JLM Blog | Episode 14: Create Passive Income by Investing in Real Estate Debt

Real Estate News, Updates, and Tips

Multifamily Real Estate Advisors in San Diego

Podcast Episode by Jason Lee – Premiered October 7, 2021

What You’ll Learn in the Podcast:

● Marco’s backstory and how he went from a successful career in the entertainment industry in L.A. into real estate

● What enticed Marco about the note holding side of the real estate industry, and the different types of “paper” he invests in

● A breakdown of how exactly Marco makes money through purchasing loans as opposed to property

● How Marco sources and buys these unique types of deals, as well as how he markets to mom-and-pop note holders

● Why Marco likes creating guaranteed cash flow through this investment option as opposed to others

● The types of syndication real estate groups Marco likes to passively invest in, and how he finds them.

● What Marco’s first real estate deal was (which he still is involved in), what he learned from it, and is still learning from it today

● What challenges Marco is seeing in the real estate industry at this moment.

Summary and Highlights:

Porch Swing Funding Marco Bario talks about investing in loans rather than investing in properties. If you are looking for a cool new way of investing your money, this successful genius shares about it. Here are some key points in Jason Lee’s interview with Marco Bario:

Different Start

Just like most real estate investors, Bario started with a different career and it is a career in the TV & film industry. After graduating from a prestigious university, he got a job as a production assistant. He worked in the industry for 20 years and he loved all the things he did there. He has no regrets about all the decisions he made and all the jobs he took because he loved all the people he worked with.

Opportunity to Network

Marco suddenly got an invite to attend a real estate meetup. He took the opportunity as he saw it as a great way to check what exactly makes this industry so appealing. He decided to grab the opportunity and he found out there are many ways to invest in real estate. It is not all about buying houses and condominium units.

House Flipping

Turning existing notes into house flipping is such a great opportunity especially if you know what you are doing. Once you realize the property is in an ideal location then you should know this opportunity does not arrive that often. As a matter of fact, some house flippers are able to gain a huge profits from the way they improve the looks of the house.

 

Commercial Syndication

Bario recalls there were commercial syndication people in those real estate meet-ups that he attended. He felt obliged enough to try and he found gold in all of his investments. It did not take too long for him to conclude that it was something that was going to benefit him when he reaches his 60s or even 70s. Surely, you would want passive income because when you reach that age you would not have the physical capacity to earn a living. If you were not able to do get passive income by that time then you are in trouble as you can’t rely on your children to give you money all the time since they also have their own families to support.

 

Working with the Right People

Everything is set in stone with what Bario is working with. He barely lifts a finger with what he does each and every day of the week. He even deals with a company that takes the loans that he invests in. It is evident he invests a lot of time in making sure he deals with the right people. He has heard plenty of people give presentations and with his experience, he was able to select the right people.

 

First Investment

He admitted that he is not someone who has been doing this for a long time. As a matter of fact, he only made his first investment a few years ago in self-storage facilities.

Episode 14: Create Passive Income by Investing in Real Estate Debt

Watch the Podcast | Read the Transcript

Transcript

00:01 
[Intro] 

Welcome to the multifamily millionaire podcast. The show that interviews multimillionaire real estate investors and top producers in the real estate industry. If you’re looking to create passive income and achieve financial freedom so that you can do what you want whenever you want, you’re in the right place. Our goal is to simplify and make real estate investing easy for you. For more information, you can find us at www.jlm.realestate.

 

00:29 

Jason Lee: All right, everyone. Welcome back to the multifamily millionaire show. We got Marco Bario here. He is the president of porch swing funding, and he’s an active investor in single family rentals and a passive investor in many apartments indication, self-storage, senior housing, all that good stuff. So I’m happy to have him on how’s it going Marco.

 

00:49 

Marco Bario: Going great Jason, I’m really excited to be here. Thanks for the invite.

 

00:52 

Jason Lee: Yeah, definitely. I’m excited to have you too. Just as a start, can you just tell us a little bit about yourself and how you went from being in the entertainment industry to eventually moving into real estate?

