#102 - Creating True Passive Income Through Note Investing with Tom Force

[00:00:00] Welcome back to Passive Income Pilots, everyone. Another week of financial education with your friends Tait and Ryan. What's up, Ryan? Not much, Tait. How have you been? I've been good. I tell you what, busy. Yeah? We're wrapping up four different deals and end-of-year stuff. We're trying to close the books and it's been really busy, but things are great. How about you? We always sprint to the end. We do.

[00:00:24] Right? November and December are just absolute sprints with the holiday break and Christmas and New Year's and all the holidays in town. Yeah. Yeah, I'm getting excited. I'm going to fly out to Detroit and go see the Lions take on the Bills. So hopefully by the time this airs, the result was good, but I'm excited about the Lions this year. Playing really well, but I'm even more excited about today's show because so often you're looking for a way to engage your spouse

[00:00:52] and check the box for becoming a real estate professional and getting that tax deduction from your airline income, right? That we're all trying to save money on. So often you don't really want to be active and have to travel the properties and do that. And a lot of people like want to figure out how to make great income. That's not in the stock bond mutual funds market. And they always have that excuse like, well, that guy just this or that girl just that, you know, this guest that we're bringing on today.

[00:01:20] He's a retired airline pilot who went through a litany of ways to make money in real estate, but then landed on note investing. And that's been like a mythical thing for a lot of people. So we go through detail by detail where to find notes, how they work, how to make money three different ways in them. I mean, this show, I think this is going to be one of our most downloaded episodes by far. Yeah. Note investing is, you know, what we're talking about here is being the bank.

[00:01:45] So instead of investing in the equity side and getting a loan for whatever you're doing is acting as the lender. And if you're thinking, well, that sounds boring and why would I want 5% on my money? That's not what it's about. There's ways to get much higher rate of returns. You can buy notes for cents on the dollar. Really interesting space.

[00:02:07] This is a space I've always been interested in, but never deep dove like this and stick around to the end because there's a lot of resources that are offered that you can go learn more about this if you're interested. If you're an airline pilot and you want to make money on your layover completely and start generating passive income, you need to listen to this episode. This episode is fantastic for that. Agreed. With that, let's get to the show.

[00:02:33] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Tom, thank you so much for joining us. Tate, Ryan, thanks for having me, man. I love talking to pilots, love talking about flying and making money. So this seems to be the place to be.

[00:03:02] Yeah, you know, it's fun, Tom, that we ran into each other at a conference, actually at an Anderson conference. And of all places, we were in Hawaii at an executive retreat. And, you know, pilots find each other, find our way to each other. So it's kind of fun. Same way I met Tate seven or eight years ago. So it's great making connections. And I think this just kind of shows, you know, get out there in the world, go to events, meet the podcast hosts and, you know, go to these conferences because you bump into some great people.

[00:03:29] I actually just got back from an event in Vegas where it turns out the Delta pilot that was there was there because he heard about, heard about Anderson on our show. And it turned out he actually interviewed with me at Delta and I totally forgot about it. And so they really went full circle. So anyway, tell the listeners a little bit about yourself and kind of what you've gotten into and things like that. Sure. So I've been flying for a long time.

[00:03:54] So just to go back, I was raised in New York on Long Island, but went to Notre Dame on an ROTC scholarship for the Air Force. That was the only way that I could pay for it. Came out with an electrical engineering degree. But four months later, I was at Reese Air Force Base training for the Air Force and spent a year there, graduated. First assignment was on the West Coast, San Bernardino, back when California wasn't too crazy. I enjoyed San Bernardino. I was flying the T-39 Sabre Liner, which is the Air Force's version of corporate flying. And they've replaced it with the Learjet since then.

[00:04:24] But what a great job flying congressmen and generals around. Got to see a lot of GA airports and big airports. Great way to learn to fly. But then I had to grow up and be a big boy. And I flew C-5s out of Dover Air Force Base. Three years active, five years in the reserves. And 1989, I got hired by American Airlines based in New York. Lived in Dover. So I was flying in the reserves, commuting to New York, driving for my trips and all that. Desert Storm kicks off in 1990.

[00:04:52] And so I'm activated and gone for a year. My wife and I had our third child while we were doing that. So I've been married for 43 years to a wonderful woman. When we retired, I said we retired, not just me. But that was a stressful time. But got out of the reserves in 94. They just weren't the same anymore. It was, you know, they wanted a lot more of my time. And I moved the family to Dallas in 94. At the same time, I became an absentee landlord because we could not sell our home in time. So I sold it on a lease option.

[00:05:21] And so I was kind of thrust into real estate investing and absolutely hated that. Moved 1,500 miles away. And I'll never forget about eight months later, I got a call from our neighbor across the street said, hey, do you know your property's empty? Like, no. And it's winter. And that's great. You know, and the heat's off. And so I got myself a Philadelphia layover. And this is back before 9-11. So I packed up a big bag of tools and hammers and nail guns. And nobody remembers security back then because there really wasn't. As long as you didn't have a bomb, you could take anything through.

[00:05:51] And so I had this carpenter's case pretty much to go about. And I spent a day and a half working on the property. And we eventually got it sold. But, you know, I've been in rentals, never really cared for them. You know, it's one aspect. I understand the tax advantages and all that. But along the way, I've done some other things. So fast forward to about 2004. At American, we had just taken a big pay cut. Mine was about 23%. And I formed a property development company with a few of my buddies.

