do a seller finance installment sale where you now because of the seller financing you only claim your percentage of the gain on that sale as you collect the money.

So as part of the down payment if they put 20% down you might collect have to pay 20% of the tax on that gain. But if over a period of time now you're collect paying that tax as they pay down the principal or upon payoff of that note. So you have some flexibility of when you actually you know accept that gain. And if you really wanted to accept the gain in any particular down year that you have from a tax planning perspective and an income shifting perspective you can sell the note off right then and claim the gain in that specific year. And you know, maybe another year that you're going to buy a property and you're going to do a cost segregation study and frontload the tax benefits.

Or maybe you already did a cost segregation study, which is just breaking apart the property into a bunch of little pieces and assigning values to those that now turn into five-year property that you can do bonus depreciation on. So that's what cost segs is. But when you do that, you have this built-in gain. So you don't really want to sell it. So you want to sell it on seller financing in that situation if you're going to sell it. you don't have to claim that gain right then and there, right? Uh so these are the the the intricacies on some of these strategies. There's one other really cool thing that uh a lot of people do is they when they do these cost segregation studies, they can only pay pay they can only take those deductions against other passive income.

Unless they're a full-time real estate investor, they can take it against everything. But normally uh they can only take it against other passive income. And most people don't have enough passive income to take these giant tax deductions when they do buy real estate, right? Because every year I buy property to frontload the tax benefits every single year as a strategy. But >> if I didn't have a bunch of cash flow from rental income and interest income is not considered passive income. It's considered uh it's considered portfolio income. However, if you have a note fund or you're in the business of running notes, just like if you're a flipper and considered a dealer, you can now claim that interest income is now ordinary income and running a business.

Therefore, if you're raising money from investors, they can invest with you as limited partners and now they have passive ordinary income and that then they can take those cost segregation deductions again. So, if you're running a a bunch of investments over here on the the um uh note side and you're in the business of doing that and you have passive investors, you can create passive income for them that then they can go take these big deductions against and wipe out all the income for these strategies. So, I know that was a little bit, you know, higher level understanding, but I'm >> research this, look at it.

It's worth it from a planning perspective. Everyone should rewind this later on and relisten to it and relisten to it and relisten to it. >> He explained very well. >> 1.75 speed. >> Yeah. >> But what what you don't realize is that once you >> once you get used to doing this over and over again, it becomes second nature like everything else. >> Yeah. >> Get your systems in place and understand the math behind CPA. So ordinary income, Matthew, what's ordinary income taxed at? So that's ordinary income tax rates which is you know whatever tax bracket you're in at that time if you're the highest you know at 35 39% now you know uh and you know the lowest is like 10 15% depends on what your tax rate is and >> that's your money comes through right it passes through your company goes to you and you have to pay >> possibly 40% of your taxes >> what are the other taxable processes capital gains and all stuff what are those tax rates because we want to know where we want to Well, >> absolutely.

And so, so you know what happens is when you're So, interest income is usually taxed at ordinary income tax rates. You know, the the running a active operation of a business is ordinary income just like your W2 is from your job. It's ordinary income, right? It's income you worked for. And now you have passive income as well like um you know your capital gains or your rental income or your royalties income and things like that that are considered more passive that you can now wipe all those off through bonus depreciation structures and things like that. Now when you sell a property you have typically two types of tax right you have one tax that is capital gains based on what your cost is versus what your sales price is.

However, if you front-loaded tax benefits via a cost segregation or that depreciation, that can be taxed at ordinary income tax rate. So, it's called the recapture of that depreciation. So, you want to have to be very careful and realize that you might have when you sell a house, you might have some ordinary income and some capital gains income that goes with that specifically if you've taken a bunch of depreciation already as well. >> So, those who may be not clue depreciation, you're basically writing off the house in 27 and a half years. correct me if I'm wrong, where you're writing it down and you're taking that deduction off your taxes.