 

01:04 

Marco Bario: Yeah, you know, a lot of people in real estate start out doing something else and that’s one of the things I like about the area. But I had a, what I consider a pretty full career. I went to college and studied television production, went to a school in Boston called Emerson college. And within a week of graduation, I moved to Los Angeles and immediately had a job working on a TV pilot as a production assistant. And I did all kinds of crazy things from, in arranging, from getting lunches to gosh, like it has nothing to do with real estate, but I had a job once where they required me to go to Dodger Stadium when there was a Dodger day game and get Dodger dogs to bring back to the writers and the production office. So that’s how I got my start and I worked my way up in the entertainment industry and I worked there for a little over 20 years. I love the time I loved the people I worked with.

Eventually I was in feature films and oversaw theatrical post-production for a large post-production service provider called Technicolor, who about a hundred years ago, I guess now advent to color film, but we were providing digital services by then and on the cutting edge too. So enjoyed a great career there, but ultimately decided I wanted more control over my life and my career. It was at a time when the industry was changing because of technology from million dollar investments to build out a suite, to provide a certain service. Now that compute technology is $10,000 or $20,000 and the cost of entry is much lower. So it was a good time to step out and it was a good time to find something else that I like to do. And what I really was drawn to was something entrepreneurial. I kicked the tires on a few things from my own e-commerce site to a couple of startups. And somebody suggested that I went, that I check out a real estate meetup in Southern California down on the south bay area Manhattan beach area. And I went and I was hooked. I was absolutely hooked. And Jason we’ve talked a little bit before we got on the recording here, real estate is an area full of niches. And I went to a handful of meetings and there was a different topic every week and I’m like, oh, I’m going to do multi-family investing. Oh, I’m going to do single families.

Oh, I’m going to jeez, you know, get my general contractor license, and oversee renovations, you know, and get my hands dirty that way. But it was one week where there were a group of panelists who were note investors. So that means they invest on the paper side of real estate rather than the property. And it really spoke to me. There was a level of creativity to the way they spoke. They looked at deals from so many different angles. There were so many different exits, there were some were buying non-performing loans. So we can talk about what that means. And some were buying, performing loans. And we can talk about what that means. That’s what I do now, but I started buying non-performing paper, so creative. And today I really sit at the intersection of property and paper. Some of my notes turn into property and back into paper again. I’ll acquire notes through creative financing. So I’m using paper to acquire, I mean, sorry, acquire property through creative financing. So I’m using paper to acquire the hard asset of the property and I can really geek out and go on and on, but I’ll stop there.

 

04:16 

Jason Lee: I mean, there’s so much to unpack them an answer. It was a great answer. Some that stood out to me is I like how you explored all the different fields of real estate and kind of found your niche, your niche that you’re most passionate about. And I feel like real estate is a double-edged sword because, you know, there’s so many things you can do, like what you just said, being a contractor, multifamily, single family, office retail, all that stuff. So I think the best way to be in real estate is to specialize in one niche and not be trying to do all these different things. And that’s cool how you, you know, ended up in a very interesting niche that I personally don’t know much about at all. So I’m super excited to kind of see what you have to say about this, this area of real estate investing. I guess the first question to start is what is the difference between a performing note that you buy and a non-performing note that you would purchase from a borrower or a note holder?

 

05:08 

Marco Bario: Well, I’ll be completely honest. I was hooked not just by the concept of notes, but like a lot of people who go to these different real estate meetups and hear these different concepts and think, oh, I’m going to get rich quick, man. This is like, get rich quick, you know, gold and let’s go. So at the time there were still, and there are still some but still quite a few rotten assets. Let’s call them floating out there from the 2008 you know, great recession that happened in the housing crisis, where a lot of loans defaulted. And what happened is the banks ultimately had to get those banks and other institutional type lenders had to get those bad assets off of their balance sheet. So they sold them and they sold them to hedge funds. They may have been larger entities who then would carve those pools of notes, maybe $10 or $20 million in a single pool with filled with, you know, a 100 or 200 different assets. They would sell those off to smaller investors and smaller investors. And I got into it late. There were people who got into it right around 2010 time. And they were able to walk into a bank and say, Hey, what do you got? The bankers would say whatever you want. And they were buying them for 5 to 10 cents on the dollar. Those days are gone. And by the time I got in, I was buying at 30 to 50 cents on the dollar.

