Why Being a Note Investor Will Payoff Big in 2020 and Beyond

There is no denying our economy has seen better days. The effects the Coronavirus continues to have on our country and the world as a whole are staggering. The lost jobs, lost revenues, lost opportunities, lost freedoms -- not to mention lost loved ones. One of the best ways to avoid it is to look forward and prepare for the future.

As we brace for 2020’s almost-certain recession, we can use lessons learned in prior recessions to guide us away from risks and towards opportunity. While no two downturns are identical, a few outcomes are almost guaranteed. Credit is harder to find and harder to qualify for. Most businesses struggle and many close for good. Jobs are lost and unemployment claims rise. And many people can no longer afford their homes.

My real estate investing career began in the wake of the 2008 financial crisis when I began investing in non-performing, residential mortgage notes. My success was made possible by the opportunity that was present in the aftermath of the Great Recession. I was able to help reasonable homeowners retain their homes. I helped those who made bad financial decisions move forward with dignity. And I enjoyed fantastic returns that allowed me to quit my job and explore the country in an RV year round.

The perfect storm for note investors

Government intervention is currently helping many US homeowners stay in their homes until they can regain employment. For those whose jobs “come back” quickly when American life normalizes, this assistance could prove to be the only way many homeowners were able to retain homeownership. But for those families who were overextended before the virus or who had jobs that will be permanently eliminated by this economic shift, this support may only delay the inevitable.

There are countless ways to invest in real estate, all of which can be profitable if managed well. But not every strategy does well during an economic downturn. When homeowners stop paying their mortgages, this “distressed” debt provides a huge opportunity for note investors. This impending flood of non-performing mortgage notes will be one of the greatest opportunities of the next decade.

Where will the opportunity come from?

Servicers and financial institutions are already dealing with a surge of borrowers requesting loan forbearance. According to the Mortgage Bankers Association, 7.54% -- or 3.8 million -- of residential mortgages were in forbearance by April 26, 2020. Black Knight recently reported that the national mortgage delinquency rate nearly doubled to 6.45% from March to April 2020, the largest increase in delinquency ever recorded. And the Bureau of Labor Statistics believes that due to interviewer error, their reported 14.7% unemployment rate is actually understated by almost 5%, making it not the highest unemployment rate since the Great Depression but rather the highest ever reported.

Assistance programs and stimulus plans can only help for so long. Servicers who work with mortgage-backed securities are legally bound to make payments to their investors even if the underlying borrowers stop paying. They will be the first to have to sell loans because of the crisis. Next will be the banks who don’t have sufficient cash flow to offset the missed mortgage payments from their delinquent borrowers. Once these loans are sold to hedge funds and other institutional investors, they too will begin selling mortgage notes, moving the deals that don’t fit their business model to smaller investors who are more flexible.

But while these results are almost given, there is no lack of uncertainty in how it will play out. Just a few of the unknowns:

• When will these loan sales start? How long can the industry support the current status quo?
• Which distressed debt will be sold off first, residential or commercial? In addition to what homeowners are facing, landlords with delinquent tenants that the government will not allow them to evict will only be able to hold on for so long. And how long can hotels and office buildings sit idle?

Why note investing leads the pack

Note investing is not my sole investing strategy. I’ve also:

• owned residential rentals,
• gotten started in self storage investments,
• wholesaled properties and notes, and
• fixed and flipped houses.

But mortgage notes continue to be my preferred strategy because of the flexibility and opportunity it provides.

I’ve owned notes in over 13 different states, visiting less than 10% of the deals I’ve invested in. I hire industry experts to be my eyes and ears so that I can manage my business from my RV. This week, I’m closing on a new non-performing note deal in Indiana on the beach in Mexico where I’m currently in self isolation.

Most of this business is done online so all I need is an internet connection and a phone to:

• Help borrowers stay in their homes or resolve their financial distress as amicably as possible,
• Gain access to discounted real estate that can be sold with affordable seller financing to buyers who cannot obtain a mortgage and
• Make a substantial profit for myself, my business partners and my retirement fund.

Note investing is not risk free. No investments are. There are bad note deals and many things that can go wrong in good deals, especially if you don’t know what you’re doing. But there is clearly a huge opportunity coming for those who are trained and prepared.