If when and if you sell that house, you're going to have to pay the taxes back on that. That's the the the whole problem with it that you're going to have partial here, partial there. >> Now, there's what is capital gains typically taxed at. >> So, like, you know, 15 20%, you know, depending and and there's obviously state taxes and things like that. So, it depends on what state you're in. if you're in, you know, communism like me in California, you're going to pay the highest rates, you know, but, you know, at the same time, um, there are strategies to mitigate this across the board that people don't understand, not just in the note space and these structures that I'm talking about with the frontloading of the tax benefits and the offsets and things like that, but just from a basic level, having an entity set up that you're doing all your notes in and things like that so that you can go through and take all these other potential personal expenses and put them in there as well as pay yourself a salary.

go through and contribute to an IRA, a 401k or a Roth or a health savings account plan. You could also, if you own your own home, you can rent your home to your business for 14 days a year and your business gets a tax deduction and now you uh can don't have to claim that either because it's it's got to be a market rates. It's got to be, you know, reasonable. But a lot of people rent their property out for $500 or $1,000 a day times 14 days a year. That's $7 to $14,000 of an additional deduction that you just get out of the blue, right? So, there's some really cool stuff like this out there that if you knew all the little tools and you keep educating yourself on the tax side, you really can whittle that down and will it down and will it down even further to where you're paying very little taxes or you're getting maximum deductions.

I mean, paying your kids for marketing work and stuff like that, letting letting them contribute to a 401k and, you know, a Roth 401k as well, so they can go and invest it and self-directing those things. The self-directed space is really interesting because you can grow your your in your stuff tax deferred, your retirement accounts tax deferred long term, and control it yourself. You don't have to invest in stocks, bonds, mutual funds, and things like that with the Fidelities, and the swabs and the all these companies that take 65% of your gains over the long run via trader fees and things like that that you don't even see.

Uh until recently, they weren't required to disclose either, which is interesting. So being able to take it take control of your financial future by taking control of your retirement accounts and taking those things and investing in promisary notes and real estate and different strategies that you control can be really really valuable. But you mentioned something, David, that I think is crazy important, which was don't do this and raise money from investors until you know what the heck you're doing. Because if you don't know how to mitigate the risk on the borrower, on the on the property, on the renovation of that property, you know, understanding what the market value of that asset is in that market and do your homework correctly and know and you haven't been through some punches in the face by, you know, taking notes back and that understanding that foreclosure process, you shouldn't be investing in that.

or you should have a mentor or someone that's way more experienced guiding you through that process. Not just your attorneys, but someone that specializes in the note space like you guys to be able to help because you know there's so much I've learned just being part of your community where you know like little things here and there where you're like I didn't realize that crap that's a big problem that's coming on coming through that in the political arena that I had no idea about. Right. So, >> so you said something right there. Networking in the space is the biggest factor you'll miss out on if you don't do it.

Networking, social media, >> such a big deal. >> Go to conferences. >> Meeting up with people who are your colleagues, your level and above constantly to learn stuff. I know I hear somebody screaming over there going, "Man, I didn't know about the 14-day house thing. How do I find out about it?" Right? I'm going to tell you the simple thing what I would do because I would ask Chachi BT hey what are some of the typical things or what are some creative things start using AI to figure things out but also get together because most CPAs aren't talking about any of this stuff right they don't have the investor hat on they just have the tax hat on and meeting with people >> right >> yeah so Matthew how did how did you learn about that because I'm sure you didn't learn about these things when you were a CPA >> you know what's funny is that I did not learn about these things when I was a CPA.

Like I I remember I went to UC Santa Barbara and got a degree in e economics with an emphasis in accounting. Became a CPA right afterwards and knew nothing about accounting or economics until until like I started my own business really or started working at the CPA firms to actually do the stuff and be like, "Oh, that's what they were talking about." Right? It's all theory in college and everything. It doesn't mean anything. And they don't teach you all the intricate ways to do the planning. You're just running through numbers and making sure that it's it's, you know, done correctly. you do understand some of those rules, but until you become an entrepreneur and run your own business, that's when you're really paying attention.

