There are more than a few schools of thought when real estate investing for retirement is the subject. Most investors, at one time or another become loyal to at least one of ’em.

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Transcript:   Man, you want to start an argument? Go into any place where there’s more two investors and say “This particular school of thought for long-term investment is by far the best, and the rest are just followed by idiots.” Man, you’re going to be there all night. There’s the super old school guy that’s never adopted to new economic times who says “If you don’t pay cash … Real estate’s just like cars. You don’t borrow money ever. That’s just not the way it’s supposed to go.” Then there’s the guy that says, on the opposite end, “I just don’t understand using any of my own money ever. The idea is use other people’s money. That’s it. That’s the ticket: OPM.” That’s super extreme. I’ve had many people come to me saying they want me to advise them but they want to use zero down loans, back when you could do it, and I refused. Literally without exception every single person came back to me within one to three years later so I could dig out my magic wand, which I’ve never owned, to fix the problems that came. Zero down doesn’t work unless it means you’re not using any of your money. You are putting down payment but it’s other people’s money. That I get. Then there’s the people that say “You never ever end up with a free and clear property because it’s a sin to waste low interest, especially historically low interest.” They get upset at the very idea of having the equity in your property vs. in the bank. I get that. Stand-alone, I’m not going to argue that principle. That comes from an author named Andrews who I like very much who wrote I think the name of the book was Fortune 101, but the idea is this: Nothing is in a vacuum. What sounds good in and of itself stand-alone, when you put it in a room full of other factors it doesn’t work. That includes things that I tell people to do. If you subtract the factors that it took for me to get to that decision and to give that advice I maybe wouldn’t have said it. What you have to understand is, a school of thought for investment if you come from my school of thought, is long term if you have the capital, if you have the ability to save, and you’re going to have a 20 to 40-year timeline, you’re buying investment real estate. You’re generally putting reasonable down payment. Now I’m not going to talk about leverage here today, but leverage in this sense is the traditional cultural definition of down payment, which is by the way, not – read my lips, n-o-t – not the real definition of leverage. Today we’ll use down payment amount. At 20 to 30% down when you buy a property you’re not at the extreme of 0 down vs. buying for all cash. You’re just using what I would call prudent leverage. Now the word prudent is subjective and relative at the very least, but if the interest rates are historically low like today, 20 to 30% is fine and will generally speaking give you cash flow somewhere between four and five on the low side, cash on cash 4 and 5% up into double digits. It depends where you’re buying and what your agenda is. The difference, though, is if you have enough to pay cash for a $300,000 residential income property, that means if you were to put 25% down on that, which is $75,000, and let’s say it cost you $85,000 to close it, that $300,000 will allow you to buy three properties with prudent leverage. If you do that over time and get those properties free and clear you end up with three times the ca...

After over three decades the American worker has begun to see the light when it comes to the employer backed 401k. Though many will argue it’s an effective retirement strategy, they lose the gift of speech when the results are mentioned out loud.

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Transcript:   Today let’s talk about your employer back 401k and the matches that he may give you. Most people fall in love with these matches. They’re usually somewhere of 50 to 100% match depending on the lock of the drawer your work. If you’re the typical American that makes 40 to $60,000 household income before taxes, you don’t have a lot left to put in your 401k in the first place. Most people are putting two to 5,000 a year unless they start making a lot more money. Even the cost of living in the Midwest it’s a lot of cash just to live. The reason people get excited because they think, “I put in a dollar and my employer puts in 50 cents. How … I can’t do anything wrong.” Here’s the thing I’m going to work backwards with the result that’s going to knock that down. People who think that it makes sense mathematically, I totally get it. “I’m making 50 cents on my freaking dollar,” well you’re not because we have those pesky little 2008 crashes. What happens is your built up $50,000 went down to 35 faster than you could watch it happen and your match is just disappearing. Now and then people say, “Well, if I didn’t have the match I could lose more.” Okay, but you would have less to lose so what it is matter. The thing is this, let’s go to the end game where people say, “Because of that match my retirement is going to be hugely improved or over what might have been.” Forbes came out recently with an article that said, “The average 65 year old American only has $100,000 in their 401k.” Now, that average American by my reckoning has been contributing to that 401k for somewhere in the vicinity of 30 to 34 years. 401k’s givers give or take began around 1980. Three decades give or take they ended up with a $100,000, if they’re going to make 4% which is what the Wall Street financial planners are going to tell you that’s $4,000 a year of retirement and they all had matches of some sort or at least the vast majority of them did. Stop looking at the matches as the savior of your retirement, it’s the bait. 401k’s are a guarantee of you living out a life sentence of a horrible retirement not the guarantee of a robust retirement.

