Aaron and Bruce Norris are joined this week by Rick Solis. Rick is a retired appraiser, investor, teacher, and property manager. Primarily he is an investor now. He retired only two years ago when he was 48.
Rick mentioned a couple things not everybody does or takes advantage of much. He did a lot of investing in the retirement accounts he had. Bruce wondered what retirement accounts he had and if it was beneficial to do it the way he did it. Rick said he had a self-directed IRA. He found out about these in his late 20s. He has always saved. He read a book in the 90s called Wealth Without Risk. There was a little piece in that book that said you can pull your money out any time without paying a penalty. You always have to pay a penalty if you pull money out of your IRA before you are 59.
There is a thing called Substantially Equal Periodic Payments. What this says is with your IRA, you can pull out money any time. The IRS has a table, and if you are 40 years old and their table says you have about 50 years left, you can divide your IRA by about 2% and pull this out. However, once you start this, you cannot stop until you are 59. If you start at 40, you have to pull out that 2%, which increases. This means next year will be a 49-year lifespan, so you divide your balance by 49. You keep going; and as the balance of your IRA increases and your age decreases, that percentage gets a little bigger each time.
When he reaches 25, he is thinking all he needs in there is $1 million, pull out 2%, and have $20 grand. At $1,500 a month, he could live like a king. This was his goal, and he asked himself why he would invest anywhere else but his IRA. He would need to give away at least 1/3 when he sells, and this is with a long-term investment. If it is short-term, you might be giving 40% away in taxes. With his IRA, he would not have to spend the profits and get a tax write off. If he put $10 grand into his IRA, he is getting a 40% write-off between the Federal and state, almost $4 grand back in tax write-offs. He decided to take this path.
Initially, he started investing in stocks. Four-five years later, he hadn’t made a penny on the stocks. He was buying, selling, doing mutual funds on the stocks. None of this worked, and this is when he first learned about self-directed IRAs. He moved his money into an equity trust company to open up a self-directed IRA there. This was back in the late 90s when he started buying notes, like second mortgages. At the time, he bumped into an investor who bought non-performing seconds at $.10-$.20 on the dollar from the finance companies. Those companies would lend people almost 100-125% of the value of their house, but they wouldn’t do anything if the people did not make payments. They wouldn’t even foreclose. They are making a 125% LTV loan in 1995, and in 1997 the people stopped paying.
In 1998, his friend walked in, noticed his $40,000 mortgage and told him he would give him $8 grand for it. He got the loan in 1999 and began foreclosing. Between 1995 when the house was worth $150 and 1999 when it was around $225, they got equity. He was running out of these $8,000 chunks to buy more loans, so he would borrow money from Rick and pay 1% a week. He told Rick he would pay him back $10 grand if he loaned him $8 grand in two months. Eventually, this guy told Rick what he was doing since he was almost like a loan shark to this guy. He was borrowing $8 grand from Rick, then he was foreclosing. Four months later, he was getting a check for $50 but could never borrow the $8 grand.
He was doing tons of these, and Rick eventually told him to sell off some of them. One idea was to buy two for $8 grand instead of just one. He would then sell Rick one for $12 grand and put up $4 grand to put up the second one. Afterwards, he showed Rick how to do it. When he started foreclosing on them and getting them back, he would turn around and sell them through his IRA. About 3-4 in, he started foreclosing on the guy, and he brought Rick current. Rick was bummed out since he did not want that loan. If he paid $15 grand on a $50,000 loan, with $3 grand in back payments and $1,000 foreclosure fees, he wrote Rick a check for $4 grand. Now, he is sending Rick a $300 payment each month. Rick wondered what he was going to do with it.
When Rick looked at the $300, he saw the yield was not too bad and he was collecting $3,600 a year. $300 was about what he made doing an appraisal when he was all done with his overhead. He was doing 40 appraisals a month at this point, now he only had to do 39. Once he got the $300 check, it was down to 38. His goal in the late 90s was to get enough of these that he would not have to do any more appraisals. By the time 2001 and 2002 came around, they started refinancing. Now, he is getting full payoffs on these things and did not have to do any work.
He was getting $4-$5 grand a year in interest and thought it was genius. His IRA balance was doubling every twelve months. When he did this for 6-7 years, it was during the sweet spot from 1998-2006. The only reason he started flipping houses and buying and selling was so he could get more money to buy more loans. He never wanted to be in the house-flipping business; he wanted the loans. When you buy a loan, you cannot take that loan to a bank and borrow $10 or $20 grand on the loan. Nobody seems to grasp the concept of it being illegal. Rick had to borrow money from credit lines and flip houses to buy the loans. Eventually, the availability of loans dried up. The 2006-2008 market wiped all that away.
