what is owner financing

Brian and Deni interview Mel from The Investor Couple all about investing with owner financing to maximize your income potential to start living life on your terms. Mel and Dave have been featured in Yahoo Finance, Bigger Pockets and more.

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live off rents podcast transcript


Brian: Hey, everybody. Happy Tuesday. Brian and Deni here from Spark Rental. So glad to have you with us. And we are joined today by Mel of the investor couple, Mel and Dave. Mel, thank you so much for joining us today.

Mel: Hey, thank you so much for having me. It’s great. Glad to be able to connect.

Brian: Absolutely. We’re super excited to hear about your journey because you and Dave have been talking all about how you own over 240 doors with none of your own cash invested, which is something that every real estate investor in the world wants to hear about, wants to learn about.

Mel: So in full transparency, of course, for the years we do the monopoly right, we use some money and put it elsewhere, as we often do as investors. But yeah, we bought over 240 units throughout the years.

Brian: Well, let’s rewind the clock all the way to your very first deal and how you guys got started in real estate.

Mel: However, when I first met and I’m fighting a bit of a cold, so my apologies if I sound a little different on the call today. But yeah, so when I met Dave, I had two buildings, Dave had the one and we decided that we wanted to do this together to grow our real estate portfolio. But we had no clue how to grow and how to scale. So we did the traditional lot of using our own money and that worked for a little bit and we worked really, really hard. We’re both working three jobs, try to save for that 20 or 25% down. And of course, right, we hit that enrollment, that common roadblock that we run out of money…

Brian: As for everybody.

Mel: Which often helps everybody. And after a while you only have so much, so much fun. So that’s exactly what happened to us as well. And then I remember being in Florida, we were listening to Rich Dad, Poor Dad, of course, Common book out there, and it completely changed our mindset about, oh my goodness, we are doing this completely wrong. And and that’s when we decided to we kept hearing about it, but we thought maybe it was illegal, all those things and financing. But no, it’s it’s not illegal. You can definitely do it. It’s legal. You can you had to make sure it did properly. And that’s when we the next year we bought did lots of research and all that of course. And the next year is when we bought 12 properties in 12 months. That was multifamily properties. So that was 56 units and that was the beginning of changing our lives really with real estate, I was able to quit my full time job my thirties the next year, and Dave used to be a full time would slide here, full time firefighter. That’s his background. And so he can be here today with us. But and he was able to also retire in his thirties.

Brian: That’s great. Well, first of all, congratulations on that. Not many people can say that they retired in their thirties. So walk us through your that first commercial deal that you did. How you raised the money. How all of that worked as a case study, if you will. Yeah.

Mel: And then we’ll use specific numbers here, but I’ll explain the concept. It was with owner financing. We do a lot of owner financing and it can be done anywhere. We’re located in Ontario, Canada, but we’re applying the strategies in the states, in Mexico and Dominican and Costa Rica. So these owner financing deals can be done in different areas. You just need to know how to structure it and of course know the exit strategy, how you’re going to be paying them back. So first deal was really having the conversation and asking them if they’d be open to exploring, perhaps holding financing for us and explaining the benefits to them. Because at the end of the day, people want to do this. Not everybody, you’re going to get some no’s. But we really explained, we showed them our numbers as well, right? At the end of the day, nobody’s going to lend you a substantial amount of money if you don’t have the exit strategy that we call it, right? And that’s why we often refer to that. How are we going to pay back whether it’s on or financing or sometimes we use secured funds like RRSPs or promissory note. How are we going to be able to pay those people back? So it was really having that conversation with them, showing them our numbers, how we see that we’ll be able to pay them back, making it a win win as well. So really spending some time listening to what they were saying as well when it came to what they were looking for.