Group investments building homes isn’t really investing. Confused? Much like flipping homes, the building of homes without a buyer in hand is pure, unadulterated speculation. Don’t let anyone tell you it’s not.

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Transcript:   Today we’re going to talk about group investment. We’ll do one at a time. Back in the day when I was in business with Dad still, late 70s and 80s, we did what was known then as syndications, limited partnerships. We bought real estate. That’s what we did. Sometimes we fixed them up. Sometimes we bought and held, and they turned out fine. What we’re going to be doing now and we’re tooling up right now, frankly one of them I’ve been a pioneer on myself with my own cash. That’s the one we’ll talk about today. We’re investing in the building of relatively luxury level homes in the southwest area of Austin, Texas. Now, when I say luxury, most of the homes in Austin, let’s call it the median, are selling $250,000 to $300,000. The homes that this guy’s building for us are $500,000 to $1 million, so you have a different clientele. What’s good about building luxury homes and they’re speculative, they’re completely speculative. I’ll get back to that part a little bit later. When interest rates go up a little bit, luxury home buyers don’t panic. They either just pay the extra $500 a month or $800, whatever it is, or they just add another 100 grand to the down payment. They don’t think about it that much because they’re, generally speaking, high wage earners. What this is, and let’s go back to the speculative factor here, this is highly speculative, highly speculative in the sense the only way I could think would be riskier would be for you to fly to Vegas, go to the roulette table, put your 50 grand on black and red and spin her. I’m joking a little bit when you’re building spec homes, don’t let anybody ever tell you it’s not risky. It’s way high on the scale of risk and what a normal investor is used to or even comfortable with. You should use money that is over and above your investment. It should be a different basket. You should invest it thinking if I lose this, I’m okay. I won’t cry for more than a few minutes. Now, a couple of my investor buddies and I put our shekels together last year and we put over $600,000 of our own money in with this start-up company. Now, they build five homes, one of them’s about to close escrow already but the bottom line is our 600-and-some-thousand is, that’s all coming back and the profits are going to be somewhere in the vicinity of $200,000 or $300,000 so we’re happy. Is it always going to be $200,000 or $300,000? No. Sometimes it’s going to be $400,000. Sometimes it’s going to be $100,000. The key word is profit. The way it’s going to work is this. We’re going to put groups together and your job is to invest, have all the documents in your den in the desk and forget about it and just look for our monthly updates. There’s going to be a preferred return. It’ll be different for each group. It’s probably going to between 8% and 12%. That means that before my company gets any part of any profit, you must get your initial capital investment back to you plus the preferred return. Then the profits are divvied up. What will typically happen is half will go to the group, half will go to my company. Let’s take an example. Let’s say we capitalized at $1 million and we bought various pieces of dirt. Let’s say that we’re not going to build houses. We’re just going to develop the dirt. Now that’s pretty cool because we don’t have to go through the risk of building.

I’ve always held that short term investments aren’t really ‘investments’ in that they’re usually more speculative in nature. Flipping and building new homes are two solid examples.