You know, when I became an economics expert is when 2008 happened. Then I was like, "Oh, I need to pay attention to this. This is like I had no idea. I'm just like hustle, buy houses, hurry up, you know, like find money, rehab, hurry up, you know." So, and and you don't realize and take that step back to learn these strategies and chant is a great way to do that. you can type in the Augusta rule uh for that if you guys wanted to do that and learn about that um the specifics regard regarding the you know renting home to your to yourself and that that strategy. Um but there's so many more uh available things that you can do.

You know there's ways to literally pay no income tax if you have the right structures and strategies in the right states and the right ways and structuring it correctly. >> Put in the chat if you understand what the Augusta rule is and why it's called the Augusta rule. If you're a golf fan, you know even more about that, but we'll skip that for now. So, with this being said, there are so many strategy out there. There's so many opportunities and like you said before, it depends if you should sell the property outright if you rent it. What are some of the big of benefits of selling that note versus selling it a property as equity or renting it out? Why would somebody create a note for tax purposes? What's some advantages? So, so for one, they may be fully depreciated on that asset and they're looking at a massive capital gain, right? They they don't want to have to claim that gain right there in this year.

Maybe they had a big income year and they want to shift that to future years and they want to take it at a small chunk at a time and not just one big chunk via paying down that principle over a period of time, right? That's one uh reason why they're why they're specifically doing that, right? Uh in addition to that, there's a massive return on investment difference. If you have to pay tax now and you're looking at what your net cash is out of the transaction that's reinvestable into something else and you look at the return on investment of the reinvestment into something else um comparatively to what your return on investment is if you just say you had a 4% mortgage on your on your name and you now know hey rates are seven and so now you can go and finance it for a seven or a 9% difference in a seller finance situation and you do a wraparound mortgage on that on that property or you do a land contract sale so the property stays in your name or something along those lines.

Obviously talk with your attorney about the right structure in your state and the legalities about that and the foreclosure rules for land contracts and everything else. At the same time when you do the math here on the difference it's very very significant as far as the return goes because you're leveraging that low rate. Remember when I talked about that 68% return when I'm lending at 14 and and using my investor funds at eight? If you're, you know, selling at a 9% rate on seller financing and you're at a 4% rate on your underlying mortgage, not only are you creating a massive cash flow difference in return on investment on your capital that you would have gotten out of that property by selling, but you're paying down your principal faster than their principal is paying down too on top of that.

and your equity is actually growing, which is insane. And so, like, it's a whole another way of being able to And what's great, too, is even though a note is not an inflation hedge against inflation, when you borrow against that note, it now is because you might be borrowing at a lower rate and your rate might be higher than inflation or close to inflation in that way. It depends on what you think inflation is, right? So, >> yeah. So what are times where maybe creative doesn't make tax sense? >> So if your gain on the sale or something like that is minimal and it doesn't make a lot of sense in that way or you have you know other losses that are going to offset that gain anyways and you're not going to pay tax on that in that year anyways.

There's a number of rules and that's why you know the cliche of your situation's different and go talk to your CPA, right? Um, in my opinion, it's the best thing you can do. If you're going to have a big transaction that occurs, you really should sit down, spend a couple thousand bucks on some tax planning with a an actual CPA. I don't do that stuff because I will cuss out the IRS because I can't talk to them, but you know, they're all the sheriff of Nottingham over here. So, you know, and at the end of the day, really, you want to sit down and have that tax planning session for your specific situation based on your income of that year.

Is there any income shifting you can do in the next year or this year to reduce your taxes? Do you even need to do that type of strategy? Do you have the option of doing a 1031 exchange as well? That's the biggest challenge with a 1031 exchange is you become a distressed buyer. Um, which is great for people that want to sell property and things like that, of course, but now you got to find something. And usually those reinvestments are not, you know, quality. And so um or it can be not quality if you're pressured to go buy something as fast as you need to. Right? So some of those things are, you know, reasons why you're not going to go do it.