[00:06:19] And we bought some land here in North Texas, about 140 acres, and divided up for builders and got deposits on that. And we ran into some headwinds with the city council. They were a bunch of tree huggers back then and kind of killed our project. But we were able to sell our body of work to the neighboring developer and actually made six figures on that. So we failed forward. So it worked out pretty well for us. A year later, I partnered with a buddy. We bought a lodge on Lake Whitney, 60-bed lodge, and built a restaurant.

[00:06:47] And I would go down there on my weekends. That's when I was flying the 777 to Tokyo. So I had my weekends off and could be down there all the time and learned a lot about the business. And actually, my partner still owns it. He bought me out a couple of years ago. But then that was the time that I was trying to put my kids through college. And it was tough economically because I remember in 2009, I had just upgraded to 7.3 Captain. And I was looking at my W-2, the Social Security statement that comes, says how much you made.

[00:07:15] And I'd look at that, and I'd look back at what I made in 2001. I was making more in 2001 on the 7.5 than I was on the 7.3. So it was always like one step forward, two steps back. And so I didn't really get back into investing until about 2014. And so got involved in some rentals, sold them off. And I really started finding syndications. Got involved in that. Did some through CrowdStreet. My wife and I, she especially likes to do flips. She's a designer.

[00:07:42] If there's one channel on in our house, it's HGTV. And we don't need anything else. Doesn't matter what game's on. But anyway, fast forward to 2019, I got involved in residential assisted living. Once again, through Anderson, Ryan. We went on a cruise with the Anderson folks. And I ran into Gene Greeno and talked about that. And bought a house in Dallas with a partner who was experienced in the space. And I learned real quickly that the real estate side of that business is easy. It's the management side that's really hard.

[00:08:11] But as a pilot, it seemed like a great deal because I was having somebody else run it. And that's one of the themes of what I do is as a pilot, I like to have things where I don't have to be day-to-day control. And if not, I have somebody else working that. So we got that thing built up. Took about a year and a lot of money. And then COVID hit. And so we couldn't get certified. So that thing sat empty for a year, accruing all sorts of costs.

[00:08:33] And by the time we kind of got out of COVID and got all the inspections, the cost of giving good care to our guests had almost gone up about 80%. And it really shot our business model. So we were able to sell our property to another operator. But that was another good idea that just kind of went by the wayside for us. So 2021, my wife and I just finished our last flip in Carrollton, Texas. Really good flip. We made six figures on it. But that's transactional.

[00:09:03] I like passive. That's transactional. I'm getting older at the time. I'm just about 62. And we do a lot of our own work. We're not a big operator. So we're at the mercy of being able to find trades to do stuff. And sometimes they're not available. So I'm getting my mask on or ripping out carpet and all that. And I don't want to be doing that for the rest of my short life. So about that time, I came across a podcast similar, you know, like you guys are doing. And it was a passive investment podcast. And the guest on was talking about note investing.

[00:09:31] And I was like, what the heck is that? And why haven't I heard about this before? And very simply, I'm sure we'll get into it a little bit more. But as a pilot, I found it really interesting because we're just talking about the paper side of the business. I'm not trying to get out there and deal with tenant headaches, anything else like that. I'm like, this is just stroke a check and get paid once a month for 30 years or whatever length it is. So sign me up. So I dove headlong into that. And the timing was interesting because if you remember, that was during the COVID mandates.

[00:10:00] And everybody's entitled to their own opinion. My opinion was I wasn't going to get the shot. Everybody should have their own choice. And fortunately, I got an exemption and then it was rolled, you know, unconstitutional. But I was facing early retirement. I was going to only had three years left to go. I would have retired and done what I'm doing now. But, you know, if I was your guy's age, it might have been a different story. You know, Ryan, especially your age, you got all these kids and everything. And I probably would have acquiesced rather than give up the rest of my career. But the timing for this was very interesting. So I dove in and got the education.

[00:10:31] And I dove in and bought my first note. And as a pilot, I was always thinking, what's the worst thing that can happen if this note goes bad? I stroked the check. What's the worst thing that could happen? Of course, in rental real estate, a lot of bad things can happen. You know, your house can get trashed. You know, taxes go up, all this. And I knew and we'll talk about it, I'm sure, during here, what the worst thing that can happen at note investing. But I was willing to take that risk because I didn't see how I could fail. So I bought my first note and the check started coming in and I bought a few more.

[00:11:01] And today, well, let me back up a little bit. I made a goal at that point when I started investing in notes that when I retired at 65, which is three years later, you know, as a pilot, I would just like to go ahead and have all this, you know, time off and passive income that I didn't have to worry about. So I set a goal as to what I wanted to reach. And I kept adding notes and adding notes. And I hit that in about two and a half years. So I like to X my infinity number. And Ryan, you know what that is. You know, it's more, you know, it's twice what what you need to live on.

[00:11:30] And it's not just to get by. My wife and I love to travel. We love cruises. Notes are great because my borrowers aren't calling me. And so that's it in a nutshell. As a pilot, I love note investing because it gives me my time back. I'm not worried about all the crap that goes on with active management. It's as passive as as you can be. And that's why I love it. And so, you know, people ask me, why do I talk about it? It gave me a lifeline to retirement. And so I I find out, like you said, Ryan, that very few people know about it.

[00:11:59] I was at that conference this weekend and everybody looked at me like, oh, tell me more. Tell me more, because in this environment, people are beaten down their burnout as landlords. They want to find out a more where the easy button is. And that's where I really think note investing is. A lot of pilots are listening to our episode and they're learning how to involve their spouses in their business. And you've been married for 43 years and you've built quite a an investing business. And I assume you're happily married still.