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Transcript:   I don’t do long-term investments anymore. Don’t need to. I still buy notes, because why not? There’s little or no management. There’s a lot of income, and my notes are inside a tax-free wrapper so what do I care? However, every now and then I’m offered a short-term opportunity. Now that’s a very pleasant buffered way of saying a speculative transaction where you could lose your rear end in a hurry. The stuff I’m doing right now is in Southwest Austin. It’s with a builder. I’ve known this builder now for about six years. They’re building homes that are geared towards upper middle class. What does that mean? That means the median price in Austin for a house is, give or take, 290, and the homes he’s building are running five to eight or nine. There’s a huge demand for those kind of homes in Southwest Austin, and very little supply. They’re less interest rate-sensitive. What does that mean? That means when interest rates go up, and they will, these people aren’t affected nearly to the degree regular folk are. They just tell their wives “It’s going to be another thousand a month. Relax,” or “We’ll just put another hundred down. It’s okay,” and they buy the house. The profits on these are really nice. The returns for investors are probably going to be in the range of 20 to 40 on an annul basis. Now that sounds really good, doesn’t it? I’m here to tell you these are speculative investments. The good news is they pay off pretty high. They pay off 20 to 40% because they’re speculative in nature. Let me give you an idea. I’m going to exaggerate like crazy. Compare it to going to Vegas, heading straight to the roulette table with $100,000, and picking black or red. Now that’s more speculative than this but I’m going to tell you, treat it the same. Act as if if this money goes down the drain you’re okay with it. Now, I don’t talk about my own portfolio ever. I’m very old school private that way. That’s the way I am with everybody including my family, except for my inner core family. I will tell you this, I’ve invested well over a quarter million in the last several months in this. I’ve brought a couple of good friends in it. We got this company started. Between the three of us, just to get this company started we put in over $600,000. We took the initial risk of turning out fine. Can it not turn out fine in the blink of an eye? You bet. You think Murphy likes buy and hold investors? He loves short-term people with speculative deals because he doesn’t have to spend that much time. He just kicks over your apple cart and walks away laughing. You can lose your money, period. On the other hand, you can put 1 or 200,000 in with me and in six or eight months, say, get your hundred back that you put in and get another 120, 30, 40, or 50 in six or eight months. Now could it go a year? Trust me, it can, and we can’t control it. You’re dealing with government officials, suppliers, subcontractors. There’s all kinds of stuff that you just want to pull your hair out or get a gun. It’s what Murphy is all about but I think this is a really rare opportunity. The last time I did short-term investments I don’t even remember who was president. That’s how long ago it was. I really like this stuff. It’s still speculative. You can still lose money, but I’m doing it and I’m putting people I like into it. If you’re interested, nobody knows it.

People ask me every now ‘n then if they can invest in the BawldGuy Note Fund without ever buying notes. The short answer is yes, and here’s how.

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Transcript:   I was asked by a guy that was wondering about what it’s like to be a client of Brown and Brown Investment Properties. What if he was an accredited investor, but didn’t want to buy notes, but he saw the return I talked about, 8%? Well, he’s on to something. There’s nothing that says you can’t put in whatever money you have and get your 8%. The fund’s going to profit by that, by using your money to create a lot bigger yield than that, but you’re not getting into the risk that you perceive is more than you’re comfortable with. The other thing is the difference between what you could be getting with that money right now, which is probably 4% at the most, five if you’re lucky. If you’ve got, say, half a million bucks, it’s the difference between 20, 22, 23,000 and 40,000 a year. That makes an impact. If that’s what you want to do, the commitment inside the BawldGuy Note Fund is for three years, and you make 8%. It’s electronically put right into your designated account every month. That’s the management you have. No muss, no fuss. You’re under no obligation whatsoever, no exceptions, to ever buy a note. Yet, you’ve increased your income 72 to 100% from what it would have been, avoiding risk on Wall Street. I think that’s something that matters to people where you can make just a small change in where your money is, and come close to doubling the yield. In some case, actually doubling. That’s all I wanted to talk about today. That’s available to you guys. I’ll see you next time out.

Arbitrage is both misunderstood and misused. Explaining arbitrage can produce far better results over the short and long run, especially when it comes to retirement income.

