Biggest Lessons Learned from 2020?

[Andy Mirza]

What were the biggest lessons you learned from your note investing in 2020?

For us, these were the two biggest:

1. The structure of our funds led to our ability to withstand the extreme volatility and effects of the pandemic in March. Our funds are structured where payouts only occur upon liquidations. Since we didn't have the pressure to sell, we stood on the sidelines to wait as the NPN market recovered.

Lesson: Make sure that the structure of your fund, JV, or arrangements with financing are in line with your business model so that you can withstand or deal with extreme events or market downturns.

2. Limit your risk by spreading capital among a lot of different notes. This is very basic but it can be more complicated to implement. You are limited to buying NPNs depending on what's available from your sellers. At times, you will have to make the decisions on risk/reward depending on the deals available to you. Even though a deal looks great, what the borrower does and your ability to accurately assess the complete interior and exterior property condition is limited. 

We bought a note backed by a gorgeous looking residence outside of Dallas, TX. The borrower filed a BK that delayed us by 8 months, which led to increased carrying costs. It turned out that the REO had lots of problems that weren't easily identifiable but added a lot of money to fix.

Although the reward would have been great, the downside was not worth it to us because of how large a part of the portfolio it represented. Far better to have purchased 2 or 3 notes instead of just one. 

Lesson: Limit your risk by spreading capital among a lot of different notes. Maybe have some rules that you won't go over a certain amount or buy any notes that exceed a certain percentage of your portfolio.