Cash Flows vs Chunks

Mike: Welcome to Real Estate Investing Secrets. We are all looking for freedom and the opportunity to live better, more fulfilling lives, but most of us were trained our entire lives to work for someone else and chase their dreams. How can we use real estate investing as a vehicle to achieve financial freedom? My life is dedicated to answering your real estate investing questions and helping you build an investing business that allows you to change your life and the world around you and to enable you to turn your dreams of financial freedom into a reality. My name is Mike Hambright from flipnerd.com and your questions get answered here on the Real Estate Investing Secrets Show.
What’s up, freedom fighters. Hey, welcome back to the show. Mike Hambright from flipnerd.com here. This is episode number 461, and we’ve got my buddy Ben Fredericks’ here with us today. He’s going to talk to us about some pretty awesome stuff. He’s had a good level of success over the past several years and he’s moving more and more into owner financing. And we’re going to talk about that, why it’s good for investors and why it’s good for people because he has as a mission to help 10,000 families get homeownership that couldn’t otherwise and there’s a lot of benefits for investors to do more owner financing as well.
And I started to see a lot of things pop up about owner financing and rentals and other cash flowing assets and that people are kind of saying there’s been all this hype over the last several years about wholesaling and how great wholesaling is and I think there’s a place for it, no doubt, and I’ve wholesaled hundreds of properties. But when you start to look back now and you’re like, “Wow, what if I had kept those as rentals?” or . . . It doesn’t mean that you could have at the time but if you start to think more about doing something today that pays you for years to come, then that’s how you really build wealth. That’s the sexy side of the business when there’s money coming in while you sleep. So Ben, how are you doing today, buddy?
Ben: I’m doing great. Thanks for having me, Mike. I’m excited.
Mike: Yeah, glad to have you on. Another little small side note here is Ben is actually from the same general kind of hometown area as me in Western . . . I’m from the Western Illinois side right on the Mississippi River, the area called the Quad Cities and Ben’s from the Iowa side of the Quad Cities, and so don’t meet very many . . . There’s a couple of real estate investors that I know from that area, so always exciting to meet somebody back from the hometown.
Ben: Yeah. And strangely enough, I meet people from the Quad Cities all the time. It’s really weird.
Mike: Yeah, yeah. Well, you’ll meet Ben . . . Ben’s a new member of our Investor Fuel Mastermind, and here in the next, I guess about 10 days or so, we have our next meeting you’re going to meet Blake McCreight who’s also from the Quad Cities as well who’s a member. He lives in the Chicago market, but awesome. Well, hey, glad to have you on. And for those that don’t know you yet or don’t know a lot about you, maybe tell us a little bit about your background.
Ben: Sure. I wasn’t always a real estate investor. I actually started my career as a mortgage broker, so kind of learned the finance side of that. I went to work for a small company called Lehman Brothers that you’ve probably heard of and did some work with for them in the glory days when it was all fun and games. But that quickly came to an end and I was in a position where I was buying property. I was doing the right things with my money, investing my money into property. I wasn’t out buying sports cars or $20,000 watches like a lot of my colleagues were.
And my wife and I were just taking our money saying, “All right, let’s take 20%, we’ll put it into a property, 20% put it into a property.” Just sort of inching our way up into what we thought would be like real estate world domination, and then the bottom falls out. And the House of Cards just really begins to start tumbling down. I lost my job at Lehman Brothers. My wife was working for Chase Manhattan Bank and then our tenants started losing their job, and then we were like, “Okay, we’re in trouble.”
So basically, fast-forward . . . and this is all, by the way, right when we got married. So imagine you’re like, “All right, let me put my relationship to the ultimate test here and you’re going through all of this.”
So after that happened, I just wanted to try and find work where I didn’t have to worry about the company being a problem at some point in the future. So I went to work in financial services for New York Life and spent about six years with them, another two with Allstate, and then my little girl came along and my wife repurposed her career, she went back to school to become a chiropractor and I said, “Once you’re done with that, I’m out of this. I’m getting back into real estate. So it’s time.”
So a friend of mine from actually from the Quad Cities, we started buying some deals in Davenport and we bought, again, just inching our way, bought one deal, saved some money, bought another deal, save, refinanced, bought another deal. And then I realized I’m like, “Man, I’m just not making a lot of progress. We’re buying . . . ” We bought five deals in like three years. I was like, “I’m never going to get financially free going at this pace. It’s just not going to happen.”
Mike: Right.
