E314 | What Stock Market Volatility Means for Note Investors

Welcome back to the Paper Trail podcast.

I am your host, Curse Sevany.

And today we're diving into a topic that's on a lot of investors minds.

What is going on with the stock market?

But more importantly, how does it impact mortgage note investing and our mortgage note fund?

Whether you're a seasoned investor or just now exploring alternative investments, understanding this distinction can be the key to building a more stable and diversified portfolio.

Let's rewind a little bit and start at the foundation and core.

And let me explain what mortgage note investing is.

Mortgage note investing involves purchasing debt secured by real estate.

You're essentially purchasing a mortgage and note and you're stepping into the shoes of the bank.

You're not buying the property.

I want to be clear.

You're not buying the property, you're buying the paper and the right to collect monthly payments from the borrower.

So instead of dealing with tenants, toilets, termites, you're collecting income while someone else lives and maintains a property.

Again, you are the lender.

The analogy I always like to use is if the roof leaks, that borrower is not calling us.

Because you own a house, you don't call your lender with a roof leak.

So here's the kicker.

We talk about mortgage note investing.

Unlike the stock market, mortgage note investing is not correlated to public equities.

Let me say that again, not correlated, meaning we've had a 10% swing over the past month.

Your note portfolio really hasn't flinched.

Ours has not.

I know a lot of folks saw their 401ks take a serious hit last month.

I have several co workers asking what do I do with my 401k.

I've never been through anything like this and I'm the old cat in the mix here at my company.

First off, I'm not giving financial advice.

I'm just telling you what I did way back in the day.

And that's it.

It's where you work 40 hours a week for 40 years and only retire on the hopes that your 401k gives you 40% of your income.

Not exactly comforting when you have markets like what's going on today?

I'll share a story of how many of you out there have parents, have grandparents, know somebody who's in their 60s looking to retire and they can't.

You know, their taxes, their insurance are still extremely high.

They may still have a mortgage on their property that 401k isn't cutting it.

Now, thankfully.

My dad worked for a school system, so he had a pension before he passed away.

And he was smart to take less.

So when he did, if he passed away, my mother would still collect something.

It's an avenue of understanding that is not going to cut it.

And you need to look at alternatives.

Now you might be wondering, Chris, you talk about the markets.

How do interest rates factor in all of this?

It's a great question.

The short answer is interest rates don't impact us the way they invest, they impact other markets.

Why?

Because we're not buying based on market rate.

We based on it.

We buy based on a targeted yield.

And if you think of this example and it's, I'm not a big fan of giving examples.

Close your eyes so.

Well, don't if you're driving.

But if a mortgage which is fixed at 6%, what's going on in the markets and what's going on in interest rates doesn't impact that loan, think of yourself.

If you own a mortgage, what's going on out there?

I have a mortgage rate, I think I'm at 3% or wherever my rate is.

What's going on out there has zero impact.

My payment stays the same.

Nothing changes.

The only thing that can change is if I lose my job.

But when my bank looks at mortgage that's fixed, what's going on really is irrelevant because everything is staying the same and we're buying based off of a yield.

So if it's non performing, we're buying it based off of a targeted yield that is going to be significantly higher than the federal rate and interest rates on loans.

So if that deal doesn't meet our expected return threshold, we just pass on it.

We like to stay disciplined and stick to the notes that hit our specific criteria.

And that's how we try and protect returns and attempt to minimize interest rate risk.

Now, within a mortgage note fund, there are two primary categories.

We invest performing notes where the borrower is paying on time.

These are more predictable and typically offer steady monthly cash flow.

And then the non performing loans where the borrower is in default, they have a greater amount of risk, but they also, because of the risk come at a discount that also Has a higher upside potential.

As an example, let's say you're buying a non performing note on $100,000 loan for $70,000.

Borrower hasn't paid in two years.

We reach out, have an attorney send a letter, work out a new deal with them, they start paying again and then we modify that loan.

Now that loan could be worth 85,000.

We created value and it's just not a win for the investor.

But it's also a win for the borrower too because they're staying in and keeping that home.

That's how we make money based off of these types of loans.

And when you hear all of this, do tariffs come into play?

No.

Does Nvidia stock going up and down or Facebook or Amazon stock, do those come into play?