But I bought a handful of non-performing assets. And not only did I see it as an opportunity to make good money and by the way, the play there, I won’t go too deep into this, but the play with a non-performing loan, I explain it. It’s like a house flip. If you walk down the street in a decent neighborhood and you see a house where they haven’t mowed the grass and the windows are boarded up and you think, boy, there’s an opportunity here. We can fix this place up and we can bring it up to market. We essentially can make this house perform. It’s going to be worth more than what I paid to acquire the asset and fix it up. And that’s usually the play with a loan.

If it’s been non-performing anywhere from, you know, five years to five months or more in the number of years, the hope is that at an individual investor level, you could work directly with the borrower and create a workout. You know, me who might have just a handful of loans, I have the time and the patients and the creativity quite honestly, to work directly with the borrower to make the loan perform again. And I’ve been able to do that with a number of loans. It doesn’t always happen and there are times, and it’s always the last course of action for me. There’s for me, my strategy is I don’t want the property in that case, cause it’s probably not in good shape. And also we’ll get into this. I also don’t tend to buy these loans in California.

So I have them all over the country. I’ll never see these properties with my own eyes, right? So I’m doing this remotely, but there are times where I’ve taken back a non-performing property based on a non-performing loan. And I acquired the property for much less than market in some cases. And I’ll give you a quick example. I was a second lien holder. So a junior lien holder, which for those who understand how liens work, you’re always subject to any debt above you, whether it be property taxes or first lien debt holder, or a municipal liens, anything like that. So there was an example where I foreclosed on a property that was out of state on the other side of the country, frankly, from second position. And I took it subject too, I took title. You know, you don’t always get the property at auction. Someone can bid above the balance due and they walk away with the property. It’s good as an investor when that happens, but sometimes they’ll end up with the property. I took this particular property back subject to an existing first. Now this first was an older loan that had been modified coming out of that 2008 timeframe and the balance was intact, but the interest rate had been reduced and the term was extended out to about 40 years. So you can imagine the loan payments were favorable for me. I didn’t have to put my own credit out there. I didn’t have to work to get that financing. So now I took title to a house that had great financing.

And in my case, again, I don’t want the property. I want to go back to paper. So I listed that house for sale, with a realtor. I did some light paint and carpet type work on the house. We put it on the market, we sold it. We were able to sell it probably a little bit above market. This was just last year and I sold it to somebody with seller financing. So we created what’s called a wrap. So the initial loan, the subject to first stayed in place, but I created a new loan. So now every month the borrower pays me on the loan balance that borrower owes to me. And I use, let’s say that she’s paying me $2,000 a month. And let’s say that I owe a thousand dollars a month to the first lien holder. I pay them their portion and I’m making money on the spread and the way that deal work, I have virtually no money left in the deal. So it’s a very favorable, so there’s an example of working all the creatives, a couple of the creative paths from modifying loans and flipping nonperforming loans to taking back a property. And I could have turned that into a rental.

I could have done a full fix and flip and just exited and let the borrower get their own financing and cashed out. I like cashflow. So that was a very long explanation on the non-performing side. Performing is different. And within performing, you know, I could go buy newly originated institutional paper, but you don’t tend to make much of a discount on that, but I’ll give you another example. If Jason, you sold me your house and you agreed to carry back the financing. So instead of going to Quicken loans to get my financing, you said, Hey, I’ll sell you my house for, we live in Southern California, let’s dream $250,000. That’s maybe an 80 unit, right. $250,000, Great. Jason, I’ll give you $50,000 down. We’ll do a $2,000 note and deed of trust because we are in California. So those would be the documents I would give to you to secure the loan against the property. So ultimately if for some reason I didn’t perform and it went not performing, you would have the rights to foreclose on me per that deed of trust and the  terms of the note, but you’ve agreed to an 8% interest rate and higher and common in seller financing. You’re loaning your own money and equity or a bank loans, other people’s money and equity thank you very much and sells off the loan. So that’s why bank rates are much lower than seller finance rates.