Mel: And so they were willing to hold financing for us and that was great. And if I can share a tip here with the listeners and we didn’t know this here in the moment, but we thought this gentleman only had one property and he did not tell us about anything else. And that was great. And we communicate with with him. We kept him updated. We paid him back early, all those great things. And it definitely paid off because little did we know that he had a significant portfolio as well. One first transaction, we were able I think we bought maybe three other buildings from him. One of them was 100% owner financed as well. So having that relationship and really being truthful, really being honest, we didn’t play with the numbers. We made sure that it made sense. We pull it up with them, we pay them back on time. We worked with them. Making truly a win win not only benefited us for that one deal, but again, we were able to kind of. So that was kind of a great way to start off. And then we just kept doing improving every time, right? Every time we met with an owner. If it didn’t go well, Dave and I would brainstorm like, Oh, well, you said this or I shouldn’t have said this. And, you know, to just decide what really worked, what didn’t work. And at the end of the day, what did they need to hear to make them feel comfortable?

Deni: Let me ask something. You said that you invest in Costa Rica and all over the place. Do you find that you have to learn each location and what works there or.

Mel: Yeah, great question. And it’s different, right? Like if you want to invest in the States as a Canadian, for example, well, you want to avoid double taxation. So there’s definitely certain things that you need to do differently that you need to be aware of in in Canada, where mostly multifamily buy and hold is typically our strategy. Often where we’re going in different areas, it’s short term rentals that we’re doing so. So although a lot of the strategies are the foundation of what we do, So owner financing, it’s pretty much the same thing. Over in Costa Rica, for example, we show them our exit strategy, we show them how we’re going to pay them back. We made sure that the deal made financial sense before getting into it, but having those conversations took place, you know, literally just all over the phone or just via Zoom type of thing. And it can be done anywhere, but it’s really making sure that you do have a team, different areas, because when we purchased, for example, in Costa Rica, we bought it without seeing it. We did our due diligence, of course. And then while somebody else has to do the property, one of them was your built, one was already existing, but it was a new, new condo. The other one was the house where it needed renovations. So in that case, well, I’m not doing renovations all the way from northern Ontario here, so I had to find somebody who would oversee the project. And the owner, of course, making sure whether it’s me or one of my team members that oversees the projects and making sure that the decorations are right, well done. And the of course, first, that the renovations are well done as well.

Deni: I have to ask one more question. How did you get involved in real estate? Was it your parent or somebody that was involved in as well, or was it just something that you just did?

Mel: You know, it was at first it was just something that we kind of did. There was no I don’t have any anyone who knew real estate and Dave had no background in real estate. I was marketing and business was my background. There was a firefighter, so we didn’t know. Throughout the years, we’ve definitely invested in ourselves. We still do. I still have three coaches, you know, as we now I see the value of of not trying to do it on our own. And at first I did. I was very stubborn and I thought, I know how to do this. I’m going to figure it out on my own. And and I did. But it was really, really costly because I definitely made a lot of mistakes where my first property was had sell it. I don’t own it anymore, for example, so that I make some mistakes along the way. But no, I had I had no background in it or any special connections. I just learned along the way and then eventually decided to finally invest in myself and and with some some coaching and learning from my own mistakes and all of that as well. Very cool. Okay.

Brian: Yeah, I think we can all relate to some of the early mistakes based on our hubris of youth, where we thought we could do it all on our own and figure it all out and then you end up losing your shirt on those first few deals.

Mel: A lot of nights sleep and a lot of unnecessary stress and then a lot of money, of course, as well.

Brian: Oh, yeah. No, I.

Mel: Was in there. Yeah.

Brian: So we touched earlier, when you get seller financing, the seller doesn’t want to hold that note for 30 years, right? I mean, you know, especially if it’s an older seller, I mean, they might not even be alive in 30 years. So you need to, you know, like you said, you have to have some sort of exit plan where you’re going to pay them off in full, usually within three years, five years, maybe seven, but not a medium term there. So how have you gone about finding that permanent financing to pay off your owner financers in the past?