They don't.

You know, the jobs market typically is the biggest influencer on what we do now.

People reach out and there's a lot of myths and facts and misconceptions about note investing because most people haven't heard about it, even though it's a 16 trillion dollar industry.

So let's talk about some of these myths and facts.

Myth number one is mortgage notes are only for banks and institutions.

Fact is we have a regulation a + offering where you can invest in our fund which invests in mortgage notes for as little as $5,000.

So unlike real estate syndications, you don't need 100,000, 200,000.

Start with $5,000.

Diversification.

Myth number two is you need real estate experience to get into notes.

The fact is you're investing in a fund like ours.

Our team handles asset management, the due diligence.

We have servicers who handle the outreach.

You don't need to be a landlord, you don't need to be an underwriter, you're an investor.

Myth number three, if the borrower stops paying, you lose everything.

Fact is, these notes are secured by real estate.

If borrower doesn't pay, we have recourse through foreclosure, taking the property back via deed in lieu where they don't go through a foreclosure, just hand it back.

Short sale.

We like first position liens so we're secured by that real estate compared to unsecured investing, which is nothing to back up that investment.

So I want to pause and recap what we've covered so far.

Just make sure everyone understands mortgage notes.

And investing in mortgage notes allow you to act as the bank and you collect the payments without owning the property.

It's mortgage, not investing.

Again, it's non correlated to the Market look at it as an alternative hedge against volatility, which we're seeing a lot of volatility right now.

You can invest in performing, you can invest in non performing notes, different risk profiles or you can invest in a fundamental that typically offers both for diversification.

And I wanted to crush a few of these common myths around accessibility, risk and knowledge to get involved.

Now I want to shift gears a little talk about how we look to mitigate risk and protect investor capital.

One, we do a deep dive into every loan.

We consider we analyze a property's equity position as we want strong collateral behind a note.

We want to be in first position.

That means we're in control.

We review the borrower's payment history and credit profile.

And if you've watched some of our other webinars, we talk about the 3P's property, the person, the predicament.

Here the borrower is a person.

Why are they with the predicament?

What got them behind what is this type of borrower?

Did they file bankruptcy seven times or is it something that temporary job loss as well as getting that property looking equity position, getting eyes on the property, what does that property look like?

And another key factor is we partner with licensed servicers, attorneys, title companies, insurance companies, tax review companies.

We want to verify documents, perform the checks and ensure compliance and make sure that the asset which is the real estate is protected.

We're not just spraying capital across random deals.

We are extremely selective.

That's how we look to reduce risk.

Let me share an example with you.

I'm recording this podcast and today we are bidding over five million dollars on a pool of over seventy million dollar pool.

And a pool is a list of assets.

So 150 assets, call it $75 million.

We are cherry picking that pool or that list of assets for five plus million dollars of the ones that fit our buy box and the ones we feel meet our profile of underwriting and that risk profile that we look for when we're successful.

We have in house asset management and also our investor relations team who is also in house that take over every process in the company.

We actively manage our assets with real time updates, monthly reports and investor relations on that transparent communication.

If you pick up the phone and call our office and want to speak to somebody about your investment, We we have 800 plus investors in our fund.

I believe you want to talk to somebody, you'll get somebody on the phone.

So that's another huge differentiator that also for me when I was looking at creating this company, what are the things when I invest that keep me up at night, people not responding, people not emailing me back when I want to know what's going on, people keeping me in the dark.

So we want to take our fund and make sure the things that we've seen that we did not like, we tried to incorporate.

I briefly talked about how we make money on notes.

I want to dive a little bit too into exit strategies a little bit more.

And we have significant amount of webinar videos on all of this.

But a big advantage of mortgage notes is the multiple exit routes and going back to the markets, the stock market, you can invest in different asset classes of tech versus real estate versus other asset classes, bitcoin, crypto, whatever it is that could be considered as good strategies in notes.

With real estate we have multiple exit strategies within this platform.

Borrower could be re performing, we get them back on track.

There is foreclosure, we take control of the property which is the last resort and happens again, number about 10% of the time feed and lieu where they just give us a property back, we can sell the note, they can short sale the property.

So there's many options to exit which is a little bit different when you think of traditional real estate.

