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From W-2 to $8K/Month Passive: The Note Investing Strategy That Let Sierra Davis Quit Her Job and Pay Off Her Student Debt
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- [00:00]
A
I quit my W2 in April because of the passive income and that forced me anywhere between 6 to 8,000amonth. I was able to pay off $60,000 worth of student loan debt in less than two years by using this method.
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B
There's still parts of this that I'm just not getting. Where's the spread? Where's the profit coming from?
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A
99% of people have never heard of it, but 100% of you have been on the other side of the coin. You can just collect monthly income without having to do much of anything. I was like, huh?
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B
Walk me through, like, what's an average deal size for you?
- [00:28]
A
If I use that same $25,000 for a down payment on a house versus just buying a out, right?
- [00:35]
B
All right, all right. What is up, Action Academy family? Welcome back to another episode of the Action Academy podcast, Corporate America's least favorite podcast. We are doing an AAC and Action Academy member spotlight today with Ms. Sierra Davis. Sierra is coming to us now a full time investor. She left her W2 back in April and she has a strategy that I am actually not very familiar with. So I'm very excited for today so I get to learn alongside you guys, the audience learning about real estate note investing. So Sierra, tell us a little bit about who you are, how you got started in this and like, what are the economics behind note investing?
- [01:11]
A
Yeah, so I'm Sierra Davis. As Brian mentioned, I'm based out of Kansas City. And one of the cool things about note Investing is probably 99% of people have never heard of it, but 100% of you have been on the other side of the of the coin. So basically I've been fortunate enough to do this for seven years. And like Brian mentioned, I quit my W2 in April because of the passive income and that affords me, you know, anywhere between 6 to 8,000amonth as well as just paying off debt. So I was able to pay off $60,000 worth of student loan debt in less than two years by using this method.
- [01:52]
B
Let's go. It's freaking sick. It's six to eight grand a month ain't nothing to shake a freaking feather at, girl. So what were you doing? What were you doing before? What was the profession? And then what got you interested and knowledgeable about note investing to begin with?
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A
Yeah. So I come from a data background, so I spent a number of years in data and analytics from AI, data science, machine learning, all the tech stuff, and spent much of my career just focusing and analyzing data, building models, looking for uncertainty and Making sense, sense of it. And I got my mba. So I was sitting in my MBA class and really thought, you know what they tell you, like, go, you know, corporate ladder. You have to have all these degrees and initials behind your name. And so I just did that. And once I graduated, I had that student loan debt bill that comes at you quick. And I was like, okay, I have this good paying job, know, six figure paying job, and I have to pay the bank for the rest of my life. $400 a month. Right. Plus interest. And so I was like, okay, I need to find a way to supplement my income. And so I took seven months to learn about different strategies in real estate, fix and flips, rentals, all of these things. And I came across this tiny little book about note investing. And it basically was saying, oh, you can just collect monthly income without having to do much of anything. And I was like, huh. So I talked to a mentor of mine, my cousin, and he was kind of like, oh, yeah, this is, you know, what you can do with this and seller financing. Create a financing world. And what I learned at the time, I guess I would never have gotten to this place if I'd just taken that seven months to learn as much as I could before jumping in. And then I just pulled the trigger and went right into that, create a finance side of it first. So basically creating the seller finance notes and then from there buying notes across the country.
- [04:09]
B
Beautiful. So we'll get into like the actual tactics of how do you buy a note? What exactly is a note for somebody that's unfamiliar? So it's basically from what my understanding of it is, is you're buying debt and you're kind of reselling debt in the private market. So what people don't realize is that their mortgages actually trade privately a lot. And I think that's what you're talking about here. But first I want to go into a little bit of a mindset thing because you come from a background in tech and in data and you're hyper, hyper analytical. And from a lot of our Action Academy members and people listening, especially like engineers, systems engineers, mechanical and data, it's difficult for them to stop the analysis and start the action.
- [04:50]
A
Yep.
