When Paul realized that the perfect time to start investing was never going to come, he jumped in! Now doing about three deals per month, Paul is able to help himself, as well as helping others build wealth with passive cash flow. Tune in to hear how he is able to find and close so many owner financed deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Paul Thompson Real Estate Background:
- Professional landlord and real estate transaction engineer
- Began investing 2 years ago and control 22 units and I’ve been involved in about 30 deals
- Specializes in creating win-win solutions
- Assists frustrated landlords and busy professionals earn higher return so they can build wealth and retire earlier.
- Based in Little Rock, Arkansas
- Say hi to him at www.wincorehomes.com
- Best Ever Book: 7 Strategies of Wealth and Happiness by Jim Rohn
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff. With us today, Paul Thompson. How are you doing, Paul?
Paul Thompson: Great, thanks for having me.
Joe Fairless: Me pleasure, nice to have you on the show. A little bit about Paul… He is a professional landlord and real estate transaction engineer – I haven’t heard that; I like that. He began investing two years ago and control 22 units and has been involved in about 30 deals. He is focused on win/win situations. He’s based in Little Rock, Arkansas. With that being said, Paul, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Paul Thompson: Yeah. My background is that I was an armchair real estate investor for many years, but I’m an engineer by trade, so I kind of over-analyzed things too much. I went into all kinds of investing. I was a realtor for a short time, got a Masters in Business, but then life kind of got in the way – work, kids, that sort of thing, and I ever really did was invest in index funds in my IRA or 401k.
One day I just realized that there’s never gonna be a perfect time to start a side hustle and really focus on building real wealth. Based on that research, I discovered that real estate I feel like is the perfect vehicle to build meaningful wealth… So I read all the books, scoured the internet, listened to every podcast that’s out there, and in the span of about two months I bought nine single-family rentals here in central Arkansas where I live, and now I’m up to about 25 single-family houses, and I’ve been involved in about 30-40 deals – assignments, and notes, and [unintelligible [00:02:42].10]
I’m doing about three deals a month now I guess, and my strategy is just to build wealth with little deals on single-family houses, three and four bedrooms here in central Arkansas.
Joe Fairless: Let’s talk about this… How about when in the span of two months you got nine rentals – how did you pay for those rentals?
Paul Thompson: On those I bought them with private money and then refi-ed them into traditional commercial loans. So it’s the buy, rent, rehab and refi.
Joe Fairless: How did you do that in two months?
Paul Thompson: I just started networking. I went to my local REIA and found people who were either wholesalers or other investors that had properties that were distressed or just had a motivated seller. One of the deals had six houses in one, so that kind of supercharged me a little bit; so it was four deals in nine units altogether, and they were all single-family houses. I had the knowledge, I had done enough of the reading and I had been in business for a while. It wasn’t like I was 21 years old, I was in my late thirties. I’m not gonna wait anymore, I’m gonna do these deals.
Joe Fairless: This certainly is important in your journey, these two months where you went ballistic and gotten these nine rental units… Walk us through each one of them please, these four deals. How much was the first one, how did you get the financing etc.?
Paul Thompson: Sure. So the first one was a rental that I bought for about 30k and then put about 10k into it. I got a private money loan that I found through a contact on Bigger Pockets. She did what they call “bullet loans”. It’s 10% on whatever you borrow from her, and it’s due in a year, and you can pay it back in one month or you can pay it back in 12 months. So it’s just a flat 10% period. No points. I still do deals with her all the time; she’s kind of like the little resident matriarch here in central Arkansas and lends to a lot of people… And those are her terms. She does 10% over prime, so now it’s 11%. It’s just non-negotiable. But for a $30,000 property that’s not that much money, considering I didn’t have $30,000 to lend myself.
So I bought the property, did some rehab that I funded out of my pocket, so I put about 10k into it… So I’m into it for about 40k. I refi-ed it and it rents for $650. I still have it, and it’s a solid little rental.
Joe Fairless: What lender did you use on the refinance?
Paul Thompson: I used a local commercial bank. I had a 5% interest, I had 20-year am, and it has a five-year balloon on it, like the difficult commercial loan does.
Joe Fairless: What are you planning on doing within five years with it?
Paul Thompson: Five years, if interest rates are doing well, I’ll just roll it to the next — because that’s all you really have to do… If we’re not in the middle 2008, we’ll just refi it, basically. It wouldn’t have all that extra fees, and we’d just do it at the current rates then. So if the prevailing winds of interest rates are at 15%, I’ll just roll it. Otherwise, I can sell it. I have enough equity into it. It’s probably worth about 65k now, so I have quite a bit of equity to play with… So I have some exit strategies.
At this point I’ve gained enough experience that I can find private money pretty quickly; it’s typically a little higher than 5%, so I’m not really in a rush to refi that into a 6% or 8% private money loan.
