381: Real Estate Investing With No Start-Up Funds & No Tenants

SHOW NOTES FOR EPISODE 381: REAL ESTATE INVESTING WITH NO START-UP FUNDS

After more than 40 successful years buying, holding and selling properties, Lou Brown has never had to get a bank loan nor qualify for a loan.  He has mastered the art of creative financing and investing in real estate without tenants.  In today’s podcast, Lou shares some of his insider secrets on how he is able to acquire properties without ever having to work with a bank and how to generate cashflow without being a landlord.

What You Will Learn

• How to buy properties without money
• How to convert tenants to home owners and boost your cash flow
• What an Non Escalating Non Qualifying loan is and how you can buy a property with one and no down payment
• How to finance a property without ever applying at a bank
• Knowing what your “safety net” is and how it can help you to buy the wrong properties
• How you can create great cash flow WITHOUT being a landlord
• The key to attracting the right buyers to you
• How you can help people and generate cash flow by “being the bank”
• The way to trade landlording for being a banker

About Our Guest

Lou Brown

Lou Brown is not only a teacher, he is a doer.  When he was faced with the most recent real estate market crash, and nothing was selling, he bought.  In the span of a year he bought AND SOLD over 50 properties.  He invented unique techniques to get his properties sold so he wouldn’t be sitting with them.  What Lou believes and teaches is what we teach here at the Old Dawg’s REI Network — cash flow is king.  It is the driving force of a successful family and business.  He has been quoted as an expert by such publications as The Wall Street Journal and Smart Money Magazine.  Lou draws from his extensive background as a real estate investor, having bought properties since his first one in 1977 when he was only 19 years old.  He has invested in single-family homes, apartments, hotels and developed subdivisions, as well as building and renovating homes and apartments.  He is well known for his creative financing and deal structuring concepts and enjoys sharing his discoveries with others as he teaches seminars, writes courses, books and audio training on how to make money and keep it.  He was the founding President of the National Real Estate Investors Association and is past President and a lifetime member of the Georgia Real Estate Investors Association.  He firmly believes the path to success is through ongoing education and he continues to invest thousands of dollars annually in his own.

More About Lou

• Lou got started on “the wrong side of the tracks”
• Raised by his single mom
• His mom came to the U.S. on the Queen Mary as a war bride
• She came over to the states to join her American husband
• Unfortunately, he turned out to be an alcoholic and abuser
• She got out of that relationship and met Lou’s father (what Lou calls, “Her second mistake”)
• She left him when Lou was three years old
• He was challenged at a young age to be a father, brother, cousin and an uncle
• They didn’t have any money
• When they did have money, she spent it
• She got into dept and life got harder
• They were always struggling
• He came up with a quote at that time: “If it is to be, it is up to me”
• He had no one to rely on
• In other words, if his circumstances are going to change, he’s the one who would have to make it happen
• His mom’s friends were called aunts and uncles, even though they were not related
• His Aunt Mable and Uncle George
  • Lou was 8 years old
  • Aunt Mable bought a duplex and lived on one side
  • She shared how the people on the “other side” paid her mortgage – so she lived there rent free!
  • Lou thought, “Wow, they are getting paid to live there and we’re hiding out from the rent man.”
• Lou began to figure out that there were”parallel universes” where there are those who have the knowledge to do well and there are those who always struggle
• Then, his aunt bought the duplex next door
• He watched as Aunt Mable went out every night because she didn’t like to cook
• Then she bought another and another and another — all on the same street!
• He saw his Aunt’s life change every year.
  • Bought a brand new Cadillac every other year
  • Traveled
  • Went on Cruises
• His Aunt was 4 foot tall and 4 foot wide and spoke with a speech impediment
  • Smoked and drank scotch

Lou’s First Property

• His Aunt became Lou’s real estate mentor
  • She told Lou, when he was 18, to purchase a house
    • He told her he didn’t think he would qualify.  He had never even been in a bank
    • His Aunt said, “You need to meet my friend “Realtor Sue”
      • Realtor Sue drove Lou around to look at properties
      • She also told him about something called NENQ (Non Escalating Non Qualifying) loans and, that for just $45, he could take over an existing loan
    • Right before Lou’s 19th birthday, he put a property under contract and after his birthday he closed on the property
  • Lou’s mom became his first tenant
    • for $600 rent, he asked his mom to only pay $100 to help cover utilities and cook some meals and wash some clothes, ten she could use the other $500 each month to pay off her debts
    • A year and a half later, his mom was debt free

