Seller Financing vs Rental Properties: Why Note Investing Can Create More Cash Flow With Less Work

Nathan Turner (00:00)
When it really came down to it, my feeling is that notes, it’s a better income for less work. And you are giving away that potential for the appreciation of the property. And that’s something that you need to seriously consider. But you don’t have to deal with tenants. You’re dealing with homeowners instead, people who are actually going to take care of the property.

You’re not setting aside money for repairs. You’re not setting aside money for insurance or property taxes. So there’s a much higher net income on a monthly basis and for a whole lot less work.

Dylan Silver (02:05)
Hey, folks, welcome back to the show. Today we’re joined by Nathan Turner, note investor and founder of earnest investing, where he focuses on creating opportunities through seller financing and note based strategies. Nathan specializes in structuring and acquiring notes, working directly with sellers to create win win deals that don’t rely on traditional bank financing. His approach centers on cash flow, flexibility and understanding how to control real estate through paper rather than just through property. Welcome to the show, Nathan.

Nathan Turner (02:33)
Hey, thanks so much. Good to be here.

Dylan Silver (02:35)
Now, note investing, as I mentioned in the green room, is an area that I love talking about because there’s so many different ways to break down notes. Let’s start off at the top. How did you get started investing in notes?

Nathan Turner (02:44)
Yeah.

Kind of by accident, right place, right time. I got in right as the market changed back in 2008, 2009. And I started by creating notes. And so I would acquire these properties and then sell them on terms, creating the note. Didn’t know what I was doing. Had no idea that this was a whole industry. So as I learned more, I learned how I was not writing the paper correctly, how to do that better, and then evolved from there. Started doing non-performing notes, because that’s what there was at the time.

and eventually switched over into performing notes. So I’ve kind of come full circle. Well, now I’m buying those seller finance notes that I used to creating back in the beginning.

Dylan Silver (03:29)
Now, when we talk about creating these notes, ⁓ is note creation a stepping stone to buying the notes or is it, you know, there’s some people that just prefer note creation versus buying and holding.

Nathan Turner (03:44)
Yeah, it’s such an interesting business because it’s so much about just your own personality and what you prefer. So I actually prefer to let somebody else create the note, but that’s not necessarily the right way to do it. It’s just the way that I like to. So somebody can create a note and then just hang onto it and keep it long-term. If they ever decide they want to sell it for some reason, that’s where I come in.

Dylan Silver (04:06)
Now, what’s the situation if there is one where no creation makes the most sense in the single family space? Is it a distressed seller situation?

Nathan Turner (04:19)
Not necessarily. a strategy. You can use it for distress situations and I’ve done that in the past. It’s also just a strategy to create long-term income without having to take care of the property. That’s what I liked about it when I first got started is I was having people pay monthly payments, the same as if it was a rental, but they’re paying principal and interest payments and they’re the owner. So they’re the ones taking care of the property, doing all the upkeep, paying the property taxes, all those things. So that took

all of that stuff off my plate. It also increased my return on investment because with the rental, you’re having to set aside money for eventual repairs, for property taxes, those kinds of things. In this case, whatever came in from the borrower, the person making the payments, that’s my net. Well, minus small servicing fee, but usually $30 or so.

Dylan Silver (05:10)
How do you feel about being in the first position, lean space versus second position?

Nathan Turner (06:03)
I came to understand second position when I first got into this and people were talking about seconds. It was a big business when I first got in and I didn’t really get it because for me it was all about quick cash. And now that I’m a little more evolved into the, to the world of node investing, I understand where they’re coming from. Really. I think the biggest difference for me is seconds are a much longer term strategy and it’s, it’s something that’s going to pay off over time and you’re going to have to work with these notes.

over time versus the performing firstly notes, they’re going to start making payments immediately. It’s just a different approach.

Dylan Silver (06:39)
Now, if we talk about the creation space and if you’re looking at getting into no creation, how much of this is talking directly with owners and sellers versus a marketplace or someone who already owns ⁓ some type of note?

Nathan Turner (06:53)
If you’re creating, then you’re going to be directly interfacing with the borrower, whoever the buyer is of that property. So then you’re going to talk with them and figure out like, what are the terms going to be? What can they do for a down payment? And you’re going to get down into that financial calculator and really work out the numbers and a lot of really one-on-one with the borrower. So that’s going to be a major part of it. The backside of it with the lenders, where lenders are talking to lenders, that’s more in buying existing notes.

And then the borrowers actually don’t have anything to do with that whole transaction. They don’t know that that’s happening in the background.

Dylan Silver (07:30)
Now, if someone is direct to the seller, I think that there is some level of confusion about what the difference between creating a note and seller financing is because it seems similar. It’s like, okay, in one situation, I’m the bank and the other situation, you know, this person is the bank and they’re holding the paper. What’s the difference?

Nathan Turner (07:44)
Mm-hmm.

