What Kind of Investor Should You Become?

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Quite often, I’m asked to meet with folks who want to learn more about investing in notes or more about the note business in general. Although what I do today pertains primarily to the note business, many of the questions and concerns that are brought to me are very similar to those raised when investing in the residential or commercial real estate business.

Personally, I feel that there are two ways to approach the newbie investor.

The first approach, which I am not a very big fan of, is to silently yell, “Yippee, here’s a live one! I wonder how much cash he/she has and how I’m going to get my hands on it.” I’ve seen many people, who raise capital, take this type of approach, basically sending the message, “You need me, and I know more than you. So trust me, I’ll make you a lot of money.” In other words, let me give you a fish.

The second approach, of which I am a bigger fan, is to give the investor the opportunity to learn how to invest, whether it’s in real estate, notes, or anything else for that matter. Basically, let me teach you how to fish. And with this newly obtained information, the investor can then decide (and take responsibility for) his/her best investment decisions.

With this approach, I typically interview the investor to see what type of investor they are.

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Are You a Passive or Active Investor?

Whether someone is a passive or active investor is determined by a few variables, and I use the interview questions in order to make the distinction.

Time and Availability

In my specialty of delinquent mortgages, the pattern of questions may stem from various potential options they may have. For example, I ask new investors how much time they have to devote to the business. Do they work full time at their current endeavor?  If the investor wants to be active, they might buy nonperforming notes and work them out themselves. Of course, this would mean that they have the time to do so and are inclined to do so. If they’re at a day job where they can make phone calls it might be doable, but if not, this could be really tough. If the investor wants to be more passive, they may use a servicer, such as FCI. They also may be more inclined to buy performing notes, as this requires less work on their part.

Capital: Accredited or Unaccredited

Another variable would be capital—how much do they have to deploy? Are they accredited (high net worth) or non-accredited? Often, accredited investors have a few more options available to them than non-accredited investors. For example, they have the option to passively invest in a note fund and collect “mailbox money,” as opposed to buying actual notes. Since they usually have more capital to deploy, they may also decide to buy nonperforming loans and hire a servicer to work them out on their behalf. Or, they may decide to do what I do and just buy re-performing loans, whether it’s in their own LLC or retirement account(s)—traditional IRA, Roth IRA, 401K, HSE, SEP, etc.

The unaccredited note investor may have fewer options, but he/she can still get involved.  Of course they can invest in nonperforming and performing loans, but another twist is that they can broker loans or joint venture with a few other investors. My one friend, who initially didn’t have much capital, just mastered the collections side of the business, and now he partners with folks who have the capital to put up.

Levels of Commitment and Risk Tolerance

Commitment level to the business is also a big factor. How many of us know someone who says they want to do real estate or note investing, but they just never do it. I think some of this stems, also, from one’s level of risk tolerance. Although, personally, I invest in many types of notes and mortgages, my company’s specialty has been second mortgages for the last several years. People often tell me that they think it’s very risky, to which I respond, “Really, I think investing in first mortgages is more risky.” Then they ask me why, and I say, “Because they have a higher price point, less upside potential, and all of your risk is in one basket (or fewer baskets).” To make my point even clearer, recently, I invested in a third mortgage. And yes, it sounds nuts, but it was for a buddy’s short term, commercial deal that had a boatload of both equity and cash flow. It’s all relative and greatly depends on one’s ability to mitigate risk.

Investment Goals and Business Model

I also ask new investors what their investment goals are or what their business model is, but it could be as casual as asking, “What can note investing do for you?” This often helps me, as well as the investors, develop an understanding of what they’re looking for. Everyone’s priorities are different. For example, someone who’s been investing in residential or commercial real estate may be tired of properties and tenants. This person may be less interested in dealing with a homeowner and more interested in investing in a fund. For a new investor, understanding your goals is crucial, whether you’re working to build short-term wealth, long-term wealth, retirement money, or legacy. For example, I have different investment goals for the different ways that I invest. I invest in a note company, I invest in a fund that does notes, and I invest in notes myself. I invest regular and IRA money in these three things.

I hope this article is, at least, a step in the right direction for new investors, who are trying to understand their own investing style and goals. I encourage you to learn as much as you can, in order to make the best investment decisions for you. After all, what’s best for one investor is not always what’s best for another. Are you respected, and are you allowed the responsibility to manage your own investments?