Um if there's other options that are available for you, uh that make better sense uh for you to reinvest those funds. But to be honest, from a headache standpoint of owning property versus owning notes, yes, if you do your notes wrong, you're going to have just as many headaches, right? You're gonna it's just an asset. If you do any asset wrong, you're you're screwing yourself, right? But owning property, if you think about owning a giant pool of notes versus a giant pool of rentals, the back and forth on the problem resolution with property managers, with repairs and service calls, evictions, delinquencies, the managers not doing their jobs, you know, all liability, all of that stuff, and and not having, you know, built-in inequity over your note value over here and the the difference in risk there.

Um, all those factors are massive. You look at the asset management cost to you of running a bunch of rentals versus running a bunch of notes and especially if you have an outside serer, you might want to have someone else >> reviewing that serer to make sure they're, you know, everything's moving correctly in a timely b manner because if there's a default in a note space action right away saves you money. So you can't just sit there and that's one of the things I've learned about the note business is you can't be Mr. Nice Guy. You got to work it out. You want to try to work it out but with specific guidelines of hey you need to do this or this is going to occur.

I have no h I have no ability to make that change because at the moment you start being too nice and having too much heart which is hard to do and um you are going to lose money because people will steal from you lie from you just like tenants will anybody will right so but but at least they have skin in the game when they're putting down payments down and you also have equity in that deal uh as well and know what states you're doing business in because I personally won't invest in judicial foreclosure states anymore just because I I don't want to wait 6 months or two years sometimes because they go through the court process, you know.

So, um that that piece is scary. I want uh non-judicial foreclosure states only if I can. >> Caveat to that, Nathan, are you out of your eviction Chicago? >> Dude, we're so close. We're so close. We got granted a second eviction on this, which that never happens, but the whole situation's weird. But anyway, almost. We're just waiting for the sheriff's. >> That same thing can happen, right? You can wait 6 months or so for an eviction to occur on a rental property and bleed the same way. Right? So it's and that's why it's important for notes and property having those reserves put aside for problems that can come up in a poolled format.

If you have a pool of notes, having something on the side to pay legal and you know those extra costs, uh if your investors are involved, I you know want reserves to continue to pay them as well even if there's a default that's occurring. That's what we do and how we retain a bunch of investors. I personally just take the damn hit even though it sucks and it keeps me up at night sometimes. You know, >> we find we've run into a lot of investors who's been in the real estate space since 2019 and they just tell us how great it is >> and how everything's performing and values go up. >> Share a little about your experience on the fact that if you've been in the space for 5 years, you haven't hit the curve and that this roller coaster of fun can become a nightmare.

So, so absolutely and you need to be very very careful. Um, I, you know, I I I correlated my experience in notes after taking some hits on him to the Shaw Shank Redemption movie where he climbed out of the tunnel of 500 yards and you're finally free of the foreclosures and you sold the damn things and they're off your plate. Um, and you know, if you if you don't do this right, it will completely bite you. And and you have to be very very careful um when you're doing your due diligence and and take quick and swift action, not lending too much money to one person. Um, and we went through a ton of pain where when we were lend we lend out to flippers, we do a lot of origination to lending out to flippers in different markets and we ended up taking a bunch of property back, like $5 million worth of property back.

But, you know, we've lent over $500 million, but $5 million is a big chunk of money and we lent, you know, multiple people at the same time when the interest rate environment changed were not able to complete their projects and they were not successful and we lent maybe five properties at a time to maybe three different people and they all defaulted and and screwed us on 15 of these properties, right? And you're not going to get much money out of them. you have personal guarantees and all this, but it doesn't really mean much at the end of the day. If you're behind, you know, on a $200,000 note by $20,000, you're you're not really going to go after them because it it's going to cost you more than that in legal fees, right? So, um, yes, if they have extra collateral, you can get crossc collateral anytime you can, that's great, you know, or crossc collateral them with each other.