Yeah, that’s a great question because it can get a little confusing and it makes it even a little bit more confusing because oftentimes we’ll use the same terms, but we’re talking about different things. So if I’m going to acquire a property and I want to buy it on terms, I’m asking for seller financing. So I want whoever’s selling the property to give me terms over time so I can buy off that property. If you’re flipping it over on the other side of that, if I’m the one that owns the property and then I’m selling that house on terms, then I’m in the position of seller finance.

So I heard somebody explain it once where if they’re trying to acquire the property, they call that seller finance. If they are the one who owns the property and offering it for sale, they call that owner finance. I’m like, that makes sense. But we all use the same terms kind of interchangeably. So it makes it a little confusing, but that’s, think, the biggest difference there.

Dylan Silver (08:41)
It’s who holds the note, right? If the seller is holding the note, then it’s seller financing. If an investor is coming in and creating a note, then we’re talking notes, right? And note creation. Now in these negotiations, if someone is going direct to seller and creating a note, when would it make the most sense for someone who’s not distressed?

Nathan Turner (08:43)
Exactly.

Yeah.

⁓ man, we see this all the time and it’s really interesting. ⁓ We see a lot in the Southern States where it’s like an ITIN borrower. So somebody who’s not a citizen of the United States, for example. So they have an ITIN, they’ve got that number. So they’re here legally, but they’re just not a full-fledged citizen yet. That’s a very common one. We see that all the time. Another one that’s really, really common is self-employed people.

where as a self-employed person, I know how difficult it is to get a loan from the bank. They just don’t know what to do with us. So it’s a kind of a situation where I can talk to the seller of the property directly and say, hey, here’s the situation. The bank, there’s nothing really wrong with me, but the bank, either I don’t want to deal with them or they don’t want to deal with me. So let’s figure this out outside of banking. And that’s often how that goes down.

Dylan Silver (10:32)
Now, buying notes. I understand that there’s marketplaces for this. I’m also imagining that once you buy a note that this kind of creates a sphere and you have other people who say, okay, I know this person who buys notes. How do you go about it?

Nathan Turner (10:34)
Mm-hmm.

Mm-hmm.

I, it’s a lot of word of mouth. It’s a lot of networking. I started going to note conferences back in 2009. I went to my very first one and I was shocked when I went and entered into the room. brand new to the business and here’s, you know, 200 people all talking about the same thing that I just barely learned about. And they’ve been doing it for years and years. And so that was where I started making those first connections and really coming together with people. And then over time,

when I was ready to start buying notes, then I would go to these people and say, hey, here’s what I’m looking to do. Do you know anybody who’s selling notes? And if they weren’t selling, they would know somebody else. There are a couple of online resources these days, marketplaces, ⁓ but that’s a small percentage of what the notes that are out there that are available. The vast majority of the deals are still word of mouth, just networking, people, know, relationships.

Dylan Silver (11:39)
Now I understand that non-performing notes can actually be attractive to some note buyers, but on surface that seems like a huge risk. How does that work?

Nathan Turner (11:50)
That’s exactly what I thought when I first heard of it. Like that seems crazy. Why on earth would you do that? Going back and this was especially big business back in like 2009 up to about 2018, 19, there were so many of these available. And the biggest attraction to it was the discount because they’re not making payments. Obviously there’s a bigger risk factor there and therefore you get better pricing. the pricing when I, especially when I first got started 2009, 2010 was

crazy good. So it was a big enough discount that you could get into a non performing note and have the property as the collateral. And you just kind of figure it out. Either you’re going to get the person making payments again, or you’re going to get them to sign over the property, or worst case scenario, you a foreclosure. And then you end up with that house and then you can do whatever you want with it, sell it, sell it on terms, create another note, rent it out if you really want to. But there’s all kinds of different options that way.

It was a really fun time for me. did that for many years and it was great, but it’s more difficult to do that these days.

Dylan Silver (12:58)
So the objective if you’re buying a non-performing note is gonna be look at, if we have to foreclose on this, because it is non-performing, we still have a way to turn a profit on it at the foreclosure auction, given how much we paid for it and how much we’re going to have, maybe you have to pay an attorney and folks to foreclose on it, and then how much we’ll get at the auction.

Nathan Turner (13:20)
Yeah, exactly. It’s, it’s when you’re looking at a non-performing note, I actually had built myself out a kind of calculator where I could look at different possible outcomes and I would base my pricing, my, whatever my bid was on the worst case scenario. And oftentimes that was taken back the property, but not necessarily. Sometimes I was actually when they’re, if the person was going to start making payments again. whatever possible scenario there was, I would look at the worst case scenario. What’s my, my least

profitable outcome and based my pricing on that, knowing that there’s really no way to know what direction this non-performer is going to

Dylan Silver (13:58)
Now pivoting here to folks who may be wanting to get into real estate as a whole and they’re looking at fixing and flipping. They’re looking at Airbnb arbitrage or know, for term rental arbitrage. They’re thinking, do I get a real estate license? Do I become a lender? Do I become a hard money lender? You know, you know, so many different ways to get in and then they hear about notes. Who is note investing right for?