But we agree to 8%. Now you collect payments for a year and you’ve made mostly interest by the way, because the way amortization works, it’s mostly interests in the beginning. I barely touch the principal after a year or two or whatever it goes by. And you think I’d like to sell the rest of my payments, cause I’ve got a great deal. I’m going to chase. And I’d like to get away from, you know, I’d like to read a play this capital. So then you would come to somebody like me. Not me cause I’m your payer in this example, but someone who does what I do and we would negotiate to sell, let’s say the balance left is $190,000. I might pay somebody who knows, you know, we negotiate 170,000, 160,000. And yes, it’s selling at a discount, but you get capital back right away that you can go deploy on some other deal. If it’s an individual, maybe they’re a retiree and they just want to have that cash for retirement homes or travel or paying for grandkids education. There are lots of reasons individuals to sell notes, but because I bought it at a discount. Now my interest, my effective yield is higher. So instead of 8%, I don’t have a calculator in front of me. I may net 10%, 11%, whatever I’m in a net. And that’s how I make money on buying performing notes. Does that make sense?

 

12:27  

Jason Lee: That makes sense. So nothing changes to the borrower, right?

 

12:31 

Marco Bario: No, no. They have a legal contract. In fact we use the same legal method is when you endorse a check to somebody, you know, if I wrote you a check and then you want her to give that check to somebody else, you would just say pay to the order of and put their names. You’ve endorsed it to somebody. That’s the same language we use on the note. A check is essentially a promissory note. So that’s an example people are familiar with. So you just endorsed that note to somebody else. And then you do, what’s called an assignment on the deed of trust. Same thing. It’s just a signs that interest in that document to me, but nothing changes for the borrower. 

 

13:06 

Jason Lee: Got it. So I’m kind of confused on the performing note seems very simple, right? It’s a pretty simple concept, but the non-performing note me and I’m sure some of the listeners are pretty confused on some of the things you said. So to start, like what happens to obviously the borrower isn’t performing, right. They’re delinquent on the loan when you’re buying these notes from the note holder. I guess question number one is what happens to the borrower in this case, once you buy the note at a discount, that’s not performing.

 

13:35 

Marco Bario: Again, I’ve just substituted myself into the place of the previous lender. I’ve essentially become the bank. If you want to use a very straightforward example. If Wells Fargo had originated this loan in 2012 and the loan went south, Wells Fargo probably sold it to somebody who sold it to me. And now I step in as the bank, as the person who the money’s due to use not legal language. And I have all the rights that come with those legal documents. I have the rights to enforce my lien per any illegal method.

14:11 

Jason Lee: Got it, got it. That makes sense. And for those who don’t know, a lien is basically, I mean, a mortgage is a type of lien. So when, when Marco is saying first lien holder, second lien holder is saying first mortgage holder, and then the second mortgage holder just in case people don’t know. But that’s a very interesting concept. I mean, I’ve never heard of you know someone buying a non-performing loan from a bank like Wells Fargo or chase or who they sold it to and, you know, making money this way. I think it’s great. How are you sourcing and finding these deals? You know that you’re buying.

14:44 

Marco Bario: Yeah, that’s a good question. So I had an evolution. I started by buying the non-performing paper one because I saw I’ve made some incredible returns on some individual deals. It doesn’t happen on every deal, but you can cause you’re buying, I was buying summit, you know, pennies on the dollar and then I might get a full payoff or I might get alone mod and I can sell the loan [15:02 inaudible] funny, that’s the house flip model right now. I fixed up the house, I’m going to sell it to somebody. I fixed up the loan in this case, but I had an evolution for one they’re less non-performing loans today than there once were. And there’s a lot of talk about what might happen when the foreclosure moratorium is finally clean up and how many loans are in default. And, but wait a minute, property values are higher than they were in 2010. And are we really going to see the foreclosures? That’s a whole rabbit hole we can go down and I don’t play in that space anymore. So I don’t follow it too closely.

There are different opinions on what that mortgage world may look like in 6 to 12 months. However, I, frankly, it was harder to come by the assets. They were getting more expensive. And I found that I liked marketing directly to owners of seller finance paper. Again, I worked in the Hollywood industry on these big budget movies and a lot of mostly nice, but some not nice people. And I felt that the last thing I wanted to do was create a career for myself and no offense attended here where I just deal with lawyers and foreclosure servicing people all day long. It wasn’t that appealing to me. Whereas now what I do is I send letters and I market online to mom and pop note holders. We’re talking some of the deals I do are mobile home and land. We’re talking, you know, middle America, real main street type people who sold a property. And for one reason or another carried back the financing, some properties frankly, aren’t easily financed by a bank that mobile home and land Example’s a good one. You’re not going to call Quicken loans and say, oh, I need a loan to buy a mobile home and land, but the property value may be too low. And that may be an asset type they don’t finance. That’s one thing.

