I used to laugh - at paper buyers - Posted by John Behle
Posted by John Behle on October 15, 1998 at 12:04:42:
I began investing in real estate. I came across a technique I found very useful of “creating a second and a third and selling the second.” (I give an example of that one and 4 more in the article that was just posted called "Paper Your Most Valuable Tool).
For that technique, I needed to find some paper buyers. There were only a couple in my area. One of them was in the local exchange group. At first I thought literally that people who bought paper were not “smart enough” or they would be buying real estate instead. Why in the world would they invest money at 18-24% yields (at that time) when they could at least double their money in real estate. But - I sure wasn’t going to tell them, I needed them as a funding source.
One of them violated my theory - that he didn’t know enough. Every exchange meeting or educational event I went to - he was there. Even in other states. Ok, I don’t get it why would he choose paper when he does know real estate.
I was doing the typical high leverage real estate game and working hard to buy properties at market value with at least a break even cash flow. I attended a national exchange meeting in Las Vegas. There he was again (maybe he’ll learn more about real estate and give up paper). I listened to a 45 minute presentation by a man named John Berven. He showed how I could buy mortgages at a discount and then trade them at face value to buy property. You then end up with the property at 60-70% of value.
I was stunned. I walked out of the room and literally was almost stumbling (had an M.O.) and bumped into this paper buyer. He looked at the look on my face and said “see, now you know why I buy paper”. I rushed back to put the technique into practice and quickly learned that I needed to put together a portfolio of notes to make it happen successfully. Once I had a portfolio and began trading for properties, I picked up a book by Carlos Royal and Max Hollis - two of the original Gurus of the paper business. I then learned about re-structuring and improving paper. It grew from there to the point where I found and created (mostly created) over 117 techniques to improve paper. All of a sudden the yields were way beyond the 18-24% and most were impossible to calculate, because I had no cash in the deals and still had a cash flow. I also learned to finance paper 100% and found it as easy to do as financing real estate with less requirements in the way of credit and personal qualification. I had found a powerful tool to help my real estate investment and also that stood alone and compared very favorably as an investment itself.
In about 1982, I had a myriad of management headaches. In particular, I exchanged into what I call the “Triplex from Hell”. I started selling off some of the properties and taking back paper. The triplex cost me massive amounts of money and time while I owned it. When I sold it, I started receiving a nice, consistent, management free cash flow. I was hooked and it grew from there.
I honestly believe there is no better tool for a real estate investor, agent or exchangor. Not only is it a tool, but it is the perfect companion investment for real estate. One very well known real estate investor has a 4 million dollar plus paper portolio. He doesn’t talk about paper much in his courses or books, but has related that through all the ups and downs he has seen, it was his paper portfolio that kept him alive, gave him stability and helped him weather the storms.
Paper as even a sole investment without real estate has many advantages. Cash flow, low management, set rate of return, low market volatility, very low downside, very high upside (improved yields), and even some substantial tax advantages.
Many buy real estate and sweat, toil, labor and wait for that final time period when the get what they want and need to retire - low management, stable, cash flow.
Paper investment - if done right - can build those cash flows immediately. It can be financed 100% and still have a positive cash flow with little risk. A friend I was training in the business asked me what the most important thing about paper was. I told him “finding it”. A few months later, he asked me again. I told him “funding it.” He learned both and topped 100k in income for the first year in his life. Into about his third year he was making 60k per month. Now, nearing the end of his sixth year, his income is much higher than that.