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B
So they have a tendency to overanalyze and over predict every single path and possibility. And they don't actually like, do the thing and make a decision. So if you were speaking to somebody that's listening, that is of that mindset, what's some advice you can give to helping them kind of draw a line in the sand and say, okay, cool, I have the sufficient data. It's time to just roll up my sleeves and get to work.
- [05:13]
A
Yeah. So don't take seven months like me. Just don't do it. This is number one. Just don't do it. Because. Because the book that you're reading, the things that you're learning, it doesn't change. Every time you open up, it's going to say the same exact thing. So just do it. So don't change. It doesn't change. So I think that's one of the things that you have to kind of do is like, read the books. Yes. Look at all the data. Get all the data that you do need, and then take action. Take action on just that thing. It took me a Sunday morning. I went to Craigslist, Kids, you might not know what Craigslist is, but I went to Craigslist and I made a call. That one call just started everything. And I think I was just brave enough to just do that one call on a Sunday, just out, you know, out of the blue. And that's what happened. I could have done it five months earlier, but I, you know, I learned everything. But I would say that take action.
- [06:16]
B
I think what's funny is everybody, again, like, I've said it a million times, but I'll say it a million and one. You wait for the confidence to take action, but it's the building of the. It's the taking of the action that builds the confidence. And I think if people would just give themselves permission to take imperfect action, it'd be a lot better. Because what you will learn doing the thing in a month will replace the same time of you learning about the thing in a year. Like, you just messing up because you're going to mess up. I'm sure you messed up a million times. I've messed up a million times. The first couple of hires we made for our company, like, it was. The hiring process was, hey, cool, you're alive. You should work for us. Let's go. And you're like. And it just. I got lucky and it worked out. But there's more to it than that. So cool. So walk us through. So now you took action. You made a phone call. You called someone on Craigslist. So walk us through. What the hell is note investing? So talk to us about how debt works in the private market.
- [07:19]
A
Absolutely. So I want to start from, like, saying, okay, when you buy a house, you probably didn't pay full cash for it. You got a loan from the bank, and that bank basically sets up payment terms, monthly payments on, you know, just contracts. Right. And at the closing, the buyer will sign some paperwork with a promissory note and a document basically securing that loan for the house. And more than likely it's probably 30 years. And so what's interesting about that is that the bank can sell that promise to pay to investors like myself, usually at a little slight of a discount, basically a little bit less than what the borrower owes. And so the homeowner, basically, their payments don't change, everything stays the same based off of that contract that was set in place once they did the closing. But now those monthly payments just go to another bank or an investor. And so that's kind of how you become essentially the bank.
- [08:17]
B
So what is the bank's incentive? So what is the bank's incentives? Why do they want to. Because I've had this happen to me when I had houses, it would get sold to another bank. So it'd be like you get with Wells Fargo. All of a sudden you sell to somebody else or you sell to a private, you know, mortgage company or something like that. I had that happen multiple times. Why does that happen? Like, what is the benefit to the bank? Why does the bank want to sell the debt or even have the debt for sale?
- [08:43]
A
Yeah, that's a good question. So typically the reason why is it either they need cash flow to do other lending. In a seller finance world, let's say if a seller is carrying back a note, they might want to do more deals. And so instead of waiting 30 years to get that payment of all those payments, they pretty much get them all up front at once. And so that's why they would particularly sell those. And those are, you know, performing and non performing. I'll talk about, you know, performing ones are the, basically the ones that are always making payments are really good. Those also get sold. But the bank also sells distressed, distressed assets. And so those particularly are the ones that they want to get off their books because they're in the business of banking and they don't want to take that house back.
- [09:30]
B
That makes more sense to me.
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A
Yeah, they would definitely want to take that. But in terms of like the bank selling those off, maybe they have a fund. You know, I've seen several funds selling them off. It's just a number of ways to get cash flow back earlier than waiting X amount of years.
- [09:49]
B
Got it. So in my brain it makes sense for a bank to a bank that does mortgages, to buy another bank's mortgage that does mortgages. Right. So you're telling me that private investors can come buy these. How does that work? Like, how do you find debt and then how do you negotiate? Why does the bank wanting to sell to you versus somebody else? And then what's the advantage for the buyer? You?