After this, Rick went back to houses. Unfortunately, by the end of the housing thing he hated houses. He hated the tenants, the realtors, the fixing and flipping, multiple offers, cancelled escrows, everything. As he sold his houses, he decided to go back to loans. Once he started looking for loans, he saw how much it was a whole different field. Now, there are loans that were made in 2007, a household for $500 grand, and they had a $400,000 first and $100,000 second. Sometimes they wouldn’t even make payments on this for five years.
A lot of these would have a $400,000 second, maybe $200 grand in back payments. They got them modified, and the lender waived all these back payments and had it modified in 2014. By then, the house was worth way less than what they owed. The lender would lower the balance of that first down to $300 grand and lowered the rate to 2%. Now this guy’s PITI payments were $1 grand a month. Meanwhile, there was this pile of seconds and people buying these things up for pennies on the dollar. A $100,000 loan could be bought for $1 grand. They would put it in a drawer and just sit on it. As soon as the first was modified, back in 2014-2015, prices were suddenly going up and the first is $300 grand. Maybe the house is worth $500 grand.
These companies went and modified these seconds and got these people paying. Now, maybe this $100 grand loan has gotten its back interest waived and he is paying $900 a month on a $100,000 loan. With a $300,000 first and a house worth $6-$700 grand, these guys who bought the loans do not want to sit on them forever. They would sell the loan, which you can usually get for $.60-$.75 on the dollar. Rick said with all this money in his IRA, if he sees a $100,000 loan for sale that he can pick up for $60 and pay $600 a month, he was able to take all the profits from his houses and start buying the loans. It was all in his IRA. He bought the loan from the place he likes to buy them from, www.FCIExchange.com, which lists loans for free. You can go on there, and there are thousands of loans for sale. You have to dig through 1,000 to find the one good one, but there is a good one in there. Once you buy that loan, it puts you in contact with the guy who has 1,000 more of those loans.
Rick would then go in, buy a loan from that, then put it with a servicing company that collected the check and charged $15-$20. They would collect the check from the borrower and send the money to his retirement account. Now, he has an asset that takes none of his effort. He gets a check each month that goes right to his retirement account each month, tax-free, until he pulls the money out of his IRA. This was most of his investment, and he started pulling money out of his IRA in 2008 after almost all his investments were wiped out. He started doing the early withdrawal thing, and he has been doing this for 8-9 years. Now, his IRA has gotten to the point where he can almost live off it since it covers about 70% of his overhead. The main thing he does now is manage his IRA. He buys the loans and invests in bonds and stocks. However, he mostly invests in loans.
Rick said after 2006 there were not any of these loans. He did not get hurt by the loans he had since it seemed like he did not have them. However, Rick said even though there were not the types of loans, there were other types of loans. This was what wiped him out. A guy would have a $250,000 house in Hesperia and a $175 first. He would get a $30,000 second and pay 12% interest. A hard money lender would then be selling the second. Well, Rick bought those seconds, and these were really good for 2005 and 2006. However, by 2007 they were worthless.
Even with houses that were worth $250 with a $120 first and a $30,000 second (60% LTV), those houses dropped down $100 grand so fast. Rick did a ton of these and aggressively kept investing the whole time. He was thinking prices would only drop 20-30%. A lot of the areas in which was investing in dropped way more than that, some over 50%.
Bruce asked Rick if he is concerned about the timing of the next down cycle as far as the severity of it and when he is investing. Pricewise, we have been going the other way for about nine years. Rick said he is concerned because he absolutely knows for sure that the recession is coming, he just does not know when. He does not know if it is a month, a year, or five years. However, with the loans he is buying now, the one he just did had a first of $120 and a second that was $44. It is a 6% second, and he bought the second for $34.
Houses in Compton were worth $450. If that Compton house drops more than 50%, then he is in trouble. This would be the first time Compton has dropped more than 50% in the history of Compton. He does not think this could happen again, but maybe it could. It would have to be worse than 2008, and if it happens it happens. However, he thinks the first $120-$130 house was worth $450 while his loan was worth $44, so she is under $175. Her house would have to drop from $450 to below $175 for Rick to get hurt.
Bruce asked who the owner was that was at 6% and if it was a standard lender. Rick said they were all bank loans, so Bruce wondered why they got rid of the loan. Rick said he suspected the owner stopped making payments on the second for a couple years, and someone sold the loan off for $.50 on the dollar. They bought it and started foreclosing on the owner, and she brought it current. This was an original loan made in 2006, and it had not been modified. This is rare, and Rick has not bought a lot like this. Most of the ones he has bought had been modified.