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Transcript:   Today, we’re going to talk about what the heck arbitrage is. We hear that on the financial news all the time, and it sound incredibly sophisticated. It’s really not. You borrow money at four percent, you make five percent on your investment. You’ve successfully arbitraged the way it’s supposed to be. Here’s the deal. If you’re wondering how to get started, and you don’t have enough to buy real estate, or maybe you’re not into real estate right now. You want some notes at a discount because you know those are high yield. You can borrow $100,000 at say 4 and a quarter, and you can go get 10 to 15 percent yield, cash on cash on those notes. Remember, cash on cash doesn’t mean that the entire return is going to fall in that range of 10 to 15 percent. It means if you add your payments up, divide by what you paid for the note, and it comes out 12 percent, your cash on cash for that note was 12 percent. Since you bought it at a discount though, you make the profit that adds on, when it pays off to your 10, 12, 15 percent. Let’s do an example. John and Suzy have a $200,000 condo, and they have a way to borrow $50,000 at 4 percent. They borrow it. Then they come to me, and they put their money into a note. Maybe they buy a note for $70,000. They get payments on that note that end up being somewhere in the vicinity of say $8,000 a year total. They put $50,000 in it. They’re making 16 percent, so they did really well. That note pays and pays. Meanwhile, they’re paying a principle and interest payment of far below $8,000 a year. That note payment is not only more than enough, even after tax probably to pay their new house payment at 4.25. When that note pays off, they don’t get 50, they get 50 plus that nice $20,000 discount that they paid, minus a little principal that they’ve received. They can choose if they want to, to let it roll, and just keep paying off that loan, which is probably what most people will do, or they can pay off that loan, and maybe they have the ability since then to acquire more cash and they’ll just keep doing it. The key to arbitrage is simple. The cost of your money must be less than the yield on your investment. If you can continually do that for decade after decade, that will be a huge source of income for you when you retire.

Inflation and real estate are misunderstood sometimes. ‘Course it depends on what side of real estate you’re on when inflation hits.

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Transcript:   People wonder what happens to real estate investments when inflation hits. The consensus isn’t on one or the other whether it’s going to be inflation or deflation. I don’t want to be the bearer of that news but there’s a school of thought, and I think this is the majority school of thought, that says inflation is waiting for us. They argue that the normally accepted formula for inflation has been altered so much that we don’t even know if we’re experiencing the amount of inflation they say we are. I’m one of those. I shop for groceries too and I’m telling you right now, food has been going up at a bigger rate than 2% a year. I don’t know about you but that’s what I see. It looks to me about 10%. Same thing with gas and diesel, right? Energy costs more than 2% a year more. I don’t know what it is; i don’t know what it’s going to be. I just know because I worship at the altar of fundamental principles. I don’t predict things; I don’t come across as I understand this is what’s going to happen or that. What I look at is if you print a whole bunch of money, the government, and you keep printing it and keep printing it and keep printing it, and you don’t see inflation yet, at some point it’s not that somebody magically has obviated the consequence of unending money printing. It’s that it hasn’t the street yet. Now there’s all kinds of reasons why all that money hasn’t hit the street yet and that’s a different conversation; that really isn’t apropos to my blog. What is apropos though is that if and when that inflation does hit, your real estate will be affected in this manner: Rents tend to track inflation; that’s a good thing. Not for your tenants, but for you. In the 1980s when we had runaway inflation, we had double digit inflation for many, many years in a row. We had interest rates for prime rate 18 to 20%. FHA was over 16. Conventional rates 16, 17, 18%. People were getting certificates of deposit for 13, 14% at the bank. I tell that to young people and they get excited. I have to remind them, wait a minute. Yeah, grandma got 14% at the bank for a CD and she got it for sometimes two or three years. The problem was that was interest. She paid ordinary income taxes on that interest and then the interest rate, the inflation rate at the time, was just under, equal, or maybe even more than that interest rate. She might have put a 100,000 in and made 14,000 a year but after inflation and after taxes she probably didn’t have her original hundred in terms of actual buying power. Everything’s relative. Going back to your real estate, though, if your rent was 1,000 dollars a month, if inflation hit, in the next six months that rent’s going to be able to be a lot more than a 1,000 dollars, maybe 1,030, maybe 1,100. I don’t know; it’s your market. It’s how high was the inflation, etc., etc. What was the supply and demand in your market? That’s going to have a large impact, too. What really happens is that inflation causes rents to rise. Now what happens with the value? Real estate values also, with some rare exceptions, they track inflation, too. If you buy real estate and you’re wondering what’s going to happen to your net worth, generally speaking the income produced by that real estate and the real estate value itself are going to go up as inflation shows its ugly head. Now is it going to track it exactly? No – or yes. Where are you? What kind of inflation is it? How did the government choose to combat it? It’s different each time.