- [10:10]
A
Yeah. So if I could step back that typically the banks are not selling their good debt, they're gonna probably sell their bad debt. What I focus on is seller finance notes, and those are investors like anyone that can basically sell their property on seller finance terms. And those are the main investors that I work with. And so those seller finance deals, they probably again, want to either buy more property to do another deal. They, you know, got their down payment already. They've gotten upfront costs. They pretty much got all the, the. All the money that they might probably put into it back. So they're okay with getting a little bit of a discount for that property, for that payment in that paper.
- [10:59]
B
Yo, what's up, guys? One sec. You're listening to a podcast right now, and I freaking love that podcast. But this is not making you more money. What makes you more money, more wealth, more equity, is being in the room with the people that you're hearing on today's episode. If you want to be around hundreds of other people like you leaving corporate America, doing big deals in business, commercial real estate, and land, check out actionacademy.com, go in the show, link the show description, and click the link to book a call with our membership director team. We'll give you the resources, the connections in the community to actually pull off the stuff that you're learning about on this podcast, and we'll hold you accountable to the actual implementation of the information that is actionacademy.com now let's get back to today's episode. Cool. So you focus primarily with investors. So walk me through the. The transition transaction itself. So maybe walk us through a couple of deals that you've done so that we can put like, pen to paper and understand the actual transaction.
- [11:57]
A
Yes. So basically I would buy. I would look for a deal that says that, you know, what if they have $40,000 left on their mortgage? And so I use a calculator, and that calculator will say, okay, how much would I need to offer them if I wanted a 12% yield? And so I would offer them that price. And let's just keep it simple. Let's say they were okay with 22,000, even though the borrower still has $25,000 left on it. So once we, you know, the offer is accepted, there's a bunch of paperwork. And so we talk about the three Ps in notal investing is people, property and paperwork. So we look at the people that are involved in it, basically the buyer and the seller. Look at who, who is the buyer, who is a seller, Are they financially stable, Are they making payments on time, have they skipped payments? Are they going through a bankruptcy? All of that goes into like the underwriting process. And so I would say the underwriting process probably takes about 14 days. But we're really looking at all the things surrounding this loan document. And it could be several different pages, basically 30 years. If I'm buying it at 25,000 unpaid balance, it might only have about five years left on it. So it might have transitioned certain hands throughout that time. And so we're looking at the property. Is the taxes and insurance current? Even though I'm not buying this property, I still want it to look nice. I still want it to have really strong value. And looking at the title work and so I can do like a drive by by that, but really understanding the property itself and because that's my, that's my collateral, that's my fallback proof. So if I'm buying this note and something happens, if I have to foreclose, will I get my loan?
- [13:58]
B
You're taking ownership of the property?
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A
Yeah, I'm either taking ownership of the property or it's going to an auction and I just recoup whatever I invested in. So I'm looking at a lower loan to value. It basically means that the lower the loan value is and the higher the value of the property is. That's what I'm looking for. So I want to make sure that that property has some equity and is a good neighborhood and is a sellable property that somebody actually wants to buy. If I do get that property back. And then the paperwork, right, I'm looking at the paperwork, making sure all of it's documented, all of the promissory notes are in place. I have all of the signatures and things like that. Because if those things are in place and I have to go through a foreclosure, it needs to be enforceable. So if Wells Fargo assigns, didn't assign it correctly and I'm in a foreclosure process, they're going to throw it out, but I have to make sure all of that is together. So it's really analyzing all of these things. And after that you're ready to close. And they basically sign those documents to you, record them, and you get set up with a servicer and that servicer handles all your paperwork, all your communications, and the borrower's paperwork. And typically that costs about $25 a month. So let's say I bought this note for 22,500. I'm getting 12% return every year, and my monthly payment for the borrower is $500. I just. My only expense for the month is for that loan is $25, so I keep the rest. So I'm collecting 475amonth.