[00:12:28] And so as a pilot, as a pilot, like how do you how do you get your spouse involved and work together as a team and really take advantage of some of the tax breaks that you might that might come from that? Well, that's a great question. And so we've always been aligned as to wanting to make sure that we've had something for our family, no matter what. And as a pilot, we know that our career is very, very tenuous. You know, my boys were involved in sports. We have three kids. They're all grown.

[00:12:58] Growing up, I was the coach. I was the hockey coach, the baseball coach, one puck or one baseball to the eye. And I'm no longer employed. And back then, the disability programs were not very good. So I've always had a plan B, whether it was real estate or something else going on. And my wife and I were, you know, on the same page in just about everything we've done. And, you know, you involve her with with, you know, your spouse, with their talents. And she had a natural eye for design and flipping is what she likes to do.

[00:13:26] She likes to take that canvas of the beat up crap house and turn it into something in her mind's eye. And that's something I can align with. And so we work together perfectly with that. And she ends up staging our properties and all that. So those are the things that I couldn't do. So we found that, you know, we merge our interests together and do it for the better good. So because you're a pilot and you have that W-2 income, partnering with your spouse to

[00:13:53] do real estate activities, did that qualify her as a real estate professional that then allowed you to take the real estate professional tax write-offs that come along with that? She's a real estate agent. So that helped right there. So yes, that wasn't the primary goal, but yes, it has tremendous advantages. And therefore, I'll tell you what, a little inside secret, and I, uh, is, uh, that, uh, you know, I've got a couple of, you know, well, being a part of Anderson, I have several

[00:14:22] different entities that I have access to the entity that we flipped our home in our last flip was a C corporation. And because of all the deductions that you get, uh, in a C corp, the money that we made on that flip was virtually tax-free. I think I paid $900 on a $107,000 profit. So I'm a tax nerd. That's why I love Anderson. Let's dive into that. Let's talk about the C corp in a flip because I'm sure other pilots out there are interested in, in flipping. Sure.

[00:14:51] It's a popular sport, but the tax, uh, hit is awful when you flip a house. And before you answer Tom, I just want to say in the show notes, we actually have a link that you can click on as a benefit to listening to passive income pilots that you can get a free one-on-one with Anderson and talk about all this stuff. It's like a thousand dollar value or something like that, but that'll be in the show notes. So everything that Tom is talking about may not be applicable to you, but find out. Right.

[00:15:20] So yeah. Yep. Yeah. Just for a couple of minutes. And of course I'll put in the disclaimer that I am not a tax attorney. Don't play one on a podcast or anything like that. So, uh, but I'll give you my, my, my experience was that, uh, a lot of people go out and they form an entity just to have one. They, they hear that they have to have an LLC and they go out to what they call legal doom and they put together a few page thing and they got their name and their shingle and they, they go out and do that. Then there's the right way to do it.

[00:15:46] And the way Anderson does, and I unabashedly will promote them because they've been instrumental in my success is when you create an S corp or a C corp, uh, they will put provisions in the operating agreement to allow you to take a substantial amount of reimbursement for your expenses. Just one of the many, I'll give you one right now. It's the medical deduction. So my C corporation reimburses my wife and I for all of our medical expenses. So I keep track of them during the year.

[00:16:14] And at the end of the year, I bill my C corp, which is just my wife and I for those expenses. The C corp takes a deduction by stroking me a check, but that check comes to me as tax free. It's not something I have to pay taxes on. So the corporation also does not have to have a profit. I can carry forward losses on that C corp when nothing's going on in it. And then when I have a profit entity or profit event, such as the flip, well, that goes out and wipes out all those past losses.

[00:16:43] So in the end, I didn't end up having to pay any taxes on that income. So one of the many tricks, I mean, there's, they have the Augusta rule where you can rent out your property for up to 14 days a year and actually take that money in tax free. Yep. And that can be a simple residence. Right. And that can be a simple, yeah. And your primary residence could be a boat if you live on it. But for the required time, I'm getting down on the weeds there. But you can actually do that. You can rent it to your company to have their annual meetings.

[00:17:12] So there's all sorts of tricks there. And so I love trying to find out how to legally not pay more than taxes than I have to. And so by properly structuring things and Anderson advice to do it because they, they are investors. They know all the tricks. I didn't invent any of it. I just followed the roadmap. So if you can link and just listen to them for an hour and get a free consult, be well worth your time because, yeah, because people get out there, go on the internet, they go to chat GPT or something.

[00:17:39] They get all this advice on, I need to form an LLC, but then they don't do the annual minutes every year and they find out, oh, I don't really have any protection to begin with. So be careful. So do it, do it with the right people. And, and Ryan, you know, I know you're there. You guys are doing business with them there. So, you know, the importance of being with these guys. Preaching to the choir on this podcast about paying as little taxes as possible and using professionals on your bench. Yeah. Don't, don't do it yourself. Yeah. You don't. Yeah.

[00:18:06] There's just, there's too much nuance to the tax code that you're kind of setting yourself up for failure. Before I slip off on that to what we're talking about legal issues, we're going to go off onto that. Take the time to get a living trust for yourself and your family. Put all your assets in there. Guys, gals, we are in a highly litigious society. You take one trip off the side of the runway and don't even hurt anybody, but you scare them. You're going to get sued. All right. And you don't want the attorney to be able to come after you and go after your assets.