The other reason people find seller finances, they’re business owners. I’m a business owner and it doesn’t matter how much money I make Sometimes, banks won’t talk to me just because I don’t have a W2 to show them. I’m happy I don’t have a W2. They don’t seem to understand that However. So there’s this really big market, That’s sort of unspoken about that seller finance paper, mom and pops, retirees, near retirees all types of people. And in their cases, you know, life happens. They may enjoy the payment stream for a while and then they may get into a jam somewhere else and they might need that cash. Some of the people nearing retirement age, who I buy from they just don’t want to deal with it anymore. They don’t want the headache of it. So they want to sell, they don’t want their, the heirs of their estate to have to figure out what to do with the note. It’s a little bit exotic for some people, so they don’t want them to fight over it or have to figure out the logistics of it. So I mark it, I send letters and I mark it online and people call me and I get to have great conversations about, you know, how’s the weather and Idaho this month. And I get to know individuals and I really love it. And I really love it.

 

17:55 

Jason Lee: That’s amazing, you know, being a broker for some time now it’s funny. It’s very hard to structure a seller financing deal with a seller. I feel like most people who sell just want their cash now and don’t, you know, don’t want to give a note to the buyer of the property right. And I feel like, you know, these situations are pretty rare. Are you finding that there’s a lot of notes out there that are seller carry deals that you can find pretty easily or are they pretty, you know, few and far between and in certain cities or areas?

 

18:29 

Marco Bario: When I send mail, I only mail to people who’ve created a seller finance note and that information is available publicly because they get recorded. The lien gets recorded. So somebody not me sifts through all the liens that all the different county recorder’s office is and pulls out the ones that look to be seller financed. And usually you can tell because it’s not a big institutional lender, you know, they may do it under their state. So it’s, you know, mom and Pop, you know, Mom and pop Smith trust that is the balance or it’s just Mom and pop Smith. And those are most likely seller finance. So I’ll mark it directly to them. There are enough out there to answer the question they’re not.

19:08 

Jason Lee: Got it and kind of switching gears, you said the beginning of the podcast that you like cashflow and you can build cashflow in many different ways to real estate, right through what you’re doing, through multifamily real estate, through single family rentals, through commercial property. Why is this specific method, your favorite form of getting cashflow from real estate?

 

19:30 

Marco Bario: It’s what I told you. I like the job, but essentially I built two businesses at once when I started investing in real estate and I left this part out of my story, but what I really did first as I went to the real estate meetups and this particular meetup that I’m stay active in, there are a lot of commercial syndication people in that group. And I learned from them and I started investing in a couple of their deals, and now I invest in others. That’s all my retirement money. I’m going to turn 52 years old this month. So where I am at my life, as I know that at 59 and a half, I can start to, unfortunately I still have a traditional, mine’s a solo 401k that allows me to, it’s like a self-directed IRA, just it’s attached to my business. So it’s a 401k structure that allows me to invest in alternative asset types. And I’m sure some of your listeners may be not all are familiar with self-directed IRAs, where you can direct, you can invest in real estate and cryptocurrency and gold and all kinds of things that aren’t wall street assets aren’t through you know, Schwab, if you will using retirement money.

So I started doing that investing in syndications and that’s sort of one business for me. It’s almost completely passive other than the part where I look for new opportunities and underwrite them and do due diligence on the sponsors and so forth. And I’m diversified there. And I really like it because I’m invested in self-storage facilities, mobile home communities, senior housing facilities. What else? Multifamily of course even a fund that owns ATM machines and they make earnings from the ATM revenues. You’ve been around Jason, you may have seen there’s one that’s been floating around out there. It’s worked out well, actually. So I love that, but so that’s one business. And then I have this other business where I’m very active and I actually need not just cashflow from that, but I need money to buy groceries and pay my mortgage. So I don’t take down personally, every deal that I source. I’ll do what’s very, very similar to a wholesaling model for single family investors, where a wholesaler markets, just like I do mostly to mom and pops. They find the house on the street that may look a little rundown and you think, oh, maybe they want to sell and you knocked on the door or you send them a postcard or you call them or whatever the marketing methods are. And they say, yeah, I’d like to sell. And the investor says, well, I can pay you cash now.