Employment

• Lou went to community college in North Carolina for one year on a scholarship he had won from Junior Achievement
• Being an anxious young man, he didn’t see how college would get him where he wanted to go
• He had a job with the American Red Cross but quit to take a sales job selling business forms
• Became a 1099 100% contractor
• Two years later, his company transferred him from Charlotte to Atlanta
  • Gave him a new territory
  • Offered to pay his closing costs on his house in Charlotte and would pay closing costs for his new home in Atlanta

Next Property

•  Made a 37% profit on his Charlotte house
• When he went to Atlanta, he told the realtor there to get him another NENQ loan
• He bought a home in Atlanta with another NENQ loan and applied some of the proceeds from the Charlotte home sale to the purchase price of the Atlanta home

Good-Bye NENQ Loans

• In 1982, Congress voted to discontinue the NENQ loan program
• There was now a “due upon sales” clause in mortgages that meant he couldn’t use the NENQ anymore
• However, after reading the law, Lou found an exception in the law that says, when you put your property in trust, for estate planning purposes, then the lender is prohibited from calling the loan due.  It would not be considered a sale.
• In 1983-84, Lou started studying trusts and became an expert in all 50 states on trusts
  • According to Lou, he “fell head over heels in love” with trusts
  • He then bought his first property under a trust
  • He found trusts to be profoundly better and different from LLCs, limited partnerships and corporations
• Lou began buying all his properties in land trusts
• He also took over sellers’ existing financing by helping them put their properties in land trusts for estate planning purposes
  • Then he would purchase the “beneficial interest of the trust” and continue making payments on their existing mortgage
• In 1986, Lou created a course and system where he taught people how to create trusts for themselves

Other Commercial Projects

• He built a Holiday Inn from the ground up using private money rather than going to the bank or qualifying for a loan
• He’s bought apartment complexes by taking over the existing financing with the full consent of the lender
  • He has crafted scripts to get the banks to agree to him taking over the financing
  • When he needed cash, he would get people to participate through their IRAs and 401Ks where they in turn would get a high or market rate of return
    • He’s had some people with him for 25 plus years because they love the returns
• He has also done land development and condo conversions
• But his favorite is single family and small multifamily homes
  • Bigger demand
  • There’s a NEED for it more than just a want
  • With commercial, you can only sell to another investor
    • There’s always got to be “room for the other side” and something in it for them
  • With single family – especially where you provide the financing – You can get top dollar for your properties

Today

• After more than 40 years in the business of buying, holding and selling properties, Lou has never been to the bank nor qualified for a loan.  He found another “little known” way to finance the investment properties he has purchased
• He still buys and sells single family homes and has found that’s one of his favorite investments – people ALWAYS need shelter
• The big money is in the FINANCING side of real estate – that’s where the banks make the BIG money!
• He gives people the opportunity to own their own home WITHOUT having to deal with banks – “The Path to Home Ownership”

Understanding Market Cycles

• He’s been through a number of recessions or downturns
• The reason it’s cyclical is because of different generations
  • People get what they needs in terms of housing  and that’s followed by a lull
  • Of course, there are economic factors, the manipulation of the stock market/currency/interest rates
• You need to know where your “safety net” is
• In 2008, he had 10 properties
  • He bought them right
  • He bought them cheap
  • Fixed them up nice
  • People wanted the houses but the contracts kept falling through because the financing wasn’t there
  • He thought about it and realized he never had problems buying properties
  • The problems always seem to occur when he would sell the properties
    • Delay in the financing – upsets, breakdowns
    • Someone changes their jobs
    • They lose their jobs
    • There’s hurricanes
    • People breaking into the properties and stealing things
    • He had the revelation:  “What if I find my buyers FIRST?”
      • He thought:  he could give people the opportunity they would not otherwise have
      • Everything changed!
      • He went out to find his buyers FIRST