[00:18:34] So protect your assets, get them in a trust and, and then do the right thing every day when we're flying. But you just never know when that's going to, whether it's a car accident or an aviation accident, you want your assets protected and they'll set it up as well. Such great advice. Real quick, before we go into note investing, cause I want to get into that. Tom, you're an airline pilot. You went through all kinds of economic ups and downs. You've been happily married for 43 years. You have three kids. You were in the military. You deployed. Thank you for your service. By the way, guys, you're listening to this girls.

[00:19:04] If you're listening to this, you know, his spouse is working in the business, right? Like you're just making your own excuse. I mean, look at, this is a perfect shining example of how you get after it and get out there and create this business on the side. And, you know, thank you for sharing your story. Cause that's a big, you know, that's a big part of it. You bet. And a shout out to my boys too. We've got two boys who are real estate agents here in, uh, in Dallas and they're working hard and it's a tough environment right now, but we all, we all work together as a family business. My daughter's entitled. So that helps as well.

[00:19:32] And that's, that's my mission in retirement is helping all them. I'm kind of the backstop kind of helping out where everybody else needs stuff. That's great. What a great legacy to leave them. Tate, you've been dying to jump in. Go for it. So Tom, we're talking about note investing today. And for anybody unfamiliar, we're talking about being the bank. So instead of taking your down payment, you know, to buy a rental property, and then you're going to go out and get a loan for the other 80, we're talking about being the 80, being the bank.

[00:19:59] And I find that the more sophisticated the investor is, the more they love debt. I think when you're starting out and you're young, debt can be a tougher thing to get into. If you don't have a ton of cash, you know, high single digit, low double digit return on your money cashflow can be excellent, but sometimes those bigger swings on the equity side can, can set you up better. But as we age, as our net worth increases and our risk tolerance gets lower and our desire

[00:20:28] to take those big swings gets, gets lower. I think that people tend to be more attracted to the debt space. And so let's talk about the difference between debt and equity and what a note is, what note investing is. Sure. You, you covered a lot there. And just to dovetail this, this picks up real nicely where your episode with David Phelps left off when he talked about his journey. And so I would recommend folks go back and listen to that one as well. Well, you're, you're exactly right.

[00:20:57] Tate in, and I could go off on a couple of different branches here, but I liken it a little bit to the way your financial advisors would advise you when it comes to the stock market. Now I'm not big in the stock market. I've got some, I have about 10% of my wealth set aside with an advisor for the end of my life. In other words, it can still take advantage of growth, but I, I'm not tapping that right now. My money's not in that, that, that space. But when you're younger, they say, you know, your allocation of stocks and bonds should

[00:21:23] be, you know, 70, 30, you know, more growth, less income as you're younger and growing. You say the same with your real estate. You want to have growth assets when you're, when you're younger, you're building your rental portfolio and you can, you can survive the ups and downs, the swings in market valuation, you know, maybe damage to your property. But as you start getting older and you start getting past 50, you know, your advisor in stocks and what maybe need a 50, 50 allocation of, of stocks and bonds.

[00:21:50] And now that I'm in retirement, I retired six months ago at 65 and I can't believe it. I mean, shoot, you know, I still feel like you go out there and fly cat three to minimums every day, but I enjoyed it. But some people it comes at the right time. But anyway, now they're saying, you know, well, you know, you should have more income allocation than, than the growth, you know, 60% bonds, 40% stocks. And the same with your, your real estate investments. It's not about growth.

[00:22:16] Now it was Will Rogers who said, I'm not as concerned about the return on my investment as it is the return of my investment. And so we have less runway to allow for the stopping when it comes to, to losses and setbacks now. So I don't need to swing for the fences. I need singles and doubles every day now. So, right. So I'm more interested in income rather than the growth of assets. That doesn't mean that I don't have growth assets. I'm in syndications.

[00:22:45] And I'm, I still have a few of those going on, but I'd say about 70% of my investment related activity is into debt or the income. And so when we talk about that, Tate, I, I talk, I'm talking about residential and land mortgages. So if anybody out there is ever, you know, taken out a mortgage on a property, we know what it is. It's a, it's a promise to pay back on the property secured by a lien on the property mortgage to make sure that, you know, if you don't pay it back, somebody has collateral to take it back.

[00:23:15] Texas is where is the number one state in the country for seller financing, by the way. But I'm also talking about dealing in paper that's created by banks. Paper is paper. And so when you take that, that mortgage out, a lot of times you find a note comes in the mail says, well, you know, your, your mortgage has been sold to such and such bank or whatever. These trade on the open market. It's called the secondary market. And what a lot of people don't know is that eventually these notes, these mortgages can filter down to the small investor like myself.

[00:23:45] They'll go through hedge funds and then hedge funds will split them off. And the, the ones they don't want move on down through the ecosystem. And eventually you can find them on online platforms such they're like eBay. Sometimes they're, they're out there or you can have connections with banks and other lending institutions that may want to offload some. Tom, could you talk just cause I want to dig into the ecosystem here and help folks understand how this whole system works. Why do lenders sell their notes?

[00:24:14] There's a couple of reasons, mostly to recapitalize. That would be the first, the first reason they may want to package some debt because they want to put it in a different offering. You know, that's talking at the big level at the big boy level. So there's, let me, I'll, I'll, I'll answer your question in a couple different ways. For sure. The big banks like to do it because they let, they need to recapitalize and they move it through. That's how they make money. Big banks move a lot of money to make a percent or two. And that's that when you're doing large volume, a small percentage is fine.