Ben: So I really just started learning and consuming everything I could about real estate, wholesaling, I go and take courses, seminars, reading books and watching YouTube videos, podcasts, whatever I could get my eyes and ears on. And I started putting out . . . This always comes off kind of hokey. I don’t know how many of your listeners actually believe in the law of attraction, but I’m a big believer in it. So I started putting out into the universe what I wanted to do in this business. And I got a phone call, one day I was waiting to get my hair cut, and it’s from my partner and he says, “My name is Odell Barnes. This might be the greatest call you ever got.” And I really had to laugh. I was like, “Yeah, okay. How did you find my number?” He was like, “I got . . . ”
Mike: Was it in a Morgan Freeman voice?
Ben: Well, he’s from South Carolina, so he’s got like this whole country boy’s southern charm going and I just I laughed and I was like, “How did you get my number?” And he says, “Well, I found you off of Craigslist.” and said, “You fund deals.” So at that time, I was trying to syndicate because I knew people that had money and they were looking for other ways to diversify and it didn’t . . . the deals seems looking to get done or just very complex and I couldn’t quite put it together, but he’s like, “Well, I’m in Daytona Beach.” I was like, “Oh, I live right down the road from there, so let’s get together and I’ll buy you a drink.” So I just went to meet him and that meeting changed my life, like, literally, it opened my eyes to what was possible in real estate.
Mike: We started off . . . before I hit the record button today, you were talking about, you just went to Grant Cardone’s 10X event and you were just kind of talking about thinking bigger and how a lot of people think small. And I honestly have said that to my wife over the past year or so many times, like, people were doing some things and it feels like we’re making some moves that on the outside where people think that we’re like something big, but I say to my wife, I’m like, “I feel like I’m thinking too small. What can we do that I think . . . What do we need to do to do something bigger?”
And I don’t know . . . sometimes I don’t know what that is, but it’s just this burn in your stomach of like, “Yeah, this seems like a bold move, but this is like . . . ” Like when you compare yourself to like Grant Cardone or somebody else and you’re like, “I’m just like, a little peanut over here. Should I be thinking bigger?”
Talk a little bit about your thoughts on how . . . because I think back to your initial part of your story of saying you had a job, a good job for a while until you lost it, and you were doing some stuff in real estate, but ultimately when you look back I know you think that was just peanuts. That’s not moving the needle fast enough. And I tend to agree with you that there’s a lot of people that are kind of dabbling here and there, they have some interest, but they’re thinking small. And just maybe share your thoughts on kind of the power of, I guess, thinking bigger.
Ben: It changes everything. I mean, it really does because if you find yourself like, “All right. I’m inching along. I’m doing well.” that’s usually . . . the only thing that’s forcing that to happen is usually it’s out of fear, like, you’re scared, and I’ve been there. I know. I’ve been in the same exact position. You go through financial failure, you do not want it to happen again. So when that happens you go into conservation mode which is the exact wrong mode.
You look at guys like Grant Cardone, he’s constantly saying, “I stay broke. I don’t stay poor, but I stay broke. I’m constantly pushing myself.” So I just had like an epiphany that said, “All right, if I’m scared, that means I got to do it, so that means I’m moving the needle in the right direction, like, I got to just lean into it hard and good things will come from and I just got to put myself into a position where I cannot fail. There’s no other choice but to succeed here.” So that was a game changer for me, just saying, it’s a decision.
Mike: Yeah. Have you ever seen the History Channel of kind of mini-series on the “Men Who Built America”?
Ben: Yes.
Mike: I love it. So I have the DVD. Honestly, I probably watch it four or five times a year. It’s only a couple years old, but I’ve seen it over and over again. And I’m not saying . . . it’s basically about Vanderbilt and all the big guys kind of industrial era barons. And there’s good parts of them and some of them were . . . sometimes they come off as being evil, sometimes they come off as . . . There weren’t a lot of rules back then, right? So there were no laws.
But the interesting thing about it is, and some of this is the story that’s told in the way it’s told it too, but there’s this line in there that energizes me every time I think of it or I hear it and it basically says that these guys were continuously willing to bet it all. Like, they had everything in the world and they would just go all in on something new because they had this vision for it and they weren’t afraid to risk it all. And I don’t want people to get carried away and . . . But I think what you said is very powerful. If you try to stay safe, it’s hard to move the needle in your life.
Ben: Yeah. Yeah, there’s a lot . . .
Mike: Because safety is really of a perception, right? It’s like, you felt safe in your job before you didn’t have it. And my story too is I worked for a large corporation and I was like the golden child there at this relatively large retail company until I lost my job. I went from like being the golden boy to like, out and nobody wants to talk to me anymore.
