Labrador Lending: Our Story
Treating Real Estate as a Business
In late 2009, my wife, Emily, and I purchased our first rental property, a condo in Baltimore County, Maryland. In hindsight, we had no idea what we were doing. After we closed, I posted a rental ad on Craigslist and we accepted the first potential tenant who responded, a divorced father who wanted nothing to do with owning a house. He prompted us to at least collect a pay stub from him. Genius! So, I did that and printed out the first lease I found online and he and I signed it. I was a true professional.
Our first tenant, who still drops off 6 months of checks at a time for us, has been there for almost a decade. This investment, our first, wasn’t a home run by any means; however, it requires very little attention. Honestly, sometimes I forget we own this one.
By early 2015, I was seriously considering treating real estate as a business, not just a hobby. My real job and the requisite commute were wearing on me. During the commute, I began listening to podcasts, especially the BiggerPockets podcast. As I thought about it, I realized we already had—in some ways—an existing real-estate team with experience. Emily and I had each worked for a title company, my father was a successful real-estate agent, and my brother was an experienced mortgage-loan originator. I began to focus on our advantages, not our limitations.
Growing Our Rental Portfolio
By 2017, Emily and I had built a rental portfolio comprising primarily single-family homes in Baltimore County. We were managing the properties and tenants ourselves, spending a good bit of time, effort, and money to rehab houses and lease them to responsible, professional renters. (To view some of the before-and-after pictures, click here.) Although some houses were more rent-ready than others, for the most part we followed the popular BRRRR (buy, rehab, rent, refinance, repeat) strategy.
By 2018, the real-estate market in the greater Baltimore area, like in most of the country, had tightened to the point where good deals were simply difficult to find. We did not purchase any properties that entire year. While I do believe in the power of buy-and-hold real estate for building long-term wealth, I also like the idea of having multiple streams of income. If you’d like to learn more about investing in rental properties vs. investing in mortgage notes, click here.
After years in the rental-property arena, I began to look for an alternative approach to real-estate investing that was easily scalable and could be managed from anywhere. I had known about strategies like mortgage notes and tax-lien certificates for quite some time, but had yet to truly study either niche earnestly. After lightly studying both, I chose to dive into one of the two.
Enter note investing.
Learning More about Note Investing
Once I had decided to embrace note investing, I knew I had to learn as much as possible. I am not one to reinvent the wheel, so I turned to people who had already paved the way. These days, there really is no excuse not to learn and keep learning. Information is everywhere.
Here are some of the resources that were instrumental in my initial growth of knowledge as it pertains to note investing: Paper Source; We Close Notes; Chris Seveney of 7E Investments and many other generous note investors; numerous podcasts; books by Dave Van Horn, Josh Andrews, and others; and BiggerPockets.
The truth is, however, I learn by doing.
Creating the LLC
I’m not totally sure what prompted me to officially create the business (it may have been the fact that (fantasy) football season had ended and I suddenly had a lot more time on my hands). Regardless, Labrador Lending, LLC was born on Valentine’s Day of 2018 and I immediately began to get the necessary administrative ducks in a row (bank accounts, insurance policies, etc.). Within 2 months, I flew out to Vegas to attend the Paper Source Symposium, a long-standing event that provides an excellent opportunity for education and networking without a ton of selling.
Becoming a Passive Note Investor
In late April 2018, I was ready to jump in to note investing but in a somewhat-passive way. Through interacting with other investors via forums on Biggpockets.com, I linked up with a company (Safeguard Capital) who coordinates loan originations for lenders and other real-estate investors. The loans this company helps to originate are not for owner-occupied properties and, therefore, have fewer regulations associated with them. Labrador Lending, LLC became the lender on a mortgage that allowed a rental-property investor in Jackson, MS, to grow his portfolio.
Shortly thereafter, in early May 2018, Labrador Lending, LLC entered into a joint venture to purchase a land contract (or CFD – see below) with Chris Seveney of 7E Investments. This deal is currently getting close to its exit point and it appears like it will be profitable for both Chris and me.
There are numerous benefits to joining forces with another, more active investor. By partnering with an experienced note investor, the newer investor can both share in the profits (or losses) of a deal and simultaneously grow their knowledge base. A lot of people have more money than time these days, and becoming a passive, “money” partner can be an excellent way to venture into the note world. More on that later.
Between May 2018 and April 2019, I continued to learn the note business as much as I could. I was mostly a passive investor at this point, but I was working toward becoming more active.