[00:24:43] And that's, that's way above my, my economics brain, but I'll tell you how it works in the smaller levels. Okay. And I think one of the, maybe your pilots can relate to. So the first note that I bought and I guess it's put in the cart before the horse, but the, the first note that I bought was in Georgia. And what people need to understand is when I buy a note, I don't ever deal with the borrower. My, all the interactions within the borrower is handled with a servicer, just like you have property management and a rental.

[00:25:10] I have a servicer handling this and there's a string of information called servicing notes. So I can go in and see the history of how the, the note was formed. And so there's note in Georgia, a fix and flipper bought this property for about $45,000, put about $30,000 into it. So he's all in for 75. He sold it for $118,000 and the borrower came in, put 10% down. No, actually it's $10,000 down.

[00:25:37] And what he created a note, he created a mortgage to that. He actually held, he was the bank and the borrower paid him every month. Okay. Eventually he wanted to go on to his next project. So he sold the note on the open market. And there there's, it's an ecosphere where we trade notes. I'm going to mastermind the sales notes. I work with some hedge funds. This note became available. And so I bought the note. This guy was able to read. I bought the note.

[00:26:05] I bought at the time, I bought $107,950 worth of debt for $88,000. It's a discount. It's a concept that takes a little bit for people to wrap their head around. But, you know, people say, didn't he lose money? It's like, no, he only had 75 in the deal to begin with. And then he collected a year and a half worth of payments. And then he wanted to recapitalize. So in that regard, that's why he sold the note is because he wanted money back to go ahead and move on to other ventures.

[00:26:32] And I think that's just such a key point here is that you can buy debt for 60, 70, 80 cents on the dollar. That's what makes it really attractive. Right. So can you walk through that concept a little bit further to really unpack like why that person still isn't losing money on that? Yeah, certainly. Well, well, the math in that in that regard is is that so if you take the amount that he paid for the house and what he put into it, he has seventy five thousand dollars tied up in the transaction.

[00:27:01] He sold the property to somebody for one hundred and eighteen, but he didn't get the cash all up front. He got a ten thousand dollar down payment. So now he's into it for sixty five. Right. He takes in a year's worth of payments. The payments were eight hundred and seventy four dollars a month. So let's round it off. He takes in about ten more thousand dollars. Now he's into it for fifty five. Then to recapitalize, he goes and sells the note for eighty eight thousand six fifty. He's still making it that transaction. He's still making another thirty two thousand dollars.

[00:27:29] So his he's he's making thirty two grand on the deal. When you think about it, he's getting that money over time. If he had sold that property for cash when he first had. So he was in for seventy five. He had sold it for one eighteen cash at the time. He makes about forty five, fifty something at that point. So but a lot of these properties that you find have seller financing on them. Big banks won't touch them for for lending purposes. So this is the only way to move them other than cash.

[00:27:58] The only way they can be financed is seller financing, because a lot of banks won't finance things hundred thousand dollars and under. So plus it opens up a buyer pool. You know, the the kind of people who buy these properties might be, you know, the folks are unbankable like like real estate agents, like people who don't have W-2s. They could be I-10 borrowers, which are immigrants who have a different version of the Social Security. And we see a lot of that right now. The mortgage affordability in this country has gone down by 50 percent since COVID.

[00:28:28] There's a numerical value on it. A lot of good people out there with a lot of a lot of money who want to get into homes. But unless you have a 780 and sparkling credit, you're not getting in. So so this actually seller financing actually fills a void in that it is really important. But hopefully I answered your question how the the note holder didn't actually lose money when he sold at a discount. What what's selling at a discount did was take the note rate from nine percent, which is what he financed that to 12 percent for me,

[00:28:57] because I'm buying somebody. I'm buying the debt cheaper. So right. I'm about to jump through the microphone here. OK, you buy just just so you're if you're listening to this and you don't understand how risk averse. I mean, nothing. Everyone's everything's got a risk. Right. But Tom can't like really lose here. So I see three scenarios. Right. And I'm just trying to make sure I understand this. And I'm going to use round numbers because I'm a pilot and I want to use round numbers here. Yeah.

[00:29:27] That house is one hundred and ten thousand dollar house. The note you bought for 90 gives you a buffer of twenty thousand dollars of equity. Right. Let me let me clarify. He's he sold he sold the house for one eighteen with ten thousand dollars down. So the people put ten down. All right. Yeah. Over the year, the debt was about one away. I did buy it for 88. But when I bought the debt for 88, the house increased in value to one hundred forty nine. Yeah.

[00:29:53] OK, so you're not so you're not you're now owning a mortgage note that is paying a higher interest rate than the previous seller. So worst case in worst case scenario, Tom just collects monthly payments and eventually is paid off the the greater balance that the borrower owes of one hundred and eight thousand whatever minus the thing where that's his worst case scenario. Well, the worst scenario is they stop paying and no, he has to go take a scenario.

[00:30:22] No, no, that's not his worst case scenario. That's true. The best case scenario is he stops paying. That's the best case scenario. That's true. Now he's got one hundred and fifty thousand dollar house that he paid eighty seven thousand dollars for. That's true. Now he's got he makes 50 grand. That's why Ryan runs the company. Yeah, that's right. Sorry. Yeah. Sorry. Not to be not to be morbid, but like literally your your worst case scenario is that the borrower just makes the payments. Absolutely. And you make twelve percent.

[00:30:51] Let me let me go. I'll take you through the scenarios. Absolutely. So when I got into this, yes, that was my sole idea was to collect payments. And it's great. And most of them pay on time every once in a while. One of them pays off early. And I've had that happen a few times. That's great. I mean, I'll give you an example. I had a property on some land in Georgia. Uh, I paid about sixty two thousand dollars for eighty thousand dollars worth of debt. Same type of deal.