Ben: Yeah. Yeah. Yeah. So critical. I mean, if you can just . . . if you can be brave enough to take the leap, I mean, it can be a game changer for people. You don’t have to go nuts with it, but at least put yourself in a position where you feel uncomfortable and then great things can come from it.
Mike: Yeah, awesome. Well, let’s kind of dive in to talking about the owner finance model. So I know you wholesale, you do a number of things in real estate, but we kind of started off talking about the owner finance model and the benefits of how it helps you as an investor and how it helps people get homes that can’t otherwise. So let’s kind of maybe talk a little bit about why owner financing works for you as an investor and why it makes sense.
Ben: Yeah. Like I said before, we own some rentals and there’s a lot of work that goes into owning rentals. I mean, even if you have a management company, management companies, they’re not around long time unless you’re really, really lucky and you’ve got to watch them closely so there’s effort that comes from that.
And I think I hadn’t learned about owner financing until I met my partner. I didn’t really know much about it. So the idea that was fascinating, and I understood it from the perspective of me as an investor I could approach somebody and see if they would owner finance a deal for me like if I wanted to look at multifamily or whatever, but I didn’t really understand the model for me becoming the bank. So what we had started out doing was just wholesaling—buying deals, selling them, maybe taking three deals and keeping one and creating a note on that—and then you’re just continuing, continuing, continuing until we built up passive income.
So, the idea of it is that there’s not a whole lot of work that goes into it. The buyer pays the taxes, they pay the insurance, they make the repairs, they pay the maintenance, they mow the lawn, they do everything, and then all I’m paying is the servicing fee every month to collect that payment. So I don’t get the same tax considerations that I do owning rental properties. I don’t get tax depreciation and stuff like that, but I’m willing to trade that for the effort that comes along with it. So that’s why I really kind of bought into that model saying, “Okay. The biggest businesses in the world are banks. Why can’t I be one?”
Mike: Yeah. Yeah. Exactly. And so for those that maybe owner financing, they don’t really know what that is, maybe just talk at a high level about what that even means.
Ben: Yeah. So essentially, if I buy a house, let’s say I buy a house for $10,000, I can turn around and create a note on that property for $40,000. Now I’ll collect a down payment and then I’ll get a monthly payment. Now I’ve got a tangible asset that I can actually sell. I hold the paper to that property. So the person that’s living there, they’re just like most people, most Americans. They’re buying something that is going to be theirs but in the meantime I’m holding that debt and they’re paying me just like they would a bank on mortgage.
Mike: Yep. And the reason that the model works for us as investors, I have some owner finance deals myself as well and I coincidentally look back and say, “I should have done many more over the years I had the opportunity to.” Is that . . . We’re able to borrow at a certain rate and the types of people that were selling to either have no established credit or they have bad credit and they’re willing to effectively pay more, a higher interest rate so you’re able to make a spread on that.
And for anybody that hears that and says, “Oh, you’re taking advantage of somebody,” it’s like, well, the truth is, and I don’t know about your deals, but usually, the way the model works is you’re allowing somebody to own something that is not too much different than what they would pay what they were renting it, but they have a chance to earn equity and get some appreciation, all those things over time.
Ben: That’s exactly right, yeah. Our model is basically we will look at what the market rents are and we always want to be less than the market rents. So they’ll be less after they pay taxes, after they pay insurance. They’re always going to be less than what the rents are in that neighborhood. And that creates great thing for us because where are they going to go that would be better than this? They own it. Go back to throwing rent away to a landlord? It just doesn’t make a whole lot of sense. And that’s been good.
Also, we want to give them equity right from the start, so we don’t . . . Let’s say the house is actually worth 75,000, we’re going to give it to them maybe at 40,000 to 50,000 so that they’ve got to build equity, there’s incentive there and . . . And we do that for two reasons. One, it’s great for the buyer. It’s fantastic for them. It puts them in a position to win. Second, it gives us an opportunity to allow them to help educate them on how they could possibly refinance in a year and pay us out 100% of the balance as opposed to selling off a discounted note if we wanted to recapitalize down the road.
Mike: Sure, sure. Yeah, that’s awesome. That’s awesome. And I’ve also found the way it works as a real estate investor too is . . . Yeah, and everybody’s model is different. I don’t know . . . There’s people like Mitch Stephen if you know him that basically sell the houses as is. That’s how I sell mine now. Early on, I kind of rehabbed them. And so is that . . . Look, as a real estate investor, I found that when I go to rehab a house, it’s not uncommon that 60 plus percent of the rehab is labor because I’m not doing the work myself, I’m going to pay somebody else to do it.