Definitions of concepts — today’s concept is depreciation. What is it? Who gets to use it against their job income, and who doesn’t?

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Transcript:   Everybody wants to hear what depreciation is, because they hear tax shelter is what it really means. Well, they’re right, it does. What it really is, is the recapturing of the aging of a property. That’s over-simplified terribly. But properties get old, and things age, and so they lose their value, at least in concept. So all depreciation is, is the tax code gives the investor a certain number of years. In residential investments it’s 27-1/2. It’s 39 for commercial. And there’s different kinds of depreciation. The depreciation covers cash flow from the investment first. If that cash flow wasn’t enough to take up all the depreciation that you had, any leftover goes to the investor’s income that he makes at the job. That’s called ordinary income. There you just learned another one. Now, here’s the problem. If you make $100,000 or less, you can take up to $25,000 a year in leftover depreciation that’s covered cash flow and was left over. You can’t use any more than that. But if you make over $100,000 a year, and up to $150,000, they begin taking that $25,000 away in a ratio from 1:150. So if you make $125,000, and you have $25,000 of depreciation left over after cash flow, they’ll only let you apply $12,500. If you make $150,000, you’re now barred from using depreciation against your ordinary income. It just goes on the shelf. We’ll talk about that later. There’s another kind of depreciation. The first kind of would be called more or less straight line. I say vanilla. It’s called cost segregation. All that is, in a nutshell, is instead of taking a 27-1/2 year for residential, 39 for commercial in terms of years, and it’s just the same amount each year for those number of years, and you can’t depreciate land, only the building. What they do is, they give a life to every component of the building. So air conditioning, heating, electrical, roofing, you get the idea. They all have lives. It’s usually going to be 5, 7, I think some are 10, very few, and then you have maybe 15 for foundation, things like that. But check the code. That’s how they do that. Now, what about long-term and short-term capital gain. Short-term capital gain is under a year, and that means you’re going to pay ordinary income tax rates, just like you had a second job. So if you flip a house, get everything done in 6 or 8 months, you make a profit, that’s your second job, big guy. You’re going to get taxed that way. Now, if you make an investment and your intent, not accidentally, your intent was for it to be long term, and you hold it over a year, and you sell it, the tax code says you’re going to pay capital gains taxes, which are usually far more attractive and lower than ordinary income tax rates. Today, I think that’s enough to chew. Don’t you think?

Buying notes vs real estate is often the wrong context. But let’s talk about notes for a bit.

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Transcript:   One of the decisions, when investing in real estate or retirement, that people make, is when they learn about the existence of discounted notes secured by real estate. Then they really light up when they learn about being able to buy them at a discount. Buying a note at a discount means, even thought the interest rate on the note might be 4%, 5%, 6%, whatever it is, and it’s, say, a $100,000 note, if it’s 5%, the payments might generate $5,500 to $6,000 in principle and interest payments per year. So if you gave the holder of that note $100,000 for his $100,000 note, you would be getting a $6,000 cash on cash return, in simple terms, if the payments for the year totaled $6,500 a month. But what if you paid him $60,000, $50,000, $70,000? That means that that $6,000 a year, let’s say you paid $60,000. You’re making 10% cash on cash. Well, now you’re talking. Then you have to say, well, it’s secured by real estate. Well, I like that even more, because if I make a mistake trying to buy low and sell high in real estate, where I’m really thinking long term, I’m just trying to make a good buy and make a profit wherever I can, in real estate. If something goes wrong with your formula, your plan doesn’t go as you thought it would, well, you either hold it forever, or you lose the property, or any number of things, most of which don’t put a smile on your face. On the other hand, you bought this note. You paid $60,000 for it. You’re probably, in real life, my experience says you’re probably making $7,000 or $8,000 on that $60,000. Okay? That note all of a sudden stops paying. You say, “Well, I don’t like that.” Nobody does. But now you may have to foreclose. Well, what’s the property worth. You say, well, we had that bubble burst. You know, when they first bought this property, they paid $130,000 for it, and they borrowed $102,000 or $103,000, or whatever 80% was. They paid it down to the $100,000, and you bought the note. The problem was, that properties not worth $130,000 any more. It’s worth $100,000. You say, “Jeff, why on earth would any bozo pay for a note who’s security is only the same value as the note? A hundred and a hundred. Isn’t that what they call 100% loan to value?” I say, “Your math is right, but your context is wrong.” The person that lent the money, from whom you bought the note, they were 100% loan to value. You paid $60,000. You’re 60% loan to value. They put out $100,000. You didn’t. So now you say, I have to foreclose. Well, that means you have a $100,000 property. It costs you 8% or 10% to sell it. You get $90,000 or $92,000 out of it. You only have $60,000. You made a profit. Of course, that sounds good on paper, but let’s kind of go through that a step at a time. What are the chances you don’t have to put a little bit of lipstick on that pig to sell it? So let’s say you have to put 5 grand. Let’s say you’ve got to put 10 grand. Well, now you’ve got $70,000 in it. Then you say, well, but I lost $10,000 in payments, because it took me a long time before I foreclosed because I had too big of a heart, and then it took me a long time to foreclose. Well, there’s another $10,000, now you got $80,000 in it. What if you sold it for $95,000, because you want to sell it in 6 days, not 6 months. Now you net out maybe $83,000, $84,000. You still got more than you put into it. So see, that’s how the discount works. Now, is it more complicated than that? Oh, you bet, and a half. There’s all kinds of of due diligence and factors.

