Where Will the OPPORTUNITIES be in Note Investing in the Next Few Years?

Question

“Notes” are such a BIG field, that I’ve found it more efficient, effective and profitable to target specific “arena” of notes at different times in different economic environments. I know most BP note investors deal in SFR notes exclusively, or at least mostly, and for myself 98% of my note investments are notes secured by commercial properties. But, that aside, I’d like to initiate a discussion of where note investors feel the opportunities will lie moving forward.

I’ll go first. I see two major areas I will target (NOT exclusively) in 2025.

1. Real estate loans to owner occupied properties where the business of the owner is closed down - or SHOULD be, and the owner needs some time to sell the property. if the note is currently in default and we can buy at at least a small discount, we may be able to restructure the note with no monthly payments - we would get paid all interest at closing when the property sells. Typically, depending on the LTV - and we wouldn’t go above 50%, we’d be looking for a 18 - 25% annual return. Sometimes we structure a”kicker” where if the property sells for over a certain amount we earn part of that. We’ve used this at least 5 times previous with excellent results

2. Note origination where the borrower owns multiple properties with little or no debt, needs a loan for an acquisition, but can't produce proof of income sufficient to get institutional financing. On these we are targeting g loans even we wouldn't normally consider; EXCEPT for the fact that we are receiving so much collateral that we end up at 35% LTV or less. Again, we have done this successfully in the past.

Maybe it’s just gut feel, but for some reason It FEELS like these two scenarios will provide excellent opportunities moving forward, while fishing for notes to purchase at significant discounts to current principal enough to yield sufficient returns doesn’t seem as promising.

Please share your thoughts on this topic.

Chris Seveney · Answer

Great post as always Don. Every year I do a podcast on predictions and what I am targeting. Here are some things we are targeting (and not targeting)

Targets:

1. Defaulted SFR loans - 1st position only (this has been our bread and butter over the years and we will continue to play in this space). We continue to see slight upticks in defaulted loans and loans in bankruptcy. The bid ask spread that had a very wide gap at the beginning of the year from 2023 has started to tighten and we are able to get more deals across the finish line.

2. Residential transition loans similar to what Don mentioned in #2. Short term (12 months), low loan to value with borrowers who have strong credit and significant assets. This for us is preferred over seller financed deals as we can do 65% LTV, 800 credit with someone who has net work 2x+ loan and get double digit rates.

3. Residential loans where borrowers do not need money but want the money (ie. they could have paid cash but want to have some leverage).

AVOID:

1. Seller financed loans where there was no downpayment- See #2 above as typically seller financed have lower rates, longer terms and higher LTV. Many of the loans we see also are not well underwritten and properties are at 125%+LTV

2. Defaulted owner occupied loans originated post covid. - Interest rates are too low and these will end up in bankruptcy and you will be buying a 3-5% loan at very low discount that would yield you returns that are not worth it.

3. Large Commercial - There will be a lot of opportunity in this space, but at this time we have around $35M raised which for large commercial is not a lot and I prefer a broad and diverse portfolio. If someone came to us with a participation, we still would most likely pass as residential is our bread and butter.

Where Will the OPPORTUNITIES be in Note Investing in the Next Few Years?

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