Mel: Yeah, and it’s really and I mean, I have a big exit sign beside me here because I want to see that’s the that’s the foundation of what we do. And you have to know how you’re going to exit before you enter the deal. And the reality is and I see it sometimes where people that get excited, somebody’s willing to hold on or financing a they’re excited and not only no money down and that’s great, but do you have your exit strategy? Because not every deal makes financial sense and it all comes down to the numbers. You know, you have to take the emotions out of it. Maybe it’s the perfect location or maybe it’s the beautiful building that you’ve had your eyes on. And that’s certainly happened to us as well, where it’s like, oh, a cash flow, that’s amazing. Cash flows, it’s perfect. Location has all these things, but I don’t have my exit strategy, you know, the numbers and you’re being on. Right, right. Looking at the looking at the numbers, you have to make sure that the numbers that you have your exit strategy and it’s not going to be in 30 years from now.

Mel: Right. They’re going to be depending on the terms. You know, it could be three years, five years, five years. It depends on on your negotiation. But am I able to? So we definitely go for underperforming properties where we can have more control over the deal. Rate appreciation is amazing, of course, but you can’t control that. You can’t predict what’s going to happen in a market. So I don’t count on natural appreciation. I go for force appreciation where it’s underperforming and it can really force appreciation. And I look at it, you know, my ratios make sense. Do I have to build an exit strategy? And if I don’t, I don’t buy the deals and and the deal the year that we bought 12 properties in 12 months, for example, I definitely analyze a whole lot more. Dave and I definitely analyzed a whole lot more than 12 properties. That’s just the reality. Many of them did not make sense. Some of them cash flowed, but I didn’t have an exit strategy, so we can go for those ones.

Brian: Yeah. Makes sense.

Deni: I like the exit strategy.

Brian: You definitely need an exit strategy in real estate. And that goes doubly when you have owner financing and someone who you need to pay them off in a few years. So do you have a team of lenders who you work with and have established relationships with that you can go to to refi out some of these owner financing deals? You do?

Mel: We do. I mean, I usually again, I don’t like that as an exit that I would just, you know, pay out one lender with another lender type of thing typically would be part of my refinancing for that specific building. So that’s usually the key that I look at. Is this building on its own self sustainable that I can have its exit strategy for the specific building? Not necessarily. I’m going to borrow another person’s money to pay off this one, right. Just because I think that’s how people can get themselves in trouble. Do I have a pool of investors throughout the years? Absolutely. Am I always looking for investors? Absolutely. We are continuing to to grow and do different things as well. So, of course, we’re always like many investors looking for serious investors as well. Who wants to to invest? But yes, we do have some. And again, it’s one of those things where we truly try to make it a win win. And some of my lenders may want to invest in Canada only. So my investors only want to invest in the state. So it’s finding who’s the right person for for what. Not everybody wants to go too far and not everybody wants to buy under-performing. So it just depends on the lender and the type of loan that it is. Is it secured? It is not secured outside of owner financing. And that’s the thing. If I have if I find an amazing property and I love the building and I love the numbers and everything’s amazing, but the owner is like, I’m not interested in selling and holding financing and that’s going to happen. I get a lot of no’s, of course, but I’m not going to stop there. If it’s an amazing deal that I know I can find the funds for, and that’s where we’ll look for secured funds or or perhaps unsecured funds as long as again, the deal can sustain the ratios.

Brian: Oc How often do you go out and get traditional financing or maybe private money through a portfolio lender or something with an owner held second, a seller held second to make up that down payment as opposed to the owner holding the first lien and the only loan against the property.

Mel: Is second Mortgage for the owner is definitely more common in my personal experience just because it’s less amount. Right? If you look at real estate over the past ten years, of course it went up. I mean, there’s zigzags, but of course it went up significantly still overall. So I do find that often there will be they’ll have that 20 or 25% to help me with that down payment. They may not have it paid out in full. Right. Because otherwise it wouldn’t be able to loan that money. I mean, if they do, sometimes they won’t be in first and that’s why they want to do that. But the majority of the properties, I probably it’s hard to say give a number, but say 75, 80% would have been in second. When it comes to owner financing, I’ve had a few 100% owner finance deals and I had a few where was owner finance in the first and I use, for example, RRSPs, somebody else’s RRSPs or secured funds for the second.