Joe Fairless: Okay. What about the next deal?
Paul Thompson: The next deal was another property I think I bought for 29k, and it rents for $600. The tenant was in place, so that tenant is still there. She’s lived there for 28 years, it’s crazy. She could have bought the house twice over; she could have made the rent payments to a mortgage company instead of to a landlord, but such it is… I think I’ve been in the house once, and I haven’t been back.
Joe Fairless: You bought it for 29k, it rents for $600… Have you done a refinance on it?
Paul Thompson: Yeah, I sure did. I did a refi on that one, and on the other and the next deal, which was a six-unit, I basically did a portfolio loan [unintelligible [00:06:27].29] refi-ed them, so I only pay one mortgage note for eight properties.
Joe Fairless: Okay. Did you have equity in them, so that when you did the refinance you don’t have to be out of pocket?
Paul Thompson: Correct, and I was lucky enough to find a mortgage company that did what they call an in-house assessment for the value, an appraisal… So there’s a lot of value in shopping around your local community banks, and you can get some pretty amazing terms.
Joe Fairless: What bank did you use?
Paul Thompson: This one I think was Central Bank of Arkansas. It’s one of the smallest banks here in Arkansas. It’s one of the second or third smallest banks in the state.
Joe Fairless: Okay. And you said you’re an engineer by trade… What type of engineer?
Paul Thompson: Network engineer. I’ve got a degree in computer engineering, and I do networking for an IP telecom company… So I just like to solve problems.
Joe Fairless: Okay. With your background and your education, I’m sure you’ve thought through the if-then scenarios… Is there a five-year balloon on this portfolio?
Paul Thompson: Yes.
Joe Fairless: Okay. What happens if the lending environment is not favorable in five years and as a result if you get private money it’s gonna be at a high interest rate because of what’s going on… What do you do?
Paul Thompson: I think that’s a really good question, and it’s actually the reason why I’ve stopped doing that very strategy. I did it on those eight properties and I haven’t done it since. Now if I can’t get fixed no call loans, then I don’t do it anymore… Because if there’s ever anything I worry about with investing, it’s the debt on those balloon notes. Those paid properties, they’re all so small that I could probably almost just pay them off if I had to; I could raise the funds, I could borrow against my 401k and put 50k into it, and pay off half the loan just by doing that. So there’s a lot of different strategies you can do if you get desperate. But not everyone gets there; I would rather just use my network of financial friends to lend to me on that.
I could go back and try and find somebody who would be willing to buy the property for me, and then I’d lend it back to myself or I’d pay them the interest rate as if they were the bank. So basically, set up a reverse owner financing deal [unintelligible [00:08:41].29] but that’s the kind of things that you would do if things don’t go well. You plan for the worst and hope for the best.
Joe Fairless: Are they cash-flowing?
Paul Thompson: Yeah. They’re low-income properties, I would say… Or middle class, working class properties, and they cash-flow very well. They tend to be some of the more higher management costs as far as just dealing with the tenants, because [unintelligible [00:09:07].15] but I would say of the eight, probably five of them I have fantastic tenants and I never hear from them. Three of them are fairly high maintenance and they end up not staying in that long and I have to turn them to somebody else, and it’s just part of the maintenance costs are higher.
Joe Fairless: What are some things you’ve learned managing these properties that you didn’t know before?
Paul Thompson: Oh, man… I’ve learned that people in this economic class are fantastic negotiators. They often don’t make a lot of money. I thought I was a shrewd business guy, right? These folks – it’s all they have; they don’t have a lot of money, and they’ve been scramping their entire life, and they are very good negotiators. Even people who are not telling lies, just people who are just looking at it as a business transaction. They will find some angle that I just never thought that was possible… And you just have to learn to be very fair and firm. If you always have the same policies — the number one lesson that I learned about being a landlord is I am never the decision-maker, even if I am the decision-maker. I never make a decision on the spot. “Oh, okay, that’s an interesting question you just asked me. I don’t know the answer to that; let me think about that with my partner and get back to you.” Then I go and have a conversation with my partner, my wife, or me, or just think about it, and like “You know what, I don’t think that works for me. I’m gonna go back and come back with this.” I think you’re much better off to be a slow negotiator than a quick negotiator, because you’ll out-negotiate yourself in the midst of a negotiation.
Joe Fairless: That’s one thing I do as well. I am never the one who has the power to make the decision if I’m speaking to a resident. It’s always “I’ve got to talk to the team and someone more important than me and ask them what their thoughts are.” I’m not the final say.
Paul Thompson: And I’ve noticed that when you start setting yourself up like that instead of being the decision-maker, people ask you less things. When they know you’re the decision-maker, they start to kind of nibble at you and you have to say “Well, I can’t make that kind of a decision. That’s way above my pay grade.”