But what they do is they get it under contract to buy at a set price. And then they assign that contract to somebody else who will actually fund and take title to the property. I do the same thing with notes sometimes. So some of the deals I get under contract with the seller, I then assign that contract from all the way from banks or a couple of banks I work with who fund my deals to individual investors who want to, they work great in a retirement account who want to take down an asset like this and just collect the cash flow over time. You place it with the loan servicer. It’s mostly set it and forget it once it’s all in place. 

 

22:23 

Jason Lee: Wow. I mean, that is fantastic. I think it’s very important to, for everyone to have an active, you know, business and also be investing on the side, that’s much more passive. Like for example, even if you have a W2 job, I think it’s very important to on the side passively and of real estate, like you are as well. Me and you just happened to be both actively in real estate and passively in real estate, but that’s amazing. From your previous, you know, due diligence of working with many different syndication groups for the listener who might want to not worry about managing real estate, dealing with tenants, all that stuff, what kind of groups have succeeded the most in, you know, giving you the best return, giving you reliable, trusted assets that you can believe in. And how did you find those groups?

 

23:13 

Marco Bario: I’m really picky and I’m mostly picky about the people I work with. I realized early on that the I’ll give a plug. There’s a group in the, mostly in the Southern California area where I live around Los Angeles called for investors by investors. And one of the founders is a guy named Jeremy Roll, who you can catch on a lot of different podcasts and things. And he primarily invest in syndications and he’s a due diligence nut, and I’ve heard him give his presentation enough that I thought, I better do a lot of that as well. And I realized it’s more who you invest with and what you, of course, what you invest in is important, but the who is incredibly powerful in the syndication world, because I get to invest in deals with sponsors who have decades usually have experience in one specific asset class. 

They know it inside and out, and not only do they know the asset class, so they’ve been through an up cycle and a down cycle. So I know that they can navigate their way through trouble. But they have access to deals. I would never have access to as an individual. And they have access to financing that I would never have access to as an individual. So I get to piggyback on that. So not only do I receive favorable returns on those investments, but I feel that I’m protected from downside risk because of the experience and the type of financing and all those other positive aspects.

 

24:35 

Jason Lee: Got it. Got it. That makes sense. And I think what you said about who was very important, I think there’s many good deals to be had in, you know, in the world, but I think the person who was managing it and structuring the deal and raising the right amount of capital is just as important, if not more important than deal. Would you agree with that?

 

24:57 

Marco Bario: Yeah. That’s essentially that sums up. You said much more succinctly what I said. Yes, absolutely. Absolutely.

 

25:04 

Jason Lee: Got it. Well, I’m switching gears a little bit. What was your first investment in real estate? And can you just tell us about, you know, the goods and the bads, what happened and what you learned from it?

 

25:15 

Marco Bario: Sure. I still hold it. I invested in a fund that took down three self-storage facilities. And let’s see, we were in Georgia and South Carolina and Florida on that, and I still hold those investments. I’m not the guy who’s been doing this for decades and decades. I invested in that in 2017. So often when one invest in the syndication, there’s an anticipated hold period. The anticipated hold on that I believe was seven years. And, you know, with market prices today, we may, some of those may exit early, I just had my first syndicated deal refinance, which is brilliant because I still have the same interest in the LLC that holds that asset.

That’s this is not the self-storage facility, but I got an ACH transfer of more than half of my initial investment. So I love those, but it’s, you know what, I don’t have much to share on this first investment other than it was somebody I knew, the sponsor somebody I know through this real estate group that I became active in and he was partnering on raising funds with somebody else who actually ran that local chapter who have a personal relationship that I’ve invested with in other ways. It’s boring, but the best deals are often the most boring deals, right. Until you’ve got the high five when the distribution start coming in and they’re big, one would hope.

 

26:44 

Jason Lee: Yeah, definitely. Then I guess my follow-up question is what is the investment or deal that you learned the most from maybe one where you made a big mistake and you know, it was a big life lesson or a career lesson that you took from it that you still benefit from today. 