Purchasing Our First Note
In May 2019, Labrador Lending, LLC took the plunge and we purchased our first existing note. Technically speaking, this asset was an inexpensive ($6k) contract for deed (CFD), otherwise known as a land contract. (Want to learn more about CFDs? Here is my post about them.) We bought this CFD, which was collateralized by a property in St. Louis, MO, from a well-known broker in the note-investing space.
We probably overpaid for it, but I didn’t care. At this point, my goal was to experience the process and mechanics of bidding, conducting due diligence, closing, recording documents, boarding a loan with a servicer, and collecting payments.
Building a Team; Using Systems, Vendors
Ultimately, a business boils down to people and systems, and after purchasing our first note, I was focused on building out the company’s systems. In the beginning, it feels like there is so much to be done: marketing, deal sourcing, learning, networking, reading, blogging, building a website, etc. While it is true that evaluating our processes is something that will always need attention as the company grows and external conditions change, in the nascent stages of a business, implementing quality systems is critical to success.
It was at this point in Labrador Lending, LLC’s budding life that my wife, Emily, jumped in. As I mentioned, she had worked for a title company years prior, preparing settlement statements and checking real-estate paperwork, among other things. It was only natural for Emily to provide support related to due diligence and workflow management. This has been a huge help. In fact, we have begun to implement some systems as a direct result of her help and experience. It may sound cheesy, but teamwork is vital. (See my blog post on teamwork here.)
Some of the systems, tools, and vendors we currently use are (for more info, click here):
Portfolio Activity Center (backed by Podio);
Google Backup and Sync;
numerous ROI calculators;
Finding Note Sources
One of the common questions I get asked is: “Where do you find notes to buy?” And, while pricing has certainly tightened some even since I have been in the note game, there are still quality inventory out there and deals to be had. You just have to know where to look.
Finding success in the note-investing world, like in the larger real-estate space, has a lot to do with building relationships. As such, finding note sources becomes easier once you begin to build your network. Among other sources for notes, I have found these few to be particularly fruitful for our business thus far: other note investors, online exchanges like Paperstac.com, and note brokers like Direct Source.
Creating Joint Ventures
If you really want to scale a note-investing business, in my opinion, at some point you need to use other people’s money. This can come in many forms: selling partials of notes, creating a note fund, and joining other (typically more passive) note investors to acquire assets together.
Many people have money, often sitting in an IRA or other qualified retirement vehicle, but not a lot of free time or desire to be hands-on investing in mortgage notes. This is where a joint venture (JV) between two or more investors can be a mutually beneficial scenario.
At this point, we have begun focusing our efforts on purchasing notes alongside other, more passive, investors—just like I did when I was just starting out. If you have questions about how this works, don’t hesitate to reach out.
Being on a Podcast
In August 2019, I was given the opportunity to be interviewed on a podcast. Chris Seveney and Gail Anthony Greenberg, experienced note investors, asked if I would like to be on the popular podcast, The Good Deeds Note Investing Podcast.
I knew immediately this was an excellent opportunity to support fellow investors and to help get our company’s brand name out there. But there was one problem. My family and I were traveling to Taiwan 2 days later. I had no idea if I would have reliable Internet service or if I would even be coherent at that time given the travel and jet-lag factors. Regardless, I agreed to participate and I had a blast. Sometimes things just work out. Here is a link to the episode: The Good Deeds Note Investing Podcast.
Exiting a Deal
While we have yet to exit a note deal, we are close. In what looks like it could be a very good deal from a return-on-investment standpoint, we will be taking back a property in Jacksonville, Florida in December. We purchased a non-performing 1st-lien note in May, and just last week, the borrower, who cannot afford the home, signed a deed in lieu of foreclosure over to Labrador Lending, LLC.
This way, the borrower, who was years behind on her mortgage payments (but was allegedly still collecting rent from family members living in the house), avoids a foreclosure and receives forgiveness of any debt to us that exceeds the property value (possibly tens of thousands of dollars). Essentially, the borrower walks away free from a house she cannot afford. This is a win for her.
And this deal appears as though it will be quite a win for us, as well. If we decide to sell the house, we will likely at least double our money in 8 or 9 months. Another option is to hold the house as a rental property, an option that also looks promising financially. If we go that route, we would possibly have a deal that hit the metrics to qualify under the elusive “2% rule.”
The current scenario with this deal underlines one thing I really like about note investing: you typically have options. To learn more about the benefits of note investing, click here.
Envisioning the Way Forward
Looking forward, Emily and I want to grow our note business, but not too fast. We prefer quality over quantity. Scaling can be great but that can also bring on more to manage. So, while we are happy with our current portfolio of 10 notes, we are looking to methodically, intelligently learn and grow. Ultimately we’d like to help other investors and borrowers while we grow our own family’s wealth.
Thanks for reading!