Joe Fairless: Yeah. Now let’s move on to your other acquisition. We’ve just talked about the nine rentals, now talk us through the other ones please.
Paul Thompson: The subsequent ones have been more of what I consider the more creative financing style where you’re doing [unintelligible [00:11:23].27] owner financing, lease options or buying with private money. Those four levers are what I use now almost exclusively, where I buy subject to [unintelligible [00:11:35].13] and then owner financing. Owner financing is probably my favorite, because that way — I feel like it’s one of the best win/win scenarios around. I pitch myself a lot as I help frustrated landlords earn passive income so that they can enjoy the cashflow without all the hassle of dealing with tenants. I take on that burden and I help them enjoy the passive cashflow that they probably wanted from real estate to begin with.
Joe Fairless: How do you do that?
Paul Thompson: For one, I’m the president of the [unintelligible [00:12:03].11] so I just get a lot of deals and landlords that are frustrated coming to me a lot. So I’m just in front of people who are landlords, and if they’re expressing an interest that they want to sell, then they’ll say “I’ll share this with everybody in the group, but I’m gonna pick my president [unintelligible [00:12:18].19] and share with you that I’m interested in buying on an acquisition mode, and I would be happy to talk to you about that.” And I just ask the question “What would you do if you could tell him right now?” and most of the people would just start asking a few questions; it’s not about the cash anymore, it’s that they don’t want the headache.
I said “Well, what would you be interested in taking for some of these?” and they’ll throw a number like $50,000. I’ll say “Well, I’ve been looking to invest $50,000. Where would you put that to get a high rate of return?” They’ll say “I don’t know, I’ll just stick it in the bank.” I said “Well, what kind of interest rate are you getting on that? Less than 1%? Well, okay, if I can show you how you can get four times that, would you be interested in hearing more about that?” And then that just opens up the conversation to where I found their problem point – they don’t wanna deal with the headaches and the hassle with the tenants, but they’re enjoying the cashflow. They don’t really want a pile of cash, they still wanna maintain that stream of cash, and I just give them the solution to that.
Joe Fairless: Thank you for walking through that, that’s really helpful. How about give an example of an owner financing deal you’ve done, with the numbers?
Paul Thompson: Sure. I’ve bought one property for 64k, it rents for $830… I think I’ve put 12k down, which is a little bit higher than I usually do, but he was willing to take 4% interest; I can’t get 4% interest even at a 30-year fixed, so I was pretty happy with those terms. So I’m paying him $400 until the end, in 15 years. So in 15 years I’ll have a house fully paid for, that’s cash-flowing for me about $250/month, and it’s in a really good neighborhood that has some gentrification going on, so I feel like there’s potential for appreciation. I don’t ever really count on that, but it’s nice. This is a cashflow market, it’s not about appreciation, but it’s just a solid house, and [unintelligible [00:14:01].09] to get that check for me every month.
Joe Fairless: Does he own it free and clear?
Paul Thompson: He did.
Joe Fairless: Okay. So there’s no other mortgage that you need to worry about.
Paul Thompson: Right. You can still do a [unintelligible [00:14:11].22] when there’s an underlying mortgage, but it’s just kind of like [unintelligible [00:14:15].06] and a lot of times I found with those that the moving parts are just so complex that it would have to be a really compelling deal to go through the headache.
Joe Fairless: Right.
Paul Thompson: And there are a lot of houses that are free and clear. There’s landlords that have been in it for a long time, and they’ve had them free and clear for a long time. They’re often times very happy to find out that there’s capital gains advantages, they don’t have to pay the taxes all at once… They can just pay the taxes on it as they get the payments. All they have to do is recapture their depreciation, so I give them enough of a down payment to accommodate for that. I walk them through the numbers and I show them how to do that, and if I can’t, I’ll pull in their CPA, and often times I find their CPA is one of my best advocates, because they’re representing the seller, but I’m asking questions that the seller may not think to, and then their accountant will confirm it.
Joe Fairless: That’s great stuff – very straightforward and play-by-play playbook for how to get owner financing deals from current landlords. I’m grateful and I know a lot of best ever listeners are grateful for that.
Let’s see, with your portfolio now – that’s your focus… Now we’re gonna go back to what you said earlier – three and four-bedroom houses. So that’s what you’re looking for now, the kind of owner financing deals?
Paul Thompson: Yeah, some sort of creative strategy where I put as little money into it as I can get away with, and then that they are solid, cash-flowing properties that I’m getting some sort of terms on, or I can get at a low enough of a cash discount where I can use private money and just fund the deal. That’s kind of my other angle – create a deal structuring, then using private money; I probably do private money on probably half of my deals now. There’s more money out there than there are deals, you just have to build that trust component with people, so that they trust that you’re gonna continue to pay them the returns that you’ve promised.