Um, but you know the pain you go through, especially if someone fights you and they're like dishonest and try, you know, we've had one of them tried on a foreclosure tried to recuse a judge saying that he knew our attorney and all this. It's just insane stuff that you're just like, "Wow, you're unbelievable, you know, in this space." And, you know, you you deal with certain crazy there are crazy note buyers or note note or or property owners just like just like tenants, right? And I like to say that after running a property management company and a note lending business, I don't trust anybody anymore.

You know, that homework up front, the background checks, the criminal checks, looking at cash reserves, looking at their income that they can make, making sure, you know, if you're lending to a flipper, for an example, um, which a lot of people, you know, do and don't do, and a lot of people do it for homeowners, but this goes for them, too. But if they're, you know, have multiple projects going, making sure they have reserves for all of those projects and stages of those projects cuz they're going to rob Peter to pay Paul over here and then you're going to end up without a rehab being done and having proper inspections on that renovation draws as that occurs.

We hold back six months of interest and hold back the full rehab when we do these things as well to make sure we can apply those those specific payments. But that's just one segment of the market. It's a big segment. It's a big business of a lot of people doing lending like this consistently. But if you also don't know the legalities involved of that state. Um certain states you can't do that even if it's a business purpose loan. Right. So knowing the differences in the states and business purpose loans versus homeowner loans and stuff like that can bite you too if you have regulators coming down on you which you guys are saying is getting more and more prevalent.

Yep. And you know people doing this wrong like you were saying in the wrap space and the notes getting called due. If you sell that and it changes title on this in this way the bank has the right to call the loan due. They don't have the obligation but they have the right to to call that note due. And if their interest rate is 3% and market seven that's when they're going to call it due, you know, and say uh and this is what happened last time we had a major change in rates. That's when you see those things starting to change. So when we add to that, I was we talked rapid loans in our private group on Wednesday and one of the big ones now is getting hit is like rocket mortgage, right? They're selling off their loan.

When that new company's doing their due diligence and figuring it out, they're saying, "Hey, listen. The borrower is not the borrower. They're not the owner. What happened here?" And that's also triggering a do and sale clause. Right? So we're seeing a lot of these wrap notes. We're never saying wrap notes are bad. We're saying it done incorrectly and dangerously. We've shared before the fact that we've seen notes where there's PIT PIT is fixed. The borrower is not underwritten at all. I don't care if you think the borrower is a good person or is a good situation, but their underwriting is terrible.

Where do you see in your conversations with people where these rap notes are probably to be the biggest problem we're going to face in the next 5 to 10 years? Personally, I think that the lack of disclosure of the underlying note to the new buyer is going to be the biggest risk for most people. You better have that fully documented in there that there is a risk that the loan can get called due in this situation. Um, and the way I mitigate that if I'm going to do it is I have the capital to just pay it off if I had to, you know, and and have that in place. And I make sure my note rate at the higher rate that I'm doing is a sellable rate that I can sell to another investor also if I had to to recapitalize as a risk mitigation tool.

But I also disclose the heck out of it. If you don't just it's like anything. It can be considered fraud if you know about this. And just like you you know you'd be defrauding a lender if you lied about your income or you lied about anything, right? It's it's fraud. So you have to be very very careful and make and that's what's I think is going to happen. And you're going to have a lot of homeowners that bought on wraps like this and they're going to start suing for lack of disclosure. Attorneys are going to they're probably already doing this. I just don't see it, you know, prevalent because I'm not involved in that, you know, that space too much as far as, you know, the the calling the notes do, right? So, um, but yeah, really interesting stuff.

