Can you hit your wealth targets only by investing in notes?

Question

Each one of us has his own wealth targets, the question I ask myself is if you can hit those by only investing in notes.

Should we diversify our real estate investment portfolio (like I believe in - I invest in notes but I already completed few flip projects and I hold few buy & hold Duplex's as well) or go "all in" into notes business?

And what should be the notes investor ultimate goals (same as a flipper which start with a SFH is aiming to grow to multifamily projects or new constructions) - Growing to invest in commercials notes for example?

Appreciate your thoughts.

Andy Mirza · Answer

My two cents: To build wealth the fastest, I believe that you need to figure out what your niche is and then focus most, if not all, of your efforts on that one thing. Become the best that you can be at that one thing and say "no" to everything else. I've done fix and flips, still have rentals, and work with notes. I'm the best at the note business and am concentrating all of my efforts on that. When I do the fix and flips on the side, it takes away capital and mental bandwidth from my note activities. If I spend time on those other activities, it takes away from my ability to do the one thing that is the most important to scaling my business: raising capital. If I split my time, I feel like I'll be mediocre at several things instead of great at one thing.

At the same time, I feel that diversification is critical as well. My retirement accounts are invested in stock and bond index funds and a couple of note investments that I do not control. I get exposure across the major asset types in my retirement and non-retirement accounts.

Gil Ganz · Answer

The last paragraph is gold. I think what @Andy Mirza mentioned also relates to that. Do what you do best to increase your wealth, when  you want to protect your wealth, diversify. Doesn't have to be one or the other you can have the majority of your portfolio invested in what you do best and the rest diversified.

Dan Deppen · Answer

You can hit your personal financial targets with a notes business. However I think you should have some of your personal wealth diversified into other investments such as stocks/bonds/other forms of real estate.

Eran Lifshitz · Answer

@John Corey, @Andy Mirza, @Gil Ganz and @Martin Saenz - Very interesting insights.

I think that my personal opinion is a merge of all.

Focus on what you do best is important, but in parallel always keep your investments bucket diversified.

Few months ago I saw one of Tony Robbins fascinating lectures and he gave an example of a well known business man who went up all the way to wealth of few hundreds of M of $, lost all and came back all the way up, and when asked him what did he learn out of it his main lesson was about the important of diversify your investments and not focus only on one segment.

John Corey · Answer

Taking the narrow view of the question, it depends on four variables.

1. The target amount?

2. The compounded rate of return you can achieve?

3. The amount you are starting with?

4. The ability to scale (volume of opportunities, the DD overhead, and other risks issues).

You could hit a wealth target with bank savings if you leave it in the bank long enough and start with enough capital given the target and the interest rate.

I suspect the biggest issues will be the gap between the target vs the starting capital and the work involved dealing with the notes. If you have a large portfolio, the operational risk becomes a big issue (losing track of the details).

Warren Buffett and some others have spoken on diversification. The general view is the theory is great for salespeople selling financial product or investors who want to be passive. Warren would rather have a small, well-chosen portfolio than a diversified one. Easier to achieve 'alpha' when you are not diversified. The more you diversify, the more you move towards the long term average. And most people working on creating wealth, rather than protecting wealth, need to outperform the average. Once you have wealth and you are just maintaining it, the broad average will deal with the downside risk for little effort.

Nate Marshall · Answer

If you qualify as an Accredited Investor you should look at investing into Syndications in Multi Family. Good operators generate great returns and most want to payoff their investors in 5-7 years. So notes are great but look at being an AI in a syndication. Generational wealth!

Logan Hassinger · Answer

No matter what business you’re in, to hit your wealth goals you need diversification.

John Corey · Answer

Eran, I would take something different from the example Tony shared.

1. Get really good at something. Increase the odds that you have a competitive advantage. That is how you can build success and wealth. The wealth also requires that the activity scales. You can be the best doctor (high skill) yet will struggle to create real wealth if you are still selling time for money.

2. Remember to take some money off the table. You are not investing to grow the money off the table. You invest so inflation does not eat the principal. Other than beating inflation, there is no much need to focus on the returns. You are using the funds in this bucket to provide stability in the long term. To have cash built from #1 even if #1 blows up.

Martin Saenz · Answer

Hello Eran, more information would need to be understood.  What type of notes do you invest in and with what outcome are you seeking?  If you are referring to 1st resi NPN's, you may be exiting through the property by which you are making a capital gain play, unless you are working a seller finance angle on the back end (or rental).  For me, I buy NPN's with the intention of keeping the borrower in their homes with loan modifications.  It provides cash flow that I live on as I self-manage my commercial/residential r/e rental portfolio which is a longer term play.  Most don't play in my sandbox as it is a GET RICH SLOW strategy and doesn't always carry that quick turnover that the property plays give you.

Eran Lifshitz · Answer

Interesting @Nate Marshall - Will be happy to get more information from you about that.

Can you hit your wealth targets only by investing in notes?

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