One of my favorite client couples, hands down. Here’s a 30 year old couple case study. Though the results are impressive, the process is surprisingly boring.

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Transcript:   Let’s do a case study today. A young couple just turned 30; they’re high earners. Between the two of them they make quite a bit of money, probably over a couple hundred thousand total. They save a lot of money; they don’t live up to their eyeballs. Several thousand a month after tax; probably five or six thousand. They have enough money to buy one small property in Texas. It’s going to cost them about 80-85,000. They’ve done that. We’re about two years into their plan. He thinks he’s going to work until his mid-60s. No matter how much I try to move him off of that rock he stays on it. He loves what he’s doing so I’ll believe him now. She’s not started having kids yet and they have said they’re going to have them. Your know happens when we have kids; we’ll let them find out for themselves. For now they have built themselves up to where, in a few months this summer, they will close their fourth small property. Now they have, give or take, 1,100,000 in property with a total of about 70%, 73 or 4 percent in debt. It’s all cash flowing and what they’re doing as part of their plan is they’re taking all the cash flow plus what they can comfortably afford – and they make that decision. Comfort zone is a big thing; you know that with me. They’re going to add a little bit from their family budget every month to the total of cash flow from all four duplexes, onto one of the loans. They’ll pay that loan off early, however long it takes. Then they’ll just go to the second duplex and they’ll do it until all four are free and clear. My guess, assuming kids and Murphy’s law and just life happening, getting those four paid off is going to take somewhere between eight and twelve years. Okay? Now, because of their youth, an EIUL – equity index universal life – it’s an insurance policy, and it’s geared towards income. It’s not geared for life insurance. Yes, there is life insurance but that’s secondary. I sent them to David Schaefer, my in-house expert on EIULs; he has forgotten more than I know about them if I studied them for five years. Bottom line is they’ll put 1 to 2,000 a month, again depending upon their family budget and their combined comfort zone. When they’re 65-66, somewhere in there, the numbers work out – and this is Dave – that they will begin receiving just a few happy meals, over 200,000 a year tax free for virtually the rest of their lives. That’s a stand alone source of income, has nothing to do with real estate. The premiums are indexed to inflation so they don’t get the results wiped out for some bad economic times. It’s structured to give them flexibility and it’s independent of everything else they’re doing. If everything goes to hell in a hand basket so to speak, they have over 200,000 tax free, which at that level of income you’re probably talking about 260 to 300,000 free tax income for most people. Now look at their four duplexes. They’re probably going to buy more because they save a lot of money. Well let’s just say that’s all they end up with. That means from the time that they’re no older than early to mid-40s, they’re going to have in the vicinity of 5 to 6,000 dollars a month coming in from four free and clear duplexes. They can do with that whatever they want: buy more, buy notes. Oh notes, yes. They’re having a hard time wrapping their heads around the concept of notes. But slowly but surely they’ve come around to the idea of it because at first they were concerned about the risk and...