All Forum Posts by: Mike Hartzog

@Jay Hinrichs - The 500K minimum makes a lot of sense for the way you are working. Sounds like you are having fun at it too. :-) Regarding NPN, I don't feel comfortable using investor money for those either. Our fund is an income fund which buys only performing assets. We work our NPNs in a completely separate entity using our own capital.

We have a 50K minimum.  Personally, I don't believe that the income/asset yardstick used to qualify an investor as accredited is a good measure of someone's ability to analyze an investment or bear the associated risks.  Most people don't earn more than 200K a year.  I know many folks making less than that, trying to save for retirement, and really in need of the kind of investment vehicles funds can offer.

Regarding one-note, one-investor, I know a lot of folks doing offering these as JVs.  That's fine, but I feel that a fund offers much better diversification.  One note puts an investors eggs in one basket, while a portfolio of them spreads the risk and minimizes the impact of a single note not behaving as anticipated. 

@Jay Hinrichs Got it, thanks for clarifying.  Our fund is filed under Regulation D, Rule 506(b).  This allows 35 non-accredited and unlimited accredited, but no advertising.

@Jay Hinrichs - What are you referring to with "1 mil dollar PPMs"?  I think you are making assumptions here. For the record, our fund is 20M max offering.  We have a mix of accredited and non-accredited, most of which have 6 figures invested.  We offer new units only when we have good assets to back them up, and we are selective about who they are offered to. 

My assumption is that none of our investors would be comfortable losing money.  Forget about the 50K investors, we have some family members in the fund!  Who needs that kind of awkwardness at Thanksgiving dinner...  :-) Without getting into details, let's just say we run a tight ship with regard to capital preservation.

@Brian Eastman - Thanks for the clarification. 

Our mortgage fund can have non-accredited as well, and there are others, but they are more difficult to find because funds registered under rule 506(b) are not allowed to advertise. 

One thing to keep in mind when investing in a fund from your SD IRA is to understand its use of debt.  If the fund uses debt, it must be non-recourse debt. Otherwise your income would be subject to Unrelated Business Income Tax (UBIT).  Ideally you want to find a fund that is consciously managed as IRA friendly.

@Dion DePaoli By definition, in an inflationary environment money loses its value.  When this happens, it takes more money to purchase hard goods than it did before.  Therefore, the true value of cash I have in accounts as well as money that I am owed (loans) goes down.  It's a very clear relationship. 

Yes, when the value of collateral appreciates, the equity position of existing debt secured by that collateral improves.  This could have a small impact on the price a given loan would sell for in the secondary market.

So what do you think the Fed will do in the event inflation increases significantly above their 2%target?  Who knows, but my guess would be that part of the strategy would include raising of  interest rates, like they did in the early 80's.  The federal funds effective rate was over 18% at times in that time period. What happens to the value of your 8% rate loan when new debt can be issued in the high double digits?  Take a guess... You definitely would want to be a borrower at 8% rather than a lender in that kind of environment.

@Dion DePaoli - I agree with your comments regarding decreasing/increasing interest rates impacting the value of existing loans.  The same dynamic happens in the bond market.  It is true that lower rates with drive up housing prices as they have over the past few years.  This affect, however, is limited to the housing market and is not inflation.  The inflation rate for the US economy overall has been hovering around 1%, which is shy of the Fed's 2% target.  What I am talking about is broad inflation like we saw in the 1970s and early 1980s.  In that type of environment, hard assets like real estate can help preserve wealth. 

I love notes and hold many of them in my portfolio.  Like rental real estate, notes have their strengths and their weaknesses.  Consider the following:

• Inflation - In an inflationary environment, real estate values will rise with inflation while the value of notes will decline (because the value of the dollar that is loaned is declining). 
• Taxes - Income received from rental real estate is significantly sheltered from taxation by property depreciation.  Interest received from loan repayment has no such built-in tax advantages.  Because of this and other factors, notes are a very nice asset to hold in self directed retirement accounts where the income is tax advantaged.
• Appreciation - Loans simply don't appreciate in value.  Real estate may not either, depending on the market, but the opportunity for appreciation is there if the real estate is in the right market.
• Leverage - As a general rule, you can't get financing to buy a loan.  You have to buy loans with cash.  We all know that it is quite common to buy real estate with financing. 

So while notes don't have the same maintenance and other difficulties that come with real estate, they don't have many of the benefits either.  My view is that is good to have both notes and real estate.  I like to hold notes in self directed retirement accounts so that the returns are protected from taxation.  I like holding real estate outside of retirement accounts where I can take advantage of financing and built in tax advantages.

Here's a few blog posts to get you started...

An Introduction to Note Investing

Elements of NPN Investment Evaluation

Evaluating NPN Exit Strategies

Due Diligence for Notes - Tax and Title

Doing the Math on Mortgage Notes