I think that's going to be the crutch that's going to break the break the camel's back there, you know. So, >> and I I going back to what you said, Dave, like and Matthew too, like there, yeah, they're written at 3% back in 2020, uh, and now the rates are much higher. There's enough of a difference there. We've heard of banks actually creating task force forces within their ranks so that they like they're creating a job to go and identify some of these issues and when they're able to call these loans due because if they can if they can extinguish that 3% loan and then lend out to somebody else at seven, of course they're going to do that.

Why wouldn't they? There's a lot of there's a lot of people out there selling the rap strategy and everything, which it is a good strategy to use because of the lower rates, you know, huge benefit, but if you don't do that right, you're you're going to run into problems or if you don't have a backup strategy for when those problems occur because, you know, I know people have been doing this for years and have never had a note called, never had a problem ever. And you know, if you're doing a massive pool of them, okay, but make sure the reserves are on the side so if something happens, you can pay it off and you're good or and make sure that disclosure is there because if you don't if you don't solve that problem, then you're going to get sued at some point in the future if it does ever get called due.

You know, you could get sued just for it being there and you not disclosing the risk and there could be no financial harm, right? I people sue for anything, you know? So, yeah, >> but we we've seen a lot >> I didn't even realize people weren't disclosing. That's ridiculous. I like that even occurred to me that you wouldn't disclose that. >> Of course, like how >> Right. Right. And a and a good closing attorney is going to >> see that. But a lot of people create their own create their own promisary notes and things like that or land contracts and their templates and they just don't have it in there and you're like, >> you need it in there.

It has to be. You're crazy. >> Yeah. So, I think what people really need to learn is the fact that doing things right and then use the tax system to your benefit, right? understanding where the tax benefit is as a company and where you're at. Now, you may have to buy property. You may do something to get the tax benefit, but just start educating yourself. I'm not saying become an expert or CPA expert, but share in the community and share information. Sharing your group, sharing your spaces, and ask others because we're all doing something different that other people may not know. Networking is key.

Sharing information is key. You're not sharing your secret sauce and your network and stuff like that. you're sharing your information, which I think is crucial. Um, just to reiterate, there is no bad way to sell a property. I'm not saying you should never do rentals or you never shoot this. I'm just saying that notes have a different way of being taxed. They're not taxed in a whole lump sum. You're only taxed the payments come in on a yearly basis of the interest you made. Right. That's still taxed at isn't it ordinary income? >> Yeah. Interest. Interest is income. >> It's the highest bracket.

Right now, I'm not saying, but if you sold that property or you did a rental suation, you're going to be taxed differently, right? If you sold the whole thing, you may hit a huge tax hip instead of just doing a loan and pushing it off, right? So, there's different angles in doing that. And regarding your strategy right now, if you are getting into rapes, we have a lot of rape people who listen to us and follow us and stuff like that. And you really want to know, I did put a link inside, I'll put on the YouTube channel as well. We created a 14 point of how to make a note valuable and legal and we have a whole video we did recording.

Take a listen to that kind of stuff and we're talking from note buyer perspective. I'm telling you we've seen more notes in the last year or two that the papers is going to be destroyed in foreclosure and your answer can't be well the borrower is paying every month. is performing because yes, when they default, the attorney that's on the other side will find your loan and everyone else's loan as created by you and go after you as a predatory lender and you could face jail time if you don't do disclosures and criminal stuff. So, be very careful what you're doing. I know right now it's exciting because everything's paying and the borrowers are great, but when they don't become great is where the problem happens.

When 2006 happens again in the rap note space, it will be a fiasco off my go back and listen to melody. >> Yeah, melody right. Melody, right? Go listen to me right again. >> One of the secondary to is the is the usery laws in those states and making sure you're compliant with those. >> What is law? What's usery law? >> So, it's basically the max interest rate you're allowed to charge a homeowner in those states. Usually different for business purpose loans versus homeowner loans. And you know, a lot of times they can be they can be fluctuating. They can fluctuate too where they might be based off of, you know, the treasury rate or the LIBO or you know, different different rates.

