Your Motivation To Start Investing In Mortgage Notes:

[Bill McCafferty]

Question of the day;
What was your biggest motivation to start Investing in Mortgage Notes?

[Don Konipol]

@Bill McCafferty

I found I could achieve my target ROI with a lot less risk and a lot less work and time investing in notes rather than investing in real estate.

I also found that notes secured by commercial property to have less competition on the buy side, thus available at higher yields. Added advantage is that commercial property notes are available in larger principal balances, are not tied to borrowers salary or income, are not subject to Federal regulation via the Dodd Frank Act or CFPB, nor are they subject to state laws regarding homestead or personal residences.

In 1999 I started investing in notes personally. In 2002 I started funding originations in addition to buying notes. In 2002 I started a commercial hard money investment fund and ultimately funded 400 plus commercial mortgage loans. The fund was terminated and liquidated in 2012. In 2013 I started a fund that (1) invests in hard money commercial loans I originate (2) invests in performing commercial mortgage loans we purchase from both individuals who owner financed a commercial property and banks wanting to remove a note from their portfolio, and (3) invests in commercial mortgage notes in default from banks where we are able to restructure the note so the borrower can avoid foreclosure, often providing him with the time necessary to sell the property.

My preference is to buy notes at a discount, as this is more profitable than originating private or hard money loans. However, since not enough are available meeting our criteria, we do continue to originate hard money loans.

On a personal level I also invest in real estate equity deals. Although my returns are lower than with my note investments, equity investments provide an inflation hedge, or inflation insurance should we have a return to the high inflation of the late 1970s and early 1980s. My strategy is to have my real estate portfolio leveraged 50% and value equal to twice my note portfolio. So if I have say two million dollars in notes, I also have two million invested in real estate at 50% leverage so the real estate is valued at four million. The result is that the entire four million invested is “inflation insured” by the four million in real estate.

I am able to obtain about a 16% annual yield on my note investments and about a 8% return on the real property investments. This does not include any capital gains appreciation on the equity side.