Finding Buyers

• Lou proceeded to create a marketing campaign to find his buyers
• When he found the buyers, he would
  • Find out how much down payment they had
  • How much they could afford on a monthly basis
  • Then he would go out to find the property that would match their abilities
• In 2009, he started his new marketing campaign and system – just to find buyers and/or those renters who wanted to own their own homes
• “The Path to Home Ownership” evolved out of that campaign
• In addition, he created a “certification” program where he could train people to become “Certified Affordable Housing Providers” not just real estate investors
  • He would train real estate investors to become “Certified Affordable Housing Providers”
  • They could help people to achieve home ownership regardless of credit or financial background
  • There is a strong demand for this because there are many people out there who want a house but don’t “qualify” according to the banks
  • “Certified Affordable Housing Providers” can work along side people who want to own their own home to achieve their dream
  • The buyer or renter sees the “Certified Affordable Housing Provides” as a manager of the process
  • The house is held in the trust and the “Certified Affordable Housing Provider” is technically hired by the trust to find the buyers and manage the process
• Years ago, when they used to do lease options for some of their developments but a very small percentage of the buyers actually ended up owning the houses
• Lou decided to create a multi-year program (3 year program) where his “Certified Affordable Housing Providers” can work with the buyers, help them to improve their credit scores, inspire them and gear them up for home ownership
  • His program now has a high degree of success — setting them up for success, not failure
  • Buyers receive credit toward their down payment every time they pay their rent on-time
  • If he didn’t “take them by the hand” and help them through the process, the success rate was only 10%
  • Instead, they have a very high success rate today where people end up with home ownership
  • Today they:
    • Put buyers through low cost credit restoration programs provided by a non-profit organization and the “Certified Affordable Housing Providers” get paid to put them in the program
    • Help buyers to lower their utilities, cell phone costs and obtain security monitoring equipment – “Certified Affordable Housing Providers” make money from these too
  • If they still don’t qualify to purchase the property by the end of the three-year term, they can “buy” an extension of time, if necessary
  • Since vacancy is your biggest expense as a landlord, he would rather have his tenants extend their time to continue to work on qualifying then cut them off from the process
  • Generally speaking, though, within one or two years, you’l know if the buyer/renter is going to make it in the program or not
  • He really tries to encourage those who are truly trying to succeed in acquiring their own home
  • His program has four levels – based on how close you are to qualifying for a loan: Bronze, Silver, Gold and Platinum
    • Some people have a lot of money for down payments – business owners, for example
    • With the higher level of people, Lou can offer them his own loans where the bank may not
    • For example, to reach the “Gold Level” that means the buyer/renter has paid at least 10% of the value of the property

Being a Rental Landlord vs. the Mortgage Company

• A rental landlord’s profit is the difference between what you’re paying (your expenses)/your cost of funds (your mortgage) and your rental income
  • For some people, this ends up being “break-even”
  • For others, you may have a thin profit margin but when a water heater goes out or you need a new roof, it can wipe out your profit for the next year or two
• With Lou’s program, the investor has multiple profit centers that can boost your income significantly
  • For example, if you have a rental property where your income is $1,000 per month and your cost of funds is $800.  Your profit is $200 per month.  And investors will also point to the financial tax benefits of depreciation. And every month you pay your mortgage payment, you’re reducing the loan balance
  • With his program, when someone moves into one of his homes that they are trying to buy, they need to put thousands of dollars in upfront.  So Lou, gets a big boost to profits from the start.
  • He gets the spread between the cost of funds and the rental income
  • When something like a water heater breaks, roof leaks, toilet gets clogged up or other repairs/maintenance, the buyer/renter has to fix it or take care of it because the house is considered their home while they are in the program.  So, repairs/maintenance do not reduce Lou’s profit margin
  • Lou is viewed by the buyer/renter as “the mortgage company,” not the landlord

