Posted 12 days ago

The House Always Wins. Are Real Estate Investments Rigged For Failure?

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I remember one September night back in 2002. I was a sophomore engineering major at Penn State adjusting to the one-star accommodations of a fraternity house. My buddy Steve asked me if I wanted to split a bet on the OVER of the Ravens, Broncos game on Monday Night Football.

Having never made a wager in my life, Steve had to educate me that a bet on the OVER was a gamble that the total points scored by both teams combined would be greater than the stated number by the bookie, in this instance, it was 38. We split a $25 bet.

If we won, the bookie owed us $25. If we lost, we owed the bookie $28; $25 plus the 10% juice.

We won, I was hooked, and I went on to lose $330 that semester.

As I withdrew the money from my account, I remember thinking, “You’re such a dumba$$, the house always wins.” It was a hard but valuable lesson for a broke college kid.

I’ve spent the last 15 years of my life advising on Fortune 500 mergers and acquisitions, raising over $1 billion of capital across the capital stack and managing investment funds in the oil and gas and real estate sectors.

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Recently, I joined a fast-growing alternative lender in the residential real estate space, with the mission to raise money for a fund that would make short duration loans to real estate developers to construct or renovate residential properties.

“Investing to me has always been about trying to understand risk-adjusted return.”

You cannot compare an investment that projects a 15% return with one that projects a 10% return without understanding the risks associated with each. In many instances, the lower return will prove to be a far better overall investment.

As I dived deep into the world of real estate note investing, before accepting the gig with IFC, I could not help but be reminded of the parallels between being the house in sports betting and being the lender in real estate.

In sports betting, the house has a definitive edge because you owe the house 10% more if you lose than they pay you if you win, which imputes to a roughly 2.5% advantage. In real estate investing, the lender secures 100% of the value of a property and provides a cash loan equivalent to roughly 65%-90% of its value.

If the borrower “wins” and pays back the loan, the lender gets all its money back plus whatever interest it charged. If the borrower “loses” and defaults, the lender owns the property at a sweet discount to market value. You do not have to be a statistician to see how the odds favor the lender.


While maybe not as sexy as following Dave Portnoy’s stock pick of the day, I encourage you to consider real estate note investing as means of generating a superior risk-adjusted return in your portfolio. Investing is just a socially acceptable form of gambling and with all things gambling, the house always wins

Want To Learn More About Real Estate Notes…Keep Reading.

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If you want to invest in real estate, but hate the idea of becoming a landlord, buying real estate notes is a great alternative.

If you’re anything like me, you value your time. Although rentals are passive income, it’s not a hands-off, passive investment.

Real estate notes, on the other hand, can be a great passive income opportunity with a lot less leg work. However, you must know exactly what you’re buying.

As I said there is always risk involved with investing. No, real estate notes aren’t rigged. However, you must be in a constant frame of mind that the house always wins — even when you have won previously. That goes for any investment. You must understand the property values, the various notes available, and the borrower’s financial situation.

What are real estate notes exactly?

Real estate notes (or mortgage notes) are loans that borrowers take out to buy a property. Lending institutions or banks make the loans, and sell the real estate notes to free up cash flow.

The buyer becomes like the bank, oftentimes purchasing notes at a low price. Then they collect the borrower’s interest and principal interest rate payment.

What are the risks?

Before taking the plunge in real estate notes, there are a couple of things you need to know upfront.

Understanding the science behind buying notes, screening borrowers, and the types of mortgage notes available to purchase will be your safety net.

Real estate notes have separate asset classes divided by commercial or residential loans. Based on the category of real estate notes, you will need to understand the inherent risks associated with them and try to minimize them. 

Real estate notes can help you reduce your hassle and be a good source of passive income for you. However you must understand the risks involved with the type of real estate notes you got and remember that the house always wins!




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