If you own a rental property, say you bought 200 and you owe 150,000 on it and tenant damages it, you need to put more money into it.

Property value may have gone down, taxes, insurance gone up, so it's cash flow negative.

What are your options there?

Pretty much your only option is to sell that property and take a loss possibly or take a cut.

In note investing, it's much more diverse because you're the lender, you're really at the top of the food chain looking ahead the economy, let's dive back into that.

And I want to wrap up on how does the current economic outlook affect mortgage notes.

We've all seen what's happened to office, multi family, other asset classes over the last several years.

I think a lot of people are nervous right now.

Rising rates which they have been coming down, but they're above what they were the last three, four years have made traditional real estate investing harder.

Mortgage is more expensive, inventory is tighter.

But for note investors, this environment actually increases opportunity.

Think about it, the more concerns with the economy, whether it's job loss, increased costs, those will cause payments go up or income to come down.

That typically leads more non performing loans that will hit the secondary market.

That creates more opportunity to acquire assets at discounts.

As long as your position to act, that is A key factor I want to highlight again, as long as you're in position to act.

I say that because I got a call yesterday from a company who is a year old.

They've been doing originating loans, short term, six 12 month loans and they reach out and said we want to start buying your non performing loans.

And I asked question who's your asset manager versus I am.

I'm like what's your experience in non performing loans?

I have an origination background and had zero experience in non performing loans.

And for me I will say any company that wants to shift into something new and this is a question, if you're an investor, make sure you ask this question.

How long have you been doing this?

Because do you want to invest in a company that wants to get into something that they've never done?

We've seen what that did to multifamily sponsors three, four years ago.

Chances of success when you create a new business unit with zero experience is going to be challenging.

If we want to expand into a business unit, we always look who, not how, who is the person we're bringing in that has the expertise and experience that can slide this in and get it operational understanding, that's going to take time.

Sorry I went on a little rant there but it's just when I see people trying to shift into things, it makes me nervous.

Back to the outlook.

We're already seeing this uptick in inventory coming to the market from banks, hedge funds, servicers.

We're seeing it on more on investor loans than on owner occupied.

We're seeing 200 million a month right now in the amount of non performing loans that are probably investor loans.

And you look back at Florida, Texas, a lot of place, people were ramping up for rental loans in those areas.

Taxes, insurance and everything else.

And inexperience are starting to sink in and hit and people are now not being able to pay.

So we're seeing upticks in those.

While there's volatility in the markets, yes, there's.

We're seeing volatility in the notes base.

Volatility in the notes base increases more non performing loans, increases the supply which typically increases that discount.

When we say non correlated to the market, some may say it's negative correlation.

I don't like to say that, but it's not correlated.

So if you're looking at an opportunity of where you could invest.

Mortgage note investing has some unique and interesting components to it.

Control Rockefeller strategy, Control everything.

Own nothing.

You're the lender, you're in control.

Don't own it.

And you're primarily insulated from that chaos that's going on in Wall street because you're buying at a discount, attempting to work with the borrowers and managing the assets proactively where you can create real value, not just paper gains.

I want to wrap up and say one last thing.

This is not a get rich quick strategy.

Investing is a long term wealth building play.

I'm going to repeat that.

It's a long term wealth building play.

It's rooted in discipline, process, smart investor and deal selection.

Whatever it is you want to do with your investment strategies, I strongly recommend that sinking and I'll share another story where I saw a Facebook ad Yesterday company offering 3 to 5% return per month, 36 to 60% return per year.

I am 100% calling BS on that investment strategy 100% because I can tell you if I could make 36 to 60% I would not be out there getting money from other people and paying them that much.

I'd be keeping it all for myself.

Because if they're making 36 to 60% per year, they still need to keep some from themselves.

Think about that.

So if it looks too good to be true, it is.

This wraps up today's episode of the Paper Trail podcast.

If you are looking to diversify your portfolio with a non correlated asset class to the markets, head over to 7e Investments.com to learn more.

We also have tons of webinars, guides, investor FAQs, stories from people just like you who are looking to invest in notes to build wealth.

And hey, if you found this helpful you could hit the subscribe, drop us a five star review and share this with a friend who hopefully is also ready to stop riding this Wall street roller coaster.

Until next time, happy investing.