 

26:59 

Marco Bario: The deal I mentioned earlier in Georgia is the one I’ve learned the most from, it’s hard to wrap that up into a succinct story. On purpose, I started investing in the non-performing assets, not just because of the potential returns, but because, and I used this explanation a lot. And especially in the non-performing space, note investing is similar to, you know, Houdini, right? Houdini would tell somebody you’re going to chain me up. You’re going to handcuff me. You’re going to put a blindfold fold. You’re going to do all these things to me. And you’re going to drop me into a tank of water and I’m going to see if I can get out. He always kind of knew what the tricks were to get out, but that was the gag, right? That was the thing. So not performing note investing sometimes often you don’t know what the exit is going to be. So I knew there were a couple of potential paths to get out of that deal. And I won’t actually, shouldn’t go into some of the gory details of that deal. It got ugly because the borrower pushed back.

I knew I was, of course I work with attorneys and of course I felt protected in that deal, but being a newer investor still, when that was all playing out, I was, I broke a sweat more than once I’ll share that much. So I don’t know that there’s, yes, there are things I would do differently, but I’m also equally as thankful that I put myself out there and trusted myself to navigate my way through it. Now buying some of these notes, the investment’s not huge. So I get to take a lot of shots at the target if you will. And if I miss one it’s okay. And that was one of those examples as well. So does is that an answer to your question? Maybe not the one you were looking for?

 

28:37 

Jason Lee: No, that’s a great answer. I think one of the biggest mistake that one of the biggest mistakes that people make when they want to get into some sort of real estate investing is that they get stuck in analysis paralysis. I love your answer because you trust yourself, you have the confidence to go, you know, headfirst into a deal that could have gone many different ways ended up great, but I’m sure, you know, there was some, you know, there was one part of your brain that was saying, you know, don’t do this because it’s very risky.

Right. So I just think taking that first step as an a real estate investor is extremely important because you learn a lot from the experience. And then from there, you, you almost get excited or addicted to it because you know, so much more about what you’re doing and it’s so much fun and that’s kind of what’s happened to me and you, and I think that’s amazing. So, yeah, it’s a great answer. My next question for you was what are some challenges you’re seeing in the real estate industry at this time and how are you kind of navigating it currently?

 

29:37 

Marco Bario: For the type of seller finance notes that I mark it for, There are very few challenges in that space right now. It’s mostly business as usual. I have started realizing that as a paper guy that I probably should own more property for the tax advantages. As my net worth increases, I’m looking for more tax advantages. And certainly one way to do that is by owning a property outright. You do get tax advantages with certain real estate syndications, but mine happened to be into retirement accounts. So I don’t get to take advantage of the depreciation there. So I’m not the first person I’m sure who said this to you, but asset prices are high. And that also triggers some of my fight or flight instinct. Should I be doing this? Should I not be doing this? But one way I’m going to challenge myself going into this fall is I will start marketing to property owners much like I do note owners and looking to acquire a property directly.

 

30:36 

Jason Lee: Yeah. I think that, you know, prices are definitely, you know high, more in some markets more than others, but I think there’s always a good deal to be had if you’re doing the right amount of marketing, find those off-market properties like you will through direct mail marketing that you do. So I’m sure people like you or someone else listening to this show love no trouble, you know, still finding deals that make sense. Cause I’m finding, they’re more rare nowadays, but I’m still finding deals that make sense even in the San Diego market, but 99% of things on the MLS is definitely priced too high for my blood.

 

31:11 

Marco Bario: Jason, I have a question for you. Do you find that sellers are unrealistic about what their property is worth?

 

31:17 

Jason Lee: Oh, all the time. I mean, I think it’s worse the closer it gets to the ocean here. I think property owners who own and very nice areas of San Diego or orange county or LA, I think they’re on their high horse. They think that their property is worth way more than market value. I’ve even showed comps to certain sellers that show that your property is worth X amount of money. And they just have this number in their heads that just came out of thin air. So there’s definitely those sellers that are just crazy with crazy expectations. But then, you know, there’s sellers that have good expectations that, you know, match the market. And there’s also some who are more motivated that will sell for a discount if you can offer good terms. So there’s all types of sellers. You just got to find the right one. You can’t get discouraged. You find one that’s, you know, that’s a little, their expectations are crazy to say the least.