Also, I encourage those who advise potential investors to treat them as you would’ve wanted to be treated when you were starting out. Let’s not just throw them a fish.
Photo Credit: Todd Lappin

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

9 Comments

  1. Here’s the thing though: I don’t want to be taught to fish*. I just want to buy a fish (or a few fish).

    *Especially because this often involves “coaching”/guru bull that costs money and I have no interest in doing. I don’t want to find notes, or work them out. I want to purchase a few to hold in my portfolio.

    Yet finding a note company that will actually sell me a fish has been quite difficult, to say the least.

    (The author of this article’s company, for example, sells one note per week in a newsletter, if you happen to be the first to email them about it I suppose you can buy it, but what I’ve been told when I try is “that note is no longer available.” – there is no other way to buy a note from them currently besides waiting on the newsletter with the one note per week they’re selling. Very friendly customer service, but not very useful for those of us that just want to buy some notes.)

    Does anyone actually know of a note company that sells notes?

    • Dave Van Horn

      Hi Joe,

      My intention with this article was to point out that the investor’s needs should be the main consideration when helping them determine how to invest in something, not necessarily just my investment vehicle.

      But, I do understand your frustration, as the demand for re-performing notes is dramatically larger than that for nonperforming. It is tough, and I have a feeling it will only get more difficult as equity comes back into the market. It is a supply and demand equation, so the prices will start to go up, and it will become even harder to find notes.

      In our company, we do keep a portion of our re-performers to stabilize ourselves so we’re more bankable for institutional capital. Our larger, accredited investors, who invest in our note funds, end up buying the bulk of our re-performing notes. We do occasionally push some out to the public, but that being said, we do not have a trade desk for performing and re-performing notes because we are primarily a specialty servicer and a non-performing note company. There are other companies, although they may not have our type of warranties, which do have a trade desk for re-performers, such as FCI. There are also online platforms that sell notes, as well as various note groups and note meet-ups where people tend to sell notes.

      Another option is to buy non-performers, and if you don’t want to work them yourself, hire a servicer to get them re-performing for you. Then, you can continue to hold the re-performing loans in your portfolio. I know this might not be the option you’re leaning towards, but I’ve seen others do it, and it is also how I get my re-performing notes.

      Best,
      Dave

      • Dave,
        Thanks for the reply.

        I would still appreciate tips from anyone on any note companies that sell performing notes, have struggled to find any company that actually does, rather than just claiming to, but not actually seeming to do so.

  2. Hi Dave,
    Can you talk a little about your fund. I see you have individual notes that people bid on but like the last poster mentioned, it seems like work.

    What is the minimum investment and what is the holding period and payment schedules, returns etc?

    • Hi Jeff,

      We manage multiple funds with varying terms but our current offering is 11%, with a
      minimum investment of $10K, shares are sold in $5K increments, for a 3yr. term. (Please be advised that our funds are only open to accredited investors). Preferred Payments are interest only and paid monthly via ACH, to your bank account or IRA custodian. You can also redeem shares at any time to purchase notes from PPR. If you need more info feel free to message me or contact Kim Cooney in our Investor Relations Department at 877-395-1290.

      Best,
      Dave VH

  3. My first experience with Notes was 35 years ago. I sold a house, interest rates were 18%, no one was buying. I told my Realtor that I would take back a Mortgage at 12%, if she found the right buyer. I was able to get 50% up front. 30-yr. amortization with a 5-yr. balloon, no pre-payment penalty. Everyone was happy. I had a nice monthly income until interest rates fell and my buyer re-financed. Since I’m such a fan of seller-financing, I now represent sellers who are ready to sell their notes. I only deal in Performing, First Lien Notes. However, since I am clearly no longer young, I have become a Private Lender. I always have portfolio of Short-term, high-interest, first lien Notes. My return on these averages 11%. They are generally for about 12 months. If you think you’d like to buy Performing Notes, you’ll want to work with someone you can trust. And I have one important piece of advice. Never buy something you don’t understand. And, as always, consult your Attorney.

    • Hi Susan,

      Yes, I agree. If you’re having trouble finding institutional re-performers, seller financed or rehab loans are a viable alternative (but usually the yields are lower). I started with these myself.

      Best,
      Dave

  4. Dave, you are the man with the plan. Sorry for the late post. I’m actually attending a REI meeting locally where the main speaker is going to discuss note investing. With what u said that will help me decide on what aspect of note investing I decide on catering to. Thanks Dave

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