Brian: Okay. And can you break down for our audience what are RRSPs and how do they work?

Mel: Yeah. So RRSPs are secured funds here in Canada. It’s like a41k for listeners in the US. And essentially you’re not pulling it out. Nobody would want to do that because you getting a lot of fees and you would not be at a win win, but you’re essentially offering them a better rate. So again, it has to make sense for for both the lender and lend and you’re it’s secured by real estate. So a lot of investors who may not be happy with their 41k return perhaps or their RRSPs and they want to have a higher return on their investment and still have it under the umbrella of of RRSPs would lend it out. And we did a transaction and of course we’d have to offer a better return. They’re currently doing. So it ends up being that true when when it’s still secured. So if they feel their money safe, I have my exit strategy. Otherwise I wouldn’t bother them or my time either to present deal, of course. And it’s great opportunity. It’s a great opportunity for people who do have secured funds, who may not be happy necessarily with their returns to to invest in real estate without actively doing so. And that’s a reality as well. A lot of people, you know, not everybody wants to what we’re all doing here and finding deals and overseeing it and and those things. Some people understand that, hey, I love real estate. I know that’s the true way to create wealth for the long term, but I don’t want to be doing what you’re doing now. And that’s where it’s a great opportunity for others who may have a line of credit or secured funds to still invest in real estate. But having me and my team essentially to do the work.

Brian: Makes total sense. We’re actually doing a webinar next week all about passive real estate investing and how to earn high returns without actually becoming a landlord, because as you know, it is a ton of work buying properties directly, renovating them, screening tenants, signing leases, collecting rents, you know, all that stuff. So let me ask you this. Oh, go ahead.

Mel: Oh, no. And I was just going to say I was just going to add and and that’s the thing. Like as you grow your portfolio, you’re going to have to make some decisions for for yourself and for your family and what you want to do. Do you want to be 100% passive and be a lender? Do you want to be an investor? Do you want to be an investor and also a property manager? Because those are two different things. And at first I started off my journey with being my own property management, doing my own property management, and I and I loved it at first. And then we came to the point where it’s not what I wanted to do. I want to be an investor, not a landlord. And that’s where you do have to make the choice of you probably can’t do both forever. As much as you scale to being able to, to, to wall, to hire people to do it, especially if you’re going to be going outside your area, you’ll need a team. And that’s the thing. As you grow your portfolio, you can start to have more and more team members, of course, do the renovations, do the construction to do the renovations, to help you with asset management and books and all those types of things as well. So it almost gets easier the more you, the more you grow after a while.

Brian: Yeah, absolutely. You benefit from not just experience but an economy of scale with this as well. So do you. How often do you sell off properties after the the balloon hits for your seller finance notes?

Mel: It depends. Often we refinance or refinancing typically has been or what we do, so we refinance. It’s a tax free transaction. When we refinance. However, sometimes we’ll sell some properties and it’s not I don’t have I I’d be lying if I said I had a magic number, you know, two years. I do this type of thing. It just depends on the deal and depends what opportunities I have. Right now. I’m selling a couple of properties because I we’re working on a big fund and we’re going to be putting some of those funds in there as well. And so we’re doing different things. We’re. Or, you know, kind of like the monopoly, Right. Take some of the things, something different. And that’s and I think people need to be afraid of doing that as well. Although I love buy and hold, but although I’m still holding, it’s going to be a different type of project type of thing as well. So. And for the timing, honestly, just depends. Sometimes it’s sometimes it’s been the market. Sometimes I’ve had somebody offer me an amazing deal and it was like, you know what? It’s a win win. I love the deal and I’ll take those funds and I’ll do this with it instead, and it helps me get to that next level. So it’s just really looking at it from from from the property itself. Do I feel like it hit the ceiling? Maybe, and I could find another underperforming one instead? And those types of things that make sense, it.