32:09 
Marco Bario: Jason, I want to, actually then could we go back to one thing that you mentioned before is that sometimes it can be hard to structure a seller finance deal because the seller just wants the money. One thing I’m finding, because I do try to acquire property and I sometimes consult with those who want to sell property using seller financing. One advantage today is because there’s been so much appreciation. The potential tax hit is huge unless somebody is going to 1031 exchange their profits into a new property. And one way to circumvent that not a tax attorney or a CPA [32:44 inaudible] is through what the IRS calls a tax installment sale, essentially, that’s what the IRS calls seller financing.

So if you’re going to make a million dollars profit on selling a multi-family property and you wanted to finance that you can split that profit up over many years. And what that means is the IRS says, okay, you’re just going to take this little chunk of the income this year, this little chunk of the income next year, it can effectively reduce your tax basis because it wouldn’t push you into a higher tax bracket depends on your own individual circumstance. And you can avoid, you can either defer and or avoid paying a certain amount of capital gains tax on the sale of the property.

 

33:25 

Jason Lee: Yeah. I mean, I think an installment sale or seller financing is one of the most powerful tax strategies. I think I do explain it in that way when I meet with people and I have structured about four seller financing deals and they’ve all done very well. I’m still in touch with those people they’re older and if it meets their needs and their goals, it’s a great proposition. I think the people who don’t exchange that are older, that want a steady stream of income. And on top of that, if their rents are very low on their assets, I think seller carry or installment sale is an extremely attractive option for any seller. I mean, one story is I sold a 10 unit apartment building in central San Diego and north park. And their rents were about 50% below market and the buyer who I brought to the table, they structured a seller financing deal. And the sellers cashflow ended up being the same after selling the property. And now she has no worries of tenants, maintenance, expenses, you know, anything it’s just a steady stream of income. So I think that’s when seller financing deals are extremely powerful.

 

34:41 

Marco Bario: Yes. I agree.

 

34:42 

Jason Lee: Kind of wrapping up here. It’s been a great show. Thank you for being on, how can someone who’s listening to the show benefit from your company porch swing funding?

 

34:53 

Marco Bario: Do more seller finance deals and sell them. I can, I just mentioned, I consult with people who are considering offering seller financing. There are ways to structure seller financing so that the discount you would receive when you sell the asset could be less or in today’s market, frankly, close to nothing. It’s never nothing by the way in the secondary market, but it can be much closer to nothing. I would love to do that with people. I can be reached through my company’s website, it’s www.porchswingfunding.com through email I’m Marco, M-A-R-C-O@porchswingfunding.com. And I post a lot on Twitter. You can find me there. It’s under, it’s Marco_Bario, @Marco_Bario.

 

35:39 

Jason Lee: Got it. Hey, thank you so much, Marco, for being on the show. And I have one last question for you before you head out here is what is the number one piece of advice you’d give to someone who’s looking to get into real estate?

 

35:51 

Marco Bario: We covered it, do a deal. The first note I bought was, the first note I bought. I just sold it because the yield was very low, but I didn’t care that the yield was low. I’d learned enough to know that, okay, I’m ready to go write a check to somebody to buy a performing note. It was created by one of these people I mentioned who I had invested with before through that self-storage deal. I felt secure that if something went south on that deal, there were no guarantees of course, that that person would step in probably and make it right. But I bought a note and it’s different than buying paper, right. And I just wanted the experience of what are the documents? What does it look like to do this? And it built my confidence a lot. So just take a small step and just do it. Get your hands a little bit dirty and just do it. It makes such a difference.

 

36:37 

Jason Lee: It is great advice. Well, thank you so much for being on the show, Marco. It was a pleasure speaking with you and hope

To talk to you soon. 

 

36:43 

Marco Bario: Thanks, Jason. I loved it. 

 

[Outro] Thank you for joining us on the multifamily millionaire podcast. The show that interviews, multimillionaire real estate investors and top producers in the real estate industry. We’re here to help you create passive income and achieve financial freedom so that you can do what you want whenever you want. We’ll catch you next time on the multifamily millionaire.

 

End of Transcript

 

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