Buying Debt - Is it crazy to buy debt?

Sometimes it never ceases to amaze me the way people perceive debt buyers, but I do understand it to a degree because I went through it myself. I began my investing career in hard real estate, doing rehabs, flipping, and eventually lending out hard money for deals. So I understood the concepts of notes, but I still didn’t fully understand debt. I even took a really renowned note course and it took me 3 years to finally start investing! And even then, I had no idea how much more profitable 2nd mortgages could be, I didn’t want to hear about them because I always felt they were too risky. It’s funny how sometimes people who buy commercial paper think that folks who invest in 1st mortgages are crazy and people who invest in 1st mortgages thinks those who buy 2nd mortgages are crazy, and I used to think if you bought unsecured or car debt that YOU must be crazy!

But what I’ve really learned over the years is that they just have a different business model and that they’ve figured out a good way to manage risk that works for them. For example, most people who buy commercial or senior lien paper are typically geographic buyers who want the property. My company buys 2nd mortgages nationwide and we don’t want the property. We prefer to keep the borrower in their home and just rehab the paper. And this is just scratching the surface on the limitless ways to be profitable from debt investing. I know a company that buys unsecured debt where they scrub it for fraud and pre-package cases for collection attorneys and they go after the borrower from a criminal angle. These guys make 300-400% returns on some of theses deals because they buy the debt at half a basis point (half a penny) and then they sell it for 3 to 4 cents. So sometimes it makes me question who’s really crazy, the old me who was judging from a perspective without much understanding of their model or these unsecured buyers ACTUALLY making the return?!

And it’s not just properties, when I was at Equity Trust this year I meet an Average Joe looking guy (hope he’s not offended by me saying that) waiting in line for coffee and we got to talking. I asked him what he did for a living and he told me all about how he got into buying debt by accident through his brother-in-law. I was excited in general just to find another debt buyer but then he told me story and I was even more ecstatic than before. His brother-in-law had a used car dealership that was doing pretty good and out of nowhere the bank decided to cancel his line of credit, forcing him to ask AJ (the Average Joe) to loan him money. AJ used his Self-Directed IRA to do it, under the conditions that he would be paid 10% interest on his investment AND he would charge his brother-in-law a $250 fee every time title would change for the vehicles sold. Next thing you know, with the new capital from his brother, he was selling more than a few cars a month and the $250 would start to add up (all tax free mind you). THEN on top of that his brother asked him if he could do lend money to his friend with a dealership who ran into a similar problem. Now talk about getting into the right business at the right time, auto debt has changed incredibly over recent years because now cars have a GPS-type mechanism where it can disable the vehicle if the car buyer doesn’t make a payment, leaving your collateral out in the open and much harder to hide. And what makes it sweeter for my friend the Average Joe is used cars have never been bigger due to the current economic climate and lines of credit are being called for all types of businesses (hint hint). And up until this morning on my way to get breakfast, I was under the impression that auto debt wasn’t’ worth anything!


All of the investments I talked about sound like they take a considerable amount of capital and some can (like 1st mortgages or lending to small businesses) but investing in debt can start small too. I’ve been seeing a big resurgence of interest in Lending Club lately, where you can invest in unsecured debt and your minimum investment could be as low as $25! Now of course like investing in many things, diversifying is always a good thing so I’ve seen many friends of mine successfully invest $25 in Lending Club, only instead of doing it once they’ll spread their risk and buy 100 of these $25 notes, averaging a return of about 15% with a default rate of less than 5%. And it has a trade desk of sorts where you can sell your notes as well. I would recommend reading a new ebook I was given by people working in the Lending Club space called “The Lending Club Story: How the world's largest peer to peer lender is transforming finance and how you can benefit” (it’s free if you’re an amazon prime member!) And if you want a good primer into debt investing, I would also always have to recommend reading Jim Napier’s Invest In Debt. So what are you waiting for? Don’t sit around and wait for investing in debt to become the next Short Sale trend, get educated and start today!