- [15:44]
B
Okay, cool. So there's still parts of this I'm just not getting. So. I mean, because you're still making the debt payments, so I guess I'm still trying to figure out where's the spread, you know, like, where's the profit coming from? Because you're taking. You're taking something that somebody's paying the debt on, but then now you're taking over the debt. I mean, are you just making your spend on the interest payments or.
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A
Yeah, so I'm not taking on the debt. I'm buying the debt. So the.
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B
What does that mean?
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A
Yeah, so essentially I'm getting assigned those payments. So, Brian, you were assigned those payments, and then now Brian assigns those payments to me. And so therefore, I have just the authority to take those monthly payments for myself. So I'm. I'm basically buying something that I can get a higher interest rate at, versus maybe a rental property or a high yield savings account. So let's say, for instance, instance, you put that same 22,500 in a high yield savings account with 4.5%, probably even less than that, where I can go buy a note that's secured by real estate, maybe 12 to 15%. And I get 12 to 15% yield on that money.
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B
Damn. Okay. That's sick. And you're in a first position. Lean against the real estate.
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A
Exactly.
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B
Okay. Okay, cool. Was it Dave Van Horn that wrote the book?
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A
Yes, it was Dave Van Horn that worked the book.
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B
Yeah.
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A
So.
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B
Okay, cool. So I remember having. Yeah, I remember having Dave on the podcast, and I didn't understand this shit either, when he was on the podcast.
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A
Yeah.
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B
So he's the one podcast guest, literally two and a half years ago that was on. I was just like, man, this guy's so smart. I was like, I just do not understand this. But no, no, that was. Now that you're saying this, it's like, shout out Dave. Yeah, Dave. Dave's on the show. No, that's. That's freaking awesome. Okay, cool. So you're looking at like a 12 to 15%, the 12% spread on the freaking first position. I mean, that's, that's freaking, that's freaking sick. So walk me through, like, what's an average deal size for you? Like, and how do you find, how do you find this debt? Is there a private marketplace? Is there a third party? Where do you go?
- [17:55]
A
Yeah, so basically I, you know, there's a bunch of ways to market for this. So because of the paperwork is all documented, you can go through county records to say, okay, seller, Sierra sold a note, carry the back, and so she might be interested in selling that note to me. That's one deal. There is a marketplace that you can go to to find different types of notes. And they could be land, mobile homes, single family. I've seen multifamily. I've seen commercial spaces. Everything has a note. Everything has some type of note. Car notes, don't buy car notes, but everything has some type of debt. And one of the things that I like to think about is if you had that same $25,000 and you wanted to get a rental property. Notes always win with the cash flow especially.
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B
There's no way you're going to get one for 25 grand either.
- [18:56]
A
Yeah, but if you're looking at the down, if I use that same down $25,000 for a down payment on a house versus just buying a note outright, I'm going to get two times more cash flow every.
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B
Yeah, I think, I think it was cool because how Dave positioned it and how you're positioning it is basically like no tenants, toilets or termites.
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A
It's ex.
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B
All of the, all of the rental income and all the upside with the downside is the, the borrower defaults on the loan, in which case you take ownership of the asset. Exactly. Cool. So what's your, what's your buy box for a deal like this? So it sounds like a pretty cash. You need to be a pretty cash liquid business or have some private investors on the side. So what's your buy box and how do you fund these deals?