But when you’re selling to somebody that is going to live in the home and it’s an entry level home, working class person that they’re willing to work for that sweat equity sometimes. So if the house needs some work, it needs to be painted, it needs some fixing up, it’s usually livable but not . . . it needs to be updated because they’re willing to take on that burden in exchange for sweat equity effectively, right?
Ben: Exactly, right. Yeah.
Mike: Yeah.
Ben: That’s one of the . . . Mitch Stephen is brilliant. I mean, that’s a guy I literally just met him in person at [Know 00:16:43] conference a couple months ago, but I read his books and dig his podcast and I learned so much from him on owner financing that has been tremendously helpful.
Mike: Yeah, Mitch has been on the show I think three to four times actually over the years. So, cool. Well, let’s talk about a little bit more about why it’s good for homeowners. Like, who would you say are the typical buyers? I mean, I talked a little bit. They either have tarnished credit or no established credit, right? But let’s be honest. Basically, the traditional lending industry is not willing to bet on that person anymore. It could be because of the size of the loan. It could be because they have tarnished credit. But talk about who that customer is and why they need you and why it’s a good fit.
Ben: Yeah. Usually, they fit a certain profile. They could be self-employed, they can’t prove a lot of income. They can show money coming in, but they don’t show it on a tax return. They have screwed up in the past, but the last couple of years they’ve been good, like, they’ve reestablished, they’ve paid good rental history, they’ve got a good job, they’ve been on their job for a decent amount of time. So they’re just people that maybe caught a bad break. Somebody in their family got sick or they got sick. We get that . . . Or they got divorced and they got cleaned out and they’re like, “Look man, my last spouse, they got the house I lived in, it was my dream place and now I’m starting from scratch again and . . . ”
So I just . . . Those are the typical people that . . . or they’re tired of throwing money away on rent. They’re like, “Seriously, I’ve seen this place across the street for like, the last three years. The banks would never sell it or I couldn’t get financing and you guys are going to sell it to me and I’m paying rent here twice as much as what I could to own that place right across the street.” So those are our typical buyers. I mean, they usually fit very certain mold.
Mike: And lenders don’t really like low-dollar house. I mean, they make . . . All the money they make is based on the size of the loan the bigger, the loan the better. Some of the houses you’re talking about $40,000, $50,000, $60,000. Usually if it’s under 50, it’s going to be a hard time to find a lender to even do it, right?
Ben: That’s right.
Mike: But those low-dollar ones plus they just get really hampered with a lot of fees even if they are willing to do it because the banks say, “Hey, this might be a small loan. The only way I can make money out of this is to fee you to death.” Right?
Ben: That’s exactly right. Yeah. In a low interest rate environment it’s just not worth it to the bank. Too much risk. [inaudible 00:19:12].
Mike: Right, right. So for folks that are listening right now that are real estate investors and they’re like, “Hey, I’ve done . . . I’m a wholesaler, I’m a rehabber, have some buy and hold stuff.” Talk a little about how if they want to do more owner finance, how do they kind of learn how to get started or kind of learn to move in that direction a little bit?
Ben: Yeah. I think the same way that I learned from it. Find somebody in the business that’s doing it and just model it. Modeling is like the fastest way to success no matter what you’re doing. If you can find somebody that’s doing it and playing at a good level.
Mike: Yep.
Ben: Deconstruct what they’re doing and then just go rebuild it. I mean, you and I were talking about ClickFunnels before we started. Russell Brunson, one of his biggest thing is funnel hacking, right? Basically, modeling somebody else’s funnel. He’s big Tony Robbins guy, so that’s where I’m . . . This isn’t something I just came up with. This is something I’ve heard for years. Modeling is the fastest way to success. So find somebody that’s doing it, learn from them as much as you can, and then the biggest thing is just go out and start doing. Take the action to get it done.
Mike: Yep. Yeah, that’s so true. And we talked about Mitch Stephen a little bit, but I’ll add a couple . . . I’ll add some links in the show notes here for some of his past shows. But yeah, I do that in everything I . . . I used to go try to learn on my own and I’m going to watch videos and find those things, and that’s always a good way to get started, but like you said now . . . It depends on where you are in your life right, but now I’m much more willing, like, speed of implementation is critical for me so I never really look at this point where I’m at in my life and my career. I don’t have years to learn anything.
So for example, I did a couple multifamily deals late last year with my buddy, Corey Peterson. Also, he’s in Investor Fuel. If you don’t know Corey, you’re going to meet him here in the next meeting. And it’s like, look, I don’t want to go figure this stuff out. That’s his model, so I just partnered with him on the deals and truthfully, I did very little because he took care of everything and he knew how to do it and I don’t want to learn that. I don’t have the time to learn that.