[00:31:20] Ten year note with a balloon on the end. What's a balloon just for the audience? Sure. So on a on on this particular property, they calculate the amortization based on 30 years and they pay the loan down based on 30 years. But at the ten year point, they have an obligation to either pay it off at that point at the amortized value that's left or restructure it. So so there is a little ticking time bomb at the end where they're going to have to either pay it off, refinance it. It's great.

[00:31:48] It was great for people in the military because they were moving all the time. So they knew they'd sell the property anyway. So so but in other words, instead of just paying it down over 30 years, we give them the 30 year type payment for 10 years or whatever the length of the balloon is. And then they go ahead and they have to pay it off at the end of the year. But the typical mortgage pays off anywhere from eight to 11 years. Either they refinance or they move. So a lot of a lot of that point is is moot. So they wanted to pay it off.

[00:32:14] And we were just literally going to we were about to leave to take a vacation after I retired. And the servicer contacts me and says, hey, your property in Georgia is paying off. I said, well, that sucks. And I got a check for thirteen thousand dollars more than I paid for the debt to begin with. Call that the money bomb that's just kind of sitting out there. You never know when it's going to go up. But to your point, Ryan, actually, when people ask and that's the biggest thing that comes up. That's the biggest thing that comes up. Yeah, it goes. I like that. Yeah, it's just ticking.

[00:32:42] You never know when it's going to go off, but it's out there. But that's the that's the thing that people ask me is like, what can go wrong? What's your risk? And so I go through what what can happen? That's the question everybody asks. What happens if they don't pay? So as a pilot, I really like a defined process as to what could happen, what could go wrong. So the first thing is, if they don't pay for a while, I'm going to have the servicer reach out to them. I don't call my bars. My insider knowledge, your guys, my bars don't know what I'm in. They don't have my phone number.

[00:33:12] They don't know where I live. Everything's done through a servicer, even when things go wrong. So I'll have the servicer send them what's called a loss mitigation package. It's kind of like, hey, guys, why aren't you paying? What can we do? Maybe it was a two income family and they lost a job, but they really want to stay in the house. Well, they might be candidates for what we call loan modification. We're going to take their situation. Maybe we need to change the payment, extend the term. I want the loans to be performing, even though, like Tate mentioned, hey, the best thing that could happen is they all default. But I don't want that.

[00:33:41] We can be compassionate in this business. Whereas Wells Fargo might just say, hey, we're going to go to REO. We can work with people to get them back on track. And I've seen that happen quite a few times. Perhaps their situation is such that they just can't afford the house, but they don't want to foreclose. Well, the next step would be a version of cash for keys, which we also see in the rental industry. And we can have boots on the ground. Before I forget, I have notes all over the country and I don't ever need to be there because I'm never going to do anything with the property.

[00:34:09] I have boots on the ground that I can hire who can be standing there on the day that they're going to leave the property. As long as the broom's swept and the trash is out and it's secured, they'll give them a check for $3,000, $5,000 to help them move on. I get the keys back to the property and it's not a property for the amount they owed. It's a property for what the property's worth. That's a win for me. And it's getting them out of a foreclosure at the same time. That's the second thing.

[00:34:34] If for some reason they're uncooperative or they just don't understand how they can just go get a realtor and sell the property, because all my properties have equity in them. But if they just want to be obstinate or play the game, then we go to foreclosure. And that's a well-defined process in every state. It's nothing to be scared of as a lender because you're in a strong position. All the expenses that I have and taking it to foreclosure with legal and property preservation, I get all those back at auction.

[00:35:01] So in the end, because I bought the note properly at a discount and the property value has gone up so much, I just have to be patient. And at the very least, I'm going to get back a check at the auction, or I might just get the property back, which is worth a lot more than I paid for. Those are the things that go wrong. Every once in a while, somebody can try to throw a wrench in there with bankruptcy. Bankruptcy is not a big deal. It actually helps because it's supposed to put them on a track back to paying off very quickly. And if they don't, then you're on the fast track to getting foreclosed.

[00:35:29] But those are the things that go wrong, guys. And I don't worry about hailstorms or AC going out or anything. That's the landlord's problem. The first of the month is payments due to me, no matter what's going on with him. So that's why I love the business. It's fantastic. That's great. So I'm an airline pilot and I want to get into note investing. Where's this marketplace and how can I find it so I can even find these notes and how they trade and how I can get in a position to buy them? Yeah. I'll give you a couple of resources.

[00:35:56] So I found out about note investing through a gentleman named Eddie Speed. He's my mentor. He's to note investing what Toby and Clint are to the Anderson community. He runs a school here in Texas. It's called Note School. And he's been a note investor for 40 years. He's actually probably the king of note investing. And so I enrolled in his school. It's called Note School. I took a three-day class back in that October 2021.

[00:36:26] I said, sign me up. And they held my hand through the whole process. That's one track. And in fact, for you, and this will dovetail into other resources. But I have a website. It's called noteclubusa.com. I don't sell anything there. It's all full of information. Because as you guys know, this is kind of a small community. I'm looking for more people to do business with. And I went out to the Anderson event today. I found five or six people who have already called me and said, hey, how do we move forward with this?

[00:36:55] And it's great because not a lot of people know about it. But on that site, you can go to the top and it says free masterclass. And I've arranged for my mentor to give a free masterclass every two weeks. Just the basics. It's about two hours on how all of this stuff works. And if you want to find out more, they can put you in a two or three day class like I took. And maybe that'll be the path that you want to go down to. Now, I dove in because I wanted to be serious about this. This was going to be my business.