Nathan Turner (14:18)
Yeah.

I it’s right for people who are looking for something that’s going to be a long term payment strategy. So like if you need money right away and if there’s something that you want money quicker, fix and flip is going to be a great way to go. But if you’re looking for generating long term income over a number of years, note is notes is really built for that. It’s really, really great for IRA investors who just want to put that IRA money out to work.

That’s a great idea. Even outside of that, I buy them just for myself, for my own portfolio. We’re building that up. That’s my retirement where I’ve got my performing notes, doing their thing, and I can go off and do whatever I need.

Dylan Silver (15:44)
Now, of course, you know, location makes a difference in real estate as a whole, right? When you’re buying non-performing notes specifically, how much of a factor does location play into it, even to the point of where you’re saying, well, hey, this is non-performing, but it’s in one great market. That’s gonna matter for more than let’s say if it was in a market that’s not appreciating as quick.

Nathan Turner (16:07)
Yes, location definitely makes a difference and it’s absolutely one of the criteria that we look at. ⁓ I’ll give you an example. So I actually tend to stay out of New England. So New York, New Jersey, Maine, ⁓ that whole quadrant because foreclosure laws are weird and they take a really long time and paying the attorney for an extended period of time gets very expensive. So I stay out of that area simply because of that. ⁓

Dylan Silver (16:23)
Okay.

Yeah.

Nathan Turner (16:37)
Are there great neighborhoods there? Are there great markets? Absolutely. But if I’ve got a non performer that I need to deal with and it’s, and that’s one of the possible things we do is a foreclosure. If that’s the way we have to go, it’s going to take me a very long time to get that done. So I just stay away from that area.

Dylan Silver (16:53)
Now for folks who are currently landlords and they have a rental portfolio and they’re trying to determine where potentially note buying might fit into their strategy, know, rental portfolio can be a long-term play as well. And for many people it is. How does owning notes compared to having tenants?

Nathan Turner (17:04)
Yeah.

Yeah, this was a debate my wife and I had early on a lot. We had this talk back and forth many times.

When it really came down to it, my feeling is that notes, it’s a better income for less work. And you are giving away that potential for the appreciation of the property. And that’s something that you need to seriously consider. But you don’t have to deal with tenants. You’re dealing with homeowners instead, people who are actually going to take care of the property.

You’re not setting aside money for repairs. You’re not setting aside money for insurance or property taxes. So there’s a much higher net income on a monthly basis and for a whole lot less work.

And so that’s a very important thing to consider. What I’ve kind of come down to is sort of an 80-20 rule that we’re all very familiar with. And I think what I’m going to do is 80 % of my portfolio will be notes and 20 % will be properties that are rented.

understanding that 80 % of my time will be spent on 20 % of my portfolio.

Dylan Silver (18:16)
Now, bonus question here for you. What’s a hairy deal that you’ve come across where you think back and you say, wow, you know, that one was either something I learned a lot from or something that I hope I don’t have to do too many more times.

Nathan Turner (18:29)
Yeah, I especially when you’re talking about non performing notes with performing, there’s very little hair on those deals. But on a non performers whole yeah, they can get all kinds of fun. The ones that really went the most off track are the ones where it was a vacant property, it vacant for years, it’s been vandalized, it’s been, you know, taking for a ride that poor property, we end up taking back that house. And we think we know what the outside of the house looks like we you know, so we have an idea of the value.

And then we get inside the front door and we go, shoot. It’s a whole lot more work, a lot more than we had anticipated. And that it’s rare, but it does happen. So that’s something to be just aware of.

Dylan Silver (19:11)
We are coming up on time here, Nathan. Any new projects that you’re working on and what’s the best way for folks to reach out to you or your team?

Nathan Turner (19:19)
Yeah, so I’ve been note investing for over 15 years. For the last 11 years, there’s been a conference called Diversified Mortgage Expo. Four years ago, I took that over. So coming up on May 1st and 2nd in Nashville is the Diversified Mortgage Expo. I host that, my wife helps me out with that, and my kids actually have been helping out the last couple years, which has been fun. But it’s just a place for everybody to come together, whether you’re creating notes, buying, selling.

anything to do with that world or if that’s something that you want to get into, this is the place to be. And the whole idea of the entire conference is bringing people together from all the different sides so we can start doing deals. There’s no upsell, there’s no extra course, there’s no buy today, any of that kind of thing. It’s just purely education and networking.

Dylan Silver (20:05)
How can folks find out more information if they’re interested in attending?

Nathan Turner (20:09)
diversifiedmortgageexpo.com and there’s lots of information there.