- [19:38]
A
Yeah, so my particular buy box, I look at states I invest across America. So I look at different states that have a shorter foreclosure process. So like Texas, Missouri, North Carolina, Tennessee, places where there's a deed of trust and that doesn't have to go through some of the judicial processes. Whereas some, you know, some states that I do avoid. And I'm looking at unpaid balances between 25,000 to 75,000, where I can basically have maybe five to 10 years left on that note. And looking for a 12 to 15% yield on those. Those are a sweet spot for me and I like to get seasoned notes. And basically what seasoning means is that the borrower has been paying for, I don't know, 24 to 48 months. Whereas it's not just a newly created note, but we have some data behind it. Right. They've made their payments on time for two years. They probably have some skin in the game, they're getting equity and so they're probably going to continue to pay. It's not foul proof, but, you know, it's one of the things that I look for. And so what I do and what I've done in the past and continue to do is work with capital investors to buy my first position performing notes and basically keeping that spread. So if a note may be paying $1,000, I might pay my investor 500 and they get a reasonable interest yield, interest return on that, anywhere between 10 to 15% based off of what I've received. And so a lot of the investors that I do work with, they invest in their self directed IRA or they have this money sitting in a high yield savings account collecting dust. And so those are the ones that want to get their money working well without having to go through all of the things that I have to go through. So I handle all the due diligence, underwriting processes, working with attorneys and lawyers, title companies and all that things that they probably don't have time for, but they still want to have a strong win win situation.
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B
Got it. Okay, so to really like cement this down, say that you find something that's $100,000 a day, right?
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A
Yep.
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B
And you're like, all right, this is a good deal. And you cut and you're like, man, I got $17,000 in cash. I'm strapped. I'm going to go to Brian, I'm going to get a loan from Brian. Brian's going to. Brian's going to take over this? No, he's going to be the capital partner on this deal. How do you have enough meat on that for me to eat and yield 10 to 15%. And then you also yield 10 to 15%.
- [22:27]
A
Yeah. So like I said, if I'm making sure that I offer at that price, making sure I offer at that 15% yield so that you could get that 12% yield for yourself. And so as we begin to build, there's a number of strategies in note investing that I could do now. So let's say if I have a note, I can what is called hypothecate that note, basically borrow against that note. So now that I have that note, you've given me so some really good cash, I can go and borrow that note and kind of basically replace that cushion that I gave you, that spread. And so now I'm able to buy more notes over time. And so building that portfolio of notes and investors, and that allows me to scale a lot longer and without having to sell my notes. And also if, if I am Stratford Cash. Right. There's sellers that can buy that sell partials of notes. And so basically a partial would be like, let's say I only buy two years worth of payments. And so I can buy two years worth of payments. And after those two years are up, I get my nice return. Those payments go back to the original seller.
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B
Okay, cool. And then for the capital partner, how long is the term?
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A
So typically I like to go from like 24 to 60 months, depending on how the investor likes to handle that. But typically that's kind of where the longer term investment is because, you know, like I said, we're holding these notes for a longer period of time. So that's kind of where we need those monthly payments to be structured. Typically, we like to keep it, as, you know, at the amortization. Amortization schedule based off of the note that we do buy. So make it to match that.
- [24:17]
B
Got it. Okay, cool. So walk me through. So what's the portfolio today that you, that you're rocking? Like, what's the passive income that you got? And then let's kind of close this out with how you're actually building out the team now that you're full time.
- [24:29]
A
Yeah. So as far as we have about a quarter of a million in under management. So thinking about the paid balances that we do have. And so that's spread across my business now, which we've been in seven years, and some have gone and went, but we've probably gone through over 26 transactions over time. And so right now we're building out a team where we can have operations managers look at due diligence processes, building partners with lawyers, and even mentors that can help us look at deals that they've been around for quite some time. So they can see things that we might not spot and see, but really just making sure that we're doing our part, you know, our best effort, especially working with capital partners and our business to do a good job in selecting deals. And it's not like it's not foul proof. Right. I'm going through a foreclosure. Right. Now, and so I haven't been paid in a year. So that's, you know, that's just the name of the game. But once we go through all of that process, we will take possession of that and resell it for more than what we pay for. So it's a game. It's a long game. And I really wanted to do this because I wanted to replace my income in a way that could last for a number of years.
- [25:51]
B
Cool. So what's the vision? So my last two closing questions are one, what's the vision for the future? And then number two, how can somebody get started in this? So first, what's the vision for the future over the next three years?
- [26:02]
A
Yeah, so the vision for the next three years is basically to scale this 10x and get more monthly income and work with investors as well as buyers who are looking to get into properties that may not be able to get into mortgages that come from the bank. And so providing them a way to get home ownership and equity through a better means. And so that's really exciting to our team as well, making sure we create these notes as well as buy them. Um, and then what was your next last question?