[00:37:22] I was going to buy notes for income. I've also learned about buying notes that are not performing as a property acquisition strategy. That's another thing that you can do is intercept them in the foreclosure process and take the property over. There's a whole world out there about seller financing right now, which is really important. A lot of real estate agents, man, they only have one bullet in their gun. If you can't get the listing, you're stuck. But if you know how to approach somebody who's stuck on price, because prices is important

[00:37:51] if they're going to carry terms. And the other thing is when somebody sells on seller financing on an investment property, they can spend the capital gains out over 30 years or whatever the length of the term is. Exactly right. A lot of people don't know that. So as I found out more about this, I said, especially in the realm that my son's work in where real estate is tough right now, having this understanding of how seller financing works and being able to apply it is something that I want to find out. So that's kind of where I'm morphing into as well. I have a story about that, actually.

[00:38:20] My very first self-storage property that I purchased, it was a special forces guy that was retiring and wanted to sell to a vet. My business partner was in the army. And he said, look, I'll sell you this property under one condition. You have to take seller financing. Because the guy was 85 years old and he didn't want to get hit with the capital gain on selling his property that he'd own for... I mean, his basis was zero because he's owned the property for 40 years.

[00:38:48] And then we said, hey, well, what kind of interest rate do you want? What kind of amortization do you want? And you know what he said? He said, I don't care about any of that. He's like, I just need $7,000 a month to live in retirement. And so we went back to the drawing board and figured out what was best for us. And we figured out, okay, 4% interest rate at this amortization schedule. We came back and made his $7,000 a month payment worked out really great for the deal. And we got to buy our first property without financing.

[00:39:18] So Tom, to your point, these seller financing tips and tricks, and you can do all kinds of... We've since... We had a provision that we worked out with a seller where we actually... When we sold that property, we took that loan with us to another property and decollateralized. And there's all kinds of stuff you can do. And it's worth... These little masterminds and classes that you can get into, some of them can be kind of foolish and just a teaser to another thing.

[00:39:48] But some of these, you can get some massive nuggets that can make you really dangerous in a good way on the real estate side. So definitely. And to your point, you don't know what you don't know. And so when I got into the note business, it was strictly, I want to create these big CDs, certificates of deposit that I continue to roll. But as I found out more about what was going on with it, it was like, yeah, it's exciting. This is all I do all the time.

[00:40:14] So on my website, you can find out about that masterclass. We have it every other Wednesday. I have other resources on there. I also do a webinar. I actually have an evergreen webinar. And if your listeners, your fellow pilots want to just email me at the information below, I will give them the link to that. It's a two-part series. And we do case studies. We go over the stuff that I've talked about here. We get to put numbers in there. What I really want to impress on everyone,

[00:40:43] and I'll get the rest of the answer before I forget, just a couple of things. One of the things that's really important about note investing versus holding the rentals and other things for appreciation is the velocity of money. And I talk about this in my webinars, is that with my notes, especially the shorter-term notes, I'm getting my money back so much more quickly that I can turn around and get that money back out of the marketplace very quickly. So it really kind of compounds the returns.

[00:41:10] The other thing is, from a legacy planning standpoint, as I get to my age now, I ain't saying that, my age, but it's a number. It is what it is. You can say, when you get to my level, because each year is a level, right? So when you get to my level, there we go. Dude, I'm still trying to deal with being retired. I'm still trying to get my... But you need to look at what kind of legacy you're going to pass on. What are you going to pass on to your family? And as I've been through the other iterations of real estate and the things that come and go with them,

[00:41:39] one of the things I really like about being where I'm at in the note space right now is, I have 40 notes. About half of them are in my self-directed IRAs. Half of them are in cash accounts and businesses. If I die tomorrow, that money will still keep coming in. It'll be going into accounts. My wife will know where it is. It's very simple to administer. And she ever has a question, either my voice can handle it, she can handle it, or the servicer can handle it. And, you know, if I was trying to pass on a whole series of rentals to her, then she's inheriting all the headaches that I had.

[00:42:09] Oh, Tom's miserable. Yeah. So it's just, you know, to me, it's the... Between the fact that we can go on a three-week cruise, and I have no worry, we're doing that in February, going on a three-week cruise, knowing that the business is just going to tick along, the servers are going to handle everything, and then when that time comes, I've got everything set up, so all the checks just keep coming in and not have to do any work. Then I think I've done my job as far as that goes. Well, and the real thing you've left to your kids, I mean, it's hard to leave an airline.

[00:42:38] You can't gift an airline career to your kids. No. You know, unless they just go learn how to fly. But you can gift this knowledge of how to produce passive income, true passive income. Right. And I think you've done a really good job gifting that to our listeners today, because I feel like a lot of people listen to the show, and they're just looking for ways to make passive income. Yeah. And, you know, listening to your story, you stubbed your toe on some rental properties, you stubbed your toe on some land,

[00:43:05] you stubbed your toe on maybe getting into a couple of different types of investments, and then you land on this thing that finally meets your goals. And, you know, I ran into this, I was buying rental properties in Philadelphia as well, and ended up having to fly there on my day off, you know, or bid layovers there frequently. And, you know, it's very active. And it's like, that's not really, you know, my goal. And I think I talked about this at the conferences. And my goal is to become truly passive.