And ultimately, could I make more money if I go find my own deals and do all the work? Yeah, but the truth is, is I’m never going to get there if I have to go figure that all out on my own. And so depending on where you are in your life, once you find the person that has that model already figured out, you should be willing to pay for it because the opportunity cost of you trying to figure it out for years on your own and all the trials and tribulations and failures. You learn from failure, but it’s just as easy to learn from somebody else’s failures faster, cheaper, ultimately.
Ben: Yeah, absolutely. You’re buying failure at a huge discount when you write it back [inaudible 00:21:46].
Mike: Yep. Yep, yep.
Ben: Yeah, I agree. I think that’s like the best thing that you could do if you don’t want to . . . if you’re busy doing something else because we have a lot of private money people partners that they’re completely busy in other things in their lives. They’ve got their own careers. They don’t have the time to reinvent the wheel here. They see the model, they’re like, “Oh, okay, this works. All right. You just do what you do and pay me a return.” And that’s great. But if you’re trying to get your foot into that door, if you can do both, that’s really good. So if you can commit time and money to get access to people that are playing at a level that you want to be in, it’s a game changer.
Mike: That’s awesome. That’s awesome. Guys, if you’re listening right now, if you have some questions, what I want you to do is if you’re not already a member of our FlipNerd Real Estate Investing Facebook group, go over to . . . you can get there by going to flipnerd.com/facebook and we’ll redirect you there. If you’re not already a member, just request access and we’ll let you in.
But we’re going to add the video, you’ll find it there in the Facebook group. And if you have questions about this, you want to interact with Ben, you have any questions that I can help you with, just go ahead and ask your questions in there and we’ll do our best to get answers for you. So, again, you can get there by going to flipnerd.com/facebook.
If you haven’t already yet, subscribe to us on iTunes, Stitcher Radio, Google Play, YouTube, all the other places where you might find this content at. Please subscribe and give us some feedback and maybe share it to your network. We’d appreciate you sharing the love here. This is episode number 461, and we’re going to keep and coming at you if you keep showing us some love. So Ben, thanks for spending some time with us today.
Ben: It’s been awesome, man. It’s my pleasure.
Mike: Yeah. Hey, if folks want to learn more about you, or I know you wholesale deals in lots of markets too, if they want to find out more about some opportunities to maybe work with you, where should they go?
Ben: So you can find us all over social media. It’s just Odell Barnes REO, which is O-D-E-L-L B-A-R-N-E-S R-E-O. That’s Instagram, Facebook, YouTube, Twitter and that’s also our website, odellbarnesreo.com.
Mike: Awesome. We’re going to add some links down below in the show notes here for folks to find you there too if they’re driving and can’t write it down right now. Excited to see . . .
Ben: Awesome. Follow me . . .
Mike: Go ahead.
Ben: Follow my Instagram. I need some more followers.
Mike: Yeah, I’m trying to build up an Instagram too. That’s what the cool kids are doing.
Ben: I guess. Yeah, that’s what they say.
Mike: I’m probably about four years behind on that, but awesome. Well, Ben, thanks again for spending time with us today. This is great stuff. I think a lot of people, hopefully, will learn more. I mean, maybe you could talk real briefly again, just real fast about the power of not just that model, but I know that from everything that you just said, and I know on the same thing, at the same place right now is, “I appreciate cash flow creating revenue streams like that that are going to pay me for a long period of time versus big chunks of money from wholesaling and rehabbing and I might get more than I did in the past.” It’s probably a business maturity and an age thing where you start to appreciate that, but maybe just share some wisdom for people that are like, they’re not quite there yet, the power of that kind of more passive cash flow.
Ben: Yeah. I’ll tell you, man, I just turned 40 last year and I didn’t really grasp the power of cash flow. Like, I was flipping some deals and you’re like, “Oh, okay. It’s nice to get a $10,000 check and that’s exciting.” But after that ends, it’s like, now what? So the polish wears off a little bit. So it never wears off with cash flow. Those checks keep coming. And while it’s definitely a little bit more long term, I don’t look at real estate as get rich quick, I look at it as get rich for sure. And that’s what cash flow can do. I mean . . .
Mike: I like it.
Ben: Yeah. It’s just awesome.
Mike: Awesome. Awesome. Thanks again for sharing your wisdom with us today.
Ben: My pleasure, Mike. Good talking to you and I’ll see you.
Mike: Awesome. Everybody, hey, this is episode number 461. We appreciate you joining us today. Again, join the Facebook group over at flipnerd.com/facebook and ask some questions on this video and we’ll do our best to get some answers for you. Until the next episode, stay strong, stay cool, and keep on fighting for freedom. See you next time.
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