The owner had been there for twelve years, and there had not been any additional loans since 2006. She had not been in foreclosure on the first since 2006, and she took great care of her house. This is what Rick liked to see: somebody who has lived there a long time, taken great care of their house, and are current on their first with a lot of equity. The return on that is not great and probably only 9%, but that is almost as close as you can get to a guaranteed 9%. The chances of her house dropping below $175 seemed the same as General Motors filing bankruptcy again. Rick said if he were to buy a bond from GM and was worried about that getting wiped out, that is about the same level as her house in Compton.
The only things he could think of hitting him in Compton is a massive earthquake wiping out the house or a huge fire happens and she does not have fire insurance. Rick does not chase fire insurance policies since he wants these things to be no effort on his part. Bruce asked Rick if he ever gets the chance to buy firsts or if all the yield is in seconds. Rick said you can buy first, but usually you cannot get a discount, and you are getting 6-7%. Rick usually tries to stay closer to 10 or 12%. He used to get 15-20%, and that was when he was getting greedy and most of it was wiped out. If you stay between 8 and 12%, you are pretty safe. Firsts, on the other hand, do not yield that much.
Rick said he likes to get a discount on loans, like one where he got $10 grand off it. Rick does not think most of these people will refi, most will go a whole distance. Bruce asked what the distance is in length of time, which Rick said it is amortized for 25 years. The current owner he was working with had 15-20 years on her 30-year loan. Rick does the work upfront, so he spends his time looking for deals. When the cashflow from the loans comes in or something pays off shows up, he has to go find something else to replace it. Most of his time is trying to figure out how to simplify his life and not have a lot of headaches.
Bruce asked about the notes in Compton and whether he has notes in other states as well and how he picked them. Rick said in the early 2000s he would buy 15 states, and some of those didn’t work out well. He has stayed away from those. The ones he really liked that are his favorites are Arizona, California, and Oregon. He used to love Washington, but now you have to have special licensing for Washington, so it is not feasible. He really likes Nevada and would probably buy more there, but he needs to understand the foreclosure laws better. He has done notes in Texas too and likes how the foreclosures there are short, but houses do not go up in value and have not for the past couple years.
He just bought his first loan in Florida, and this one made him really nervous. This guy had been there a long time and had a great pay history. However, he had a really long stable period of pain and Rick does not see it working out well. Bruce asked Rick why he is afraid of that, which he said he is worried about the Chinese drywall, hurricanes, and sinkholes. When it comes to loans, Rick has learned that you do not know about other states. Every state is completely different, and you just do not know. Bruce said as a lender, he is really glad that his son Greg has flipped 75 homes. They had to learn a lot about Florida the hard way, including how much things really cost. Another interesting aspect of Florida real estate is turtles. He was selling the remaining lots on the tract, and there were three turtle holes. To an amateur, this meant the guy who was on site said he knew how to deal with it. He put a little tub in the dirt to attract the turtles, then he moved them to a safe place. This may sound logical; however, it is a felony.
Bruce had to learn how to do it right, which he did after the builder told him about the permits he needed. After the fact, they did all this, and it was done by experienced people who would have done it the same way at the beginning. There are three people who were known for being a receptor for those turtles. You call the turtle removal expert, then they move the turtles to this guy who gets a grand of turtle. He has made millions of dollars being the receiver of turtles.
When Rick traveled to Florida for the first time, he was very impressed with that state. He wanted to do more there, and that was why he bought the loan. Usually he won’t bother with learning or dealing with that until he has some chips invested.
Bruce finished by asking if the notes work like an auction or are for sale at a certain price. It almost works like eBay, although there is not a time in the bidding process. It is sitting up there, and usually they are $.80 on the dollar. They negotiate back and forth, and there is a lot that can go wrong if you do not know what you are doing when buying notes. However, there are people who will walk you through all this. Once they have all the documents and everything looks in order, including the assignments, you wire the money to the seller and they send you the original file. Afterwards, they will collect the payment for you.
Bruce asked Rick about his favorite newsletter. He said he likes a lot of blogs, and his favorites are Mr. Money Moustache and the Wealthy Accountant. There is a large financial independent community that doesn’t really have much to do with real estate, but these are the ones he likes. Mr. Money Moustache retired at 30. He worked like a madman, saved 60-70% of his money, and was able to retire within 5 years. Rick noticed a lot of these people did coding. They may not like their job, but they make a lot of money doing it, save their money, and are able to retire early. Bruce wondered if he reads books too, which he said he does, usually ones dealing with early retirement. You have to figure out not only how to retire, but also how to retire and be happy.