And so you want to be very very careful um what you're actually lending at because if you do that, you could have all that interest retracted in court where you have to pay all that money back plus fees and fines and penalties and all kinds of stuff. So being very very careful uh on that side is key, too. And and I've I've seen that personally like I I years ago I had a note that was created by a different company and we won't name names but anyway they were there was a giant lawsuit all several different states got in on board and uh I got a phone call directly from the attorney general in this one state and then said hey do you have this the loan on this house I had since we'd gone through the whole process.

We had I sold the house by that point anyway. Long story short, so in the end, she's like, "No, you're okay. I think you're all right. We're not going to pursue anything." I'm like, but that came on to me. I didn't even create that loan, but I was a second party. Like, I bought that loan after somebody else had created it at too high of an interest rate. I didn't know anything about that. I didn't have anything to do with it, but it can still affect down the road. So, just because you're you're creating it and you're going to sell it and be like, "Ah, it won't matter." Yeah, it does. And it can and it can be a huge deal.

>> There are certain states where usually law doesn't make sense. It's really too low. It should be based on liable or or some but it's a fixed number which makes no sense at all. Like as the market changes, you're in a position now where some states the seller finance notes are actually the same price as the original notes because of of the pricing, right? There are certain states where if you're below 50,000 the interest rate can't be above six, which makes no sense at all, but that's what it is. >> Yeah. And and the way the way to get around some of that is to bump your price up. So then that way you can take a reduction on on that and get the note, you know, on that piece, right? Um and there's one other thing that I think a lot of people don't realize is the massive benefit of notes, especially if you own a pool of these notes.

Say you own $5 million worth of a pool of notes and you're getting a monthly payment coming back on those notes specifically and a lot of it is advertised principal and interest. You can take those payments because it's a large enough payment and reinvest and buy more notes automatically consistently every single month. And the compounding effect of the relication of buying more of those notes by taking your principle and getting it into more right away is insane. If you do the math on this, just get out an Excel sheet and break it down on a pool of these things. Yeah. when you're, you know, you have a 9% payment coming in or something like that or a 10% payment coming in on $5 million every single month and that's, you know, principal and interest, you're, it's unbelievable the compounding effect that that can occur by reinvesting that monthly principle on real time basis by having acquisition strategy of buying new notes every month.

So, >> so I do you there's a link inside our chat. Feel free, you can click that button and connect with Matthew. Send me an email. He's an open book. He's really been beneficial. Uh he's a top dog in this space, so I give him a lot of credit. Before we disconnect, >> Nathan, go right ahead. >> I I'm super curious because you've done a whole lot. You've you've been through the last crash and you experienced it firsthand, which was super fun. >> What do you see coming up? What's uh what's your crystal ball say? It's it's actually a really hard question right now because, you know, how long can they kick it down the road? I don't you know, we just had a new jobs report come out and we're not it's not looking good.

They may lower the the rate by, you know, half a basis point. Uh uh and you know, uh and we'll see what happens, you know, at the next Fed meeting and stuff like that as well. Interest rates are a big play in this as well. But, you know, I I I think in my opinion, the reason why it's so hard to tell is because I don't know over the next 5 years how AI is going to, you know, displace workers in society. I think real estate and the economy and all this is very dependent on jobs and uh the ability to create income for people. And I am looking at this having a big concern with the I I'm already you utilizing AI for a number of things.

Uh I wrote a book last a couple weekends ago using AI in a weekend, right? Um we're using it now for content. I don't need um people to do video editing anymore. I don't need people to write content anymore. I don't need there's so many different applications and we're actually implementing it in the asset management space. And so that makes me concerned about the job loss. While I think it's going to create opportunity over here just like any I'll say revolution that occurs or you know um change in in what you know in the in actual market. Um I also think that the economy is not healthy right now.