The “Agreement for Deed” and What Happens in a Default

• His buyer/renters must sign an “Agreement for Deed” to get in the program
• They don’t actually get the deed to the home
• They will get the deed after they pay off Lou
• Their monthly payment covers principal, interest, taxes and insurance, just like a traditional mortgage
• If the buyer/renter defaults, Lou declares the default and gives them the opportunity to “work it out”
• If they can’t work it out, then Lou can go through with a traditional foreclosure process to get the property back
• However, it is very rare that he has ever had to foreclose – he’s done it only a couple of times in his entire career
• He’s more geared toward:
  • Finding the right buyer/renters for the program
  • Having them pay a significant down payment that helps the buyer/renter stay committed and further allows Lou to recoup any losses
  • Taking over their mortgage when they reach qualifying, lowering the interest rate and “becoming the banker” long-term (he has 40 year loans)

What a Typical Deal Looks Like

• Lou or any of his “Certified Affordable Housing Providers” becomes the lender
• Lou usually gets 10% down on a home
• 40-year, 10.99% financing
• Receives additional 3 points (rolls it into the loan)
• On a $100,000 home you can end up, over the term of the loan, earning over a half a million dollars after 40 years
• You truly BECOME THE BANKER!

Your Biggest Mistakes

• Launching into things with no knowledge or experience because it “sounds like it would be fun”
• Bought a ranch at the height of the market and it was not a good deal
• Became a developer
  • Bought a big piece of land and subdivided it into lots to sell to developers
  • Lots of pain and suffering for those who are not experienced
  • The local county can dictate your success – what you thought would be 25 lots becomes 20 lots! If your last 5 lots were your profit, now you don’t have any profit!
• It’s better to buy a building that you can valuate and you can know what to do with it and how to do it

Your Biggest Success

• Not just creating a profitable business, but creating a business that can truly help people!
  • Serving people
    • The heart side
    • The gift side
    • Making a difference
    • The significance
    • The dynasty
• Looking back at your life and asking the question, “What did I do to make a difference here?”
  • Am I just here to make a lot of money?  Who am I making the money for?  And what am I doing this for? Am I making a difference in some else’s life?
• Lou got away from landlording where he felt bad and made others feel bad and decided to attract people he could help – to do something good for them and make a better life for themselves.  He loves the people he serves today!
• If all of us can just step back from what we are doing and ask the question, “How am I making a difference and how can I make a difference for better?”

Advice for Old Dawgs looking at Real Estate Investing to help in their retirement years

• A couple came to Lou that were 65 years old
• They told Lou they were retirees from IBM, from Dallas, Texas, that worked for IBM for 29 years
• They said that even with our retirement income from IBM that they didn’t feel secure
• They asked Lou, “What would you do with us?”
• Lou said, “Get on board and stay on board.”
• Two years later, they came to Lou and said, “We’re done!”
  • They had 15 cash flowing properties and are tired of being the landlord
  • Lou said, “Let’s make you both “Certified Affordable Housing Providers” and take your tenants and turn them into home owners.”
  • 5 of the people had good enough credit to get loans from banks
  • They sold the properties to his renters and they took the profit from the five to pay off the other 10 properties
  • Then they gave the 10 tenants the opportunity at home ownership
  • Their cash flow went to $10,000 per month with no headaches of landlording or management
  • All they had to do was collect the mortgage payments

Current Business

• Lou loves to teach and see people become successful
• Today, he teaches others to become “Certified Affordable Housing Providers” and shows them exactly how to do what he does
• Teaches them how to attract good buyer/renter clients

Rap-It-Up

• Favorite real estate book: How to Wake Up the Financial Genius Inside You by Mark O. Haroldsen
• Favorite business book: Traction by Gino Wickman
• Most valuable web site for success (other than your own): Landmark Education
• Favorite app: Notes
• Favorite quote: “If it is to be be, it’s up to me.” – Lou Brown and “Never, never, never, never, never give up.” – Winston Churchill
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? I would go to a neighborhood where I would love to own property and I would start knocking on doors and I would say, “I would love to own a home in this neighborhood, do you know of any for sale?” It is remarkably productive. Find a home.  Take over existing financing.  Give the seller what they need. Help them to be successful.”

How to Reach Lou

• StreetsmartInvestor.com
• Get a free copy of his Amazon best seller: Doing Good While Doing Well
• YouTube: https://www.youtube.com/user/StreetSmartInvestor

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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