Brian: Makes total sense. It makes total sense. Well, as we wrap up here, I want to ask, what are your best tips for people who have not ever done an owner finance deal before? What are your best tips for them to negotiate owner financing with the sellers that they’re that they’re working with? Because that’s there’s a bit of an art and a science to working or talking sellers through this. Right. And sort of negotiating this with them and explaining it and pitching it. So can you just give us some of your best tips for that for someone who’s never done it before?

Mel: Yeah, no, absolutely. I mean, number one, you got to make sure you know what you’re doing. You got to make sure at the end of the day, this was my fear when I started, was that you are dealing with somebody else’s money. You should make sure that you know exactly how you’re going to pay them back. And if you’re not very confident that your exit strategy is not very strong, and if you don’t have a clue where to do that, you probably need a coach if you want to make sure you’re doing it properly. Of course, the second thing is don’t be afraid to ask. Don’t be afraid of no’s. It’s okay to get no’s. All of us get no’s in real estate investing, and it’s not a bad thing. And and I’ll just share this as well. Like I hold financing right now for, for, for my properties that I sold in the past couple of years. Why would I do that? I’ve never met. I’ve never met them. I don’t know what to look like. Why would that why would I do that as an investor? Because it benefits me. So there are benefits for the owners to want to hold financing and but it may not be a good fit for everyone. Some people will want to exit. Some people don’t want to have that. However, some people may need that exit. And what I mean, what I mean by that is that as an owner, here’s a quick little case if if I may disconnect for a minute.

Mel: But for example, one of the properties that we purchased, the husband passed away and that was the husband’s role of taking care of the management. The wife was not involved. She didn’t care about this. And all of a sudden her her husband passes away and she has no exit. She doesn’t want to pay all these capital gains in the same year and all those kind of things. So for us offering her this opportunity, it really was a true win win. I bought the property no money down and no joint venture partners. I solely on the property. And for her it was a way that she could sell her property right away, get rid of what’s considered a headache, and also help her from a tax perspective. So go in it with that mindset that it’s not a good fit and it’s okay, but that you can really, if you know how to create that win win with them as well. It can really be a positive transaction. And the cool thing as well, once you do that and you build that relationship with them, once you pay them back, they have a lot of fun. So perhaps now they want to do a promissory notes or different things with us. Well.

Brian: That’s cool. Makes total sense. That is the crux of all negotiation, right? Is finding what’s in it for the other person, finding what it is that they want. That may not be obvious at first. So I love it. Mel, where can people connect with you and Dave and learn about what you’re doing? Maybe even invest with you guys? Where can people connect with you?

Mel: Yes, absolutely. We’re all over social media. So if you’re not following us yet, we have a YouTube channel. There’s new videos every single week as well as we have lots of content there are on Instagram and Facebook. And it’s always investor Mel Dave. So I’d invest in Dave. If you search that on any platform, you’ll be able to find us there and we release content daily on all the other platforms as well. We’re even on Tik Tok. You’ll see me. That’s a little uncomfortable.

Brian: So we put some links in the comments here to your website and your handle on social media and also a link to an article that we have about what is owner financing and how that works. Rebecca Taylor from the audience says, Well, great tips. Thank you for speaking. And Rebecca speaks for all of us. Thank you so much for joining us today. This is so much fun. I love what you guys are doing. Keep it up and come back soon.

Deni: Yes, thank you very much.

Mel: You’re very welcome. Happy to come back anytime. And maybe next time I’ll be able to have Dave in here with us as well. I’m sure he’d have lots more to say than I do. So…

Deni: I think you’ve been great. Thank you. Thank you so much.

Brian: Bye bye. Have a good one, you guys. We’ll see you next week.

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