I mean we have the worst affordability we've ever seen. We've seen the real estate prices go like this. If that crashes or comes down we got major problems. We have certain markets that are having crashes like, you know, Florida's and Texas and Idaho and things like that that are having a lot more supply, but there's other markets that are completely fine and still an up market. And so, you really got to be very strategic about market by market by market on a micro standpoint uh and even neighborhood by neighborhood and be very very strategic about where you're investing and where that population metric is going because it's supply and demand.

So, making sure you invest on the data is one of the most important things you can do. Um, and to protect yourself, but I think there's too much volatility out there that's happening. We have, you know, cryptocurrencies and, you know, the the CBDC coming in and stuff like that, you know, central bank digital currency and stuff like that. They're they're not calling it that, but they're, you know, they're basically bringing that to play. And now they're saying that one for one, these stable coins can be can be they can be used to buy treasuries. What is that going to do to the treasury market and the interest rate market uh down the line? Right? Are we going to have a massive additional supply of buyers that want to buy the Treasury debt? Because right now they can't sell enough, right? And that's why the rates have been sticky, right? They can't sell that debt.

And so down the line, if all of a sudden you bring in this $2 trillion dollar supply of of, you know, new money that is all based on fabrication, it's basically just adding new inflation to the market and saying now we're going to use that to just buy treasuries too. That's still going to trickle into the market over here and uh cause more inflation. But in the meantime, rates will come down uh if that supply is able to buy all that treasury. So that I think a very much dependent on interest rates in the short term. In the long term, I don't know, they're going to shift into something else. And I'm a very big believer that we're all going to eat bugs and own nothing and be happy according to the World Economic Forum.

So, maybe I'm a little crazy, right? >> Yeah. I'm like, I need a farm and my water supply and, you know, stay away from people. You know, >> I did I did hear that Gray Cardone is actually selling his house for Bitcoin, not cash. >> I don't know if it's true or not. >> Interesting. But yeah, he's supposedly selling his house on Bitcoin pricing, not cash. >> Interesting. >> What will that do to the market? Who knows? >> Yeah, that'll be interesting. >> Yeah. And I think I think more and more people are able to separate real estate and, you know, buy things in cryptocurrencies and things like that as well as the note space.

Um, I haven't heard about it too much in the note space comparatively to real estate being fractionalized and sold off that way. Um, but I would think it's a security and all that stuff too. and you got to abide by SEC law >> and then keep your eyes open for heckhams. Heckhams reverse mortgages are going to be a huge thing in the next 10 years. All the baby boomers who are buying getting into who need money are we're picking out heckhams. I'm curious what the numbers are in heckhams. Um so if anyone has it out there feel free to let us know. But that's going to be another market. So wrap notes heckhams.

There's going to be a lot of chain in the next 5 10 years that's going to shake up this entire market. It's ridiculous. >> I I I think I think diversifying into different asset classes too. you know, you have real estate that uh you know, the real estate investments, you have, you know, node investments that are secured by real estate, but we're also investing in node investments secured by accounts receivable, completely not correlated to the the actual real estate market or really even the economy in general. Uh, and you know, we're also doing like legal fee financing. You know, I own um other businesses like a marijuana farm and different projects like that that are completely uncorrelated to the real estate market or the interest rate environment.

Um, so being able to invest in those and I also invest in some gold and silver as a backup strategy. Um, we've seen silver go through the roof lately, of course, and uh I I think long-term those are good plays for a store of value because I think they're just going to keep printing money. So I think that diversification of putting some maybe 10% of your wealth into hard metals and commodities and things like that. um putting, you know, a chunk of your money into note cash flow and rental income cash flow uh along with those other private businesses as well um can really really benefit you from a holistic financial planning standpoint.

>> You notice he didn't say stock market, guys. We're staying in the we're staying in the alternative market. So, >> Matthew, hang on for a few minutes for after hours, guys. Feel free to take a look at everything Matthew has. The links below. Um I will we may need to be back in a few weeks. Um, if you have any questions, feel free to reach out to us. If you have notes you're looking to create or sell, reach out to us. And we look forward to seeing you all soon. Take care, everyone..