Joe Fairless: What’s something we should watch out for if we’re gonna follow this approach?
Paul Thompson: For using the private money?
Joe Fairless: Either that, or the owner financing thing.
Paul Thompson: Anytime you’re doing creative deals at all, you have to learn and know the rules. It’s really easy for — you hear about the books that you read, the podcasts that you have, and somebody just gives you a flashy demonstration, and it sounds good and in principle it is good, but knowing the mechanics of that is really, really helpful. So knowing that a seller has to capture depreciation is not something you wanna find out after the fact, when they are doing their taxes the next year and they find out they have to pay taxes because of the deal you structured.
Joe Fairless: Who’s on your team that helps you make sure that the deals are structured properly?
Paul Thompson: I would say it’s just me. I have a pretty simple process, but what I’ve done is I’ve done the homework on the front-end. I’m not doing something that I don’t fundamentally understand first. Some of the best ever advice you can give – and you hear it a lot – is to find a mentor. And whether it’s somebody you just find locally or someone you pay to be a real estate guru – whichever, you pick your preference there, but it’s really helpful to have somebody that you can trust and talk to about the deals.
I kind of have a local mastermind group that we work and talk our deals through. They don’t formally review our deals, but we’re talking strategies all the time and I’ve actually considered going into the Airbnb and I’ve been trying to figure out how you’re supposed to structure those from a tax point of view, and right now there isn’t a clear answer that I can tell. You just have to kind of do it and hope that the IRS comes down on your side [unintelligible [00:17:48].07]
Joe Fairless: Based on your experience as a real estate investor – I know you’ve just mentioned the mentor thing – what is your additional best real estate investing advice ever?
Paul Thompson: Why are most people investor in the first place, and why do people consider real estate? That’s because they want more out of life, and they don’t wanna be chained to a cubicle, they want a more fulfilled life. [unintelligible [00:18:10].19] So real estate isn’t really about the physical house or the [unintelligible [00:18:15].11] it’s just a really useful asset class that allows us to design the life of our dreams.
I sat on the sidelines for 15 years, telling myself that I was a risk-averse person. This was just a code for “I’m afraid of failing.” Then I just suddenly realized that if I’m going to make this happen, I kind of discovered that I have to make a living at the service of others and not at the expense of others, and that kind of concept really changed my life. So now when I meet other people, I’m not thinking how they can help me, I’m thinking how I can serve them. So the best ever advice ever is thinking through the eyes of the person you’re talking to; this applies to buying houses, raising money, selling houses, or even if you’re just referring your photographer freelancer to a good client.
The lesson is deals happen because the other side needs something, and if I can engineer a way for the other side to win and I also get something that I need, then it’s a true win/win scenario. Sometimes there’s nothing more than just referring a friend, other times it’s showing someone they can earn a higher or more consistent rate of return, while avoiding the volatility of the stock market. So the best ever advice is to find out the pain point of the other person and solve it.
Joe Fairless: I love that. Are you ready for the Best Ever Lightning Round?
Paul Thompson: Let’s do it!
Joe Fairless: Okay, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Paul Thompson: Seven Strategies Of Wealth And Happiness, by Jim Rohn.
Joe Fairless: Best ever deal you’ve done?
Paul Thompson: The first one, because I did it.
Joe Fairless: What’s a mistake you’ve made on a transaction, that you haven’t mentioned?
Paul Thompson: I didn’t get the insurance in place; I didn’t have the details of the deal that failed, and it’s because I didn’t have a checklist, so now I have a checklist for everything so that I don’t have to remember what to do next.
Joe Fairless: Best ever way you like to give back?
Paul Thompson: I like to pay that mentorship that I received forward. I offer the same deal to anyone that was given to me by my first mentor, and I give away tons of free advice, and I will do a free strategy session for anyone who’s trying to get started.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Paul Thompson: I have a website where I send people – it’s wincorehomes.com; I think you have that in the show notes.
Joe Fairless: I do have that in the show notes. Thank you so much for being on the show and talking about your deals. Boy, once the light turned on with you, holy cow – you went all in! I’m glad that you walked us through step-by-step how you did that, as well as the potential risk with the five-year balloon and how you’re looking to mitigate that risk as much as possible in the meantime.
Additionally, the owner financing deals from current landlords – how to get owner financing deals from current landlords and the dialogue that you have with them. For any Best Ever listener who’s looking to do what you’re doing in their market, you just gave them the flow of the conversation; I hate scripts, but the flow and the general parameter or structure of the conversation – you walked us through it, as well as bringing in their CPA and then how you structure the actual deal.
Thanks for being on the show. Great stuff, great job getting going so quickly out of the gate once you decided. I hope you have a best ever day, and we’ll talk to you soon.
Paul Thompson: Thanks so much!