[00:43:34] And what I realized was I was not getting the goal. I was making myself active, which is why I'm so passionate. And Tate and I are so passionate about finding these like syndications and stuff that are truly passive, right? Node investing is truly passive. I mean, it's an activity that you have to attend to, and you got to learn. But, you know, these things become truly passive, and they take care of themselves, and they don't turn into problems that you have to go rescue. Absolutely. And so, you know, that's what I love about it. And, you know, now, it's no secret.

[00:44:02] I'm very active in real estate. And that's a way to generate wealth, over time, like substantial wealth. And if that's the route you want to go, fine. But I mean, you're 40 notes, all passive. You have your life. You have passive income. I mean, it's amazing, you know? And it's not dependent on necessarily a career. And I think a lot of listeners too, like everything's great in the airlines right now, but what happens when it's not? And as Tom can attest, you're going to have lots of things that happen.

[00:44:32] And just because everything's going great today doesn't mean it's going to be there tomorrow. So thanks for sharing your story. I read a great book called Note Investing by Dave Van Horn a long time ago, and was always intrigued by the note space. So I appreciate your insight into it, Tom. No problem. Another book, if you guys are into it, it's called The Banker's Code. And it deals with the same thing. And I'll give away the punchline. It's you borrow money low and you invest at high. And that's kind of what we do.

[00:44:59] You know, because we don't just invest my own money. Now I've learned to leverage, you know, and I'll take six or 7% money all day and turn around and invest it at 12. And I mean, this is an excellent strategy to pair with another one that we've talked about a lot on the show, which is life insurance. Absolutely. You know, borrowing from your whole life at 4% or 5% and making a 8% to 12% return on it. You can arbitrage that very safely. It's a nice strategy. Absolutely. I love it. Well, Tom,

[00:45:28] wanted to really thank you for your time and coming on and congratulations on your retirement and your passive income strategy and a successful time with your wife and family. That's really amazing. I see your website. I'm on your website right now, noteclubusa.com. Right. And just as you said, there's a consultation, there's a masterclass, there's a podcast, there's all kinds of stuff on there. So if you're listening and it's up to you, if you want to learn about this stuff, it looks free to me. Go on his website,

[00:45:57] you know, right? You're listening to this show. And so, but how else can the listeners get ahold of you or what other advice do you have for our listeners before we depart? Sure. So I designed that site to be kind of like a catch-all for anybody who's interested at whatever level. You might not be like me. You might actually be like me where you want to dive in and learn from the best to make this a business and aspire to do what I've done. And that free masterclass, you know, a link is a good place to start. But maybe you just want to kind of dip your toe in the water

[00:46:26] and maybe just buy a note or two and see how that goes. I broker notes just like an agent would broker a property so I can find them for you. We would just have that conversation. I've already spoken to several people from the Anderson conference this past weekend who want to explore that. Maybe you just have money sitting in a self-directed IRA. We didn't even go there today, but, you know, you just want to get a decent return, but not necessarily on a note. Well, we have strategies where you can lend us against our notes and we'll pay you back a good return as well.

[00:46:56] Also on that site, I've got a series of podcasts. I'm not nearly as proficient as you guys. I do them about once every two months, but they're long. They're about an hour or so. And I take fellow note investors or service providers and we talk about the note investing business in depth. And the other thing you can do is you can email me. It's very simple. Tom at no club USA.com. And you can ask me for the link to my evergreen webinar. And I've got a two part series that takes everything we talked about today, what I did, my case studies,

[00:47:25] go into depth about it. And hopefully it excites you. If not, then that's fine. But I just love talking about this stuff, even if it's just to talk to somebody brand new about it and say, Hey, how can I make this work? That's what I'm here for. That's kind of what I'm dedicating my retirement to when I'm not traveling. That's great. Thanks so much for sharing your knowledge, Tom. Appreciate it. I'm so glad you guys, I got together with you, Ron, because this is a great format and I didn't know it existed. So I've always thought pilot, quick story, my retirement flight, all right,

[00:47:55] guy I'd flown with a few times. I did a Nassau turn out of Dallas. And so we're delayed, we're delayed an hour off the gate. And then you just, this is the usual stuff. And so we finally get on our way to Nassau, we level off and I do the PA and we sit back and he goes, so Tommy, tell me what, uh, tell me what budgeting looks like when you're 65 or retiring. And I'm like, I looked at it and I said, Paul, I'm not sure what that is, bro. Buckle up. So I, let me talk to you about note investing and his eyes are like that. So you never know who would,

[00:48:24] who'd be interested in something like that. Just love to have the conversation. This show is changing the way we think about it in aviation. I mean, I, I, you know, Tate and I got together, you know, five, six, seven years ago, whatever it was. And it's like, Hey, airline captains don't ever take a financial advice from a pilot. Okay. Where do you find it? Right here. Right. Right here on the show. And we don't, we don't focus on real estate or crypto or we focus on it all. Absolutely. A business, building a business, being passive, being active stock market, mutual funds,

[00:48:54] bonds, whatever it is, it's all here. Yeah. And so this is just a, uh, an education space where you can, you can come learn about all different types of investments and learn about, you know, maybe starting your own business. And, um, and it's tailored for pilots. So it's, you know, Tate and I are both airline pilots. Tom's an airline pilot. We're all here and we're, we're leveraging our network and we're taking the time that it would otherwise take to go and learn and make all these mistakes.

[00:49:23] And we're condensing timelines and providing that education to people. So that's what we love about the podcast. It's awesome. You're doing a great service and I appreciate you guys. Thanks for having me on. Yeah. Thanks Tom. Thanks Tom. you