- [26:36]
B
Yeah, the last question is if somebody's listening to this and they're like, hell, yeah, Sierra. Like, this is sick. You know, I'm working a job right now. This sounds interesting to me. Like, I want to get started, but I don't want to take seven months. Like, what. What's some advice that you can give for them to get started and get rocking?
- [26:51]
A
Yeah, so one of the things that I do, I have a book that can allow you, you know, show you exactly what this strategy is and you can get that. Put the whatever in the. In the link as well. But really just look at that. That book and kind of understand what it is and take action. I think that's the number one thing to do once you find out what you're optimizing for. If you're optimizing for monthly cash flow, this is a goal, this is a strategy that you can't deny. If you're optimizing for appreciation, maybe you diversify in it and add on to your rentals or add onto your small business, but really just understanding that, you know, it is a learning curve, but with guidance and help. I think that buying a note with secured by real estate is one of the best strategies you can start with versus, you know, stocks and dividends and a rental property.
- [27:48]
B
Yeah, no, I think it's freaking sick. All right, sweet. So if People want to find out more about you. They want to find out what. What the link is they want to maybe potentially invest with. Where can they go?
- [27:58]
A
Yeah. So if you go to Sierra Davis, official on Instagram, I'm there. As well as wealthwithnotes.com you can go there and sign up for a free educational email course. And I send out little tidbits about note investing all the time and where I'm speaking and show you exactly how the strategy works for all of those who are working full time.
- [28:21]
B
Beautiful. That's where we can go. And then last question is maybe capital amount. Is there a specific capital amount that somebody should have? So, like, if somebody's buying real estate, we like to see maybe 50 grand. You know, is there a specific capital amount that somebody should start with?
- [28:36]
A
Yeah. So I think it's a good way to get started with 20, you know, 20,000, you could get a really strong note that pays about 12% on your money. So I definitely think that's a good starting point.
- [28:50]
B
You know what? And at the end of this, it's like, people are like, oh, well, let's just do the S&P 500. But the S&P 500 is trading at, like, I think, a 26 XP ratio versus the 13, which is the traditional sweet spot. So it's about two times overvalued today, driven by seven of the largest companies in the world, and the rest are all just kind of chilling. So if you guys want an alternative to the S and P, like, I think this is a wonderful alternative backed by real estate. First position, 12%. I'll take that all day, any day.
- [29:21]
A
Yep.
- [29:22]
B
So sweet. Yeah.
- [29:23]
A
Appreciate it. Yeah. And it doesn't change like the stock market changes up and down, but whatever's in that contract remains the same.
- [29:30]
B
Boom. Let's go. So, guys, everybody, that is wealth with notes.com, correct?
- [29:35]
A
Yes. Yep.
- [29:36]
B
Wealthwithnotes.com and then we'll have Sierra's Instagram in the show description. Ladies and gentlemen, that's S I E R R A Sierra. So beautiful. All right, thanks so much for coming on. It's been absolutely awesome.
- [29:48]
A
Thank you so much.
- [29:49]
B
And with that, it's been Sierra and Brian with the Action Academy podcast signing off. Boom. Thank you guys so much for listening to another episode of the Action Academy podcast. My one ask real quick before you go. If you enjoy this episode, if it brought value to you, please share this episode with one to three friends that you think could get value from it. This is how we grow the show. And at minimum, if you could leave us a five star rating and review on Apple podcasts, Spotify or whatever platform you listen to that would mean the world to us is how we get in front of other entrepreneurs. If you're done sitting on the sidelines, you're done listening to the podcast. You want to be the freaking guest on the podcast? Go into action academy.com, go in the show description, the show link, and book a call to speak with our Action Academy community. We have hundreds and hundreds of people just like you buying businesses and commercial real estate with full coaches, full mentors, full support, full capital. Everything. ActionAcademy.com is where you'll find us.