All Forum Posts by: Tracy Z. Rewey

@Zachary Beach Interesting read and thanks for sharing.  Curious your thoughts on how the understated inflation will impact a note portfolio?  We have bought and sold notes since 1988 so have seen many economies.  I've found that interest rates, real estate appreciation, and the economy as a whole impact prices more than inflation.  Although it could be argued those items also impact the true rate of inflation. Thoughts?

Originally posted by @Zachary Beach:

@Tracy Z. Rewey the CPI is a very misleading number and the actual rate of inflation is higher arguably much higher before the extra money printing of COVID it was closer to 6-12% than 2% the government states. Now who knows how high it will go.

The increases in real estate definitely support that!  What index or site do you like to use to track inflation? 

@Jamie Bateman Great addition.  As real estate prices go up the value of the collateral goes up giving our payor's more equity to protect.  I'm curious, do you balance your portfolio with real estate along with real estate notes?

@Ned Carey Yes, definitely agree.  Higher interest rates can lead to a higher cost of funds.  When rates are low, notes can be sold on the secondary market for higher prices.  We recently sold an existing 0% note (trust me we didn't write it at that rate - it came to us that way) to an institutional investor at a 4% yield because their cost of funds would allow them to buy at that rate.  That same 0% face rate note would have dropped in value by almost half if the required yield would have been higher (say 8%). 

When we are marketing for notes we let the holder know that right now their future payments are worth more since rates have never been lower.  Just like locking in a low rate mortgage loan, the pricing on notes changes as interest rates rise. 

If you buy notes using credit lines you also have to be sensitive to changing rates, especially when notes are long term (20-30 years - and what incentive is there to payoff a 0% real estate loan unless you sell the property?)  As you mentioned, usually there is enough cash flow and yield spread to act as a cushion but an important factor for certain.  

Anyone else getting this question a lot lately?

When we buy notes at a discount our return far surpasses the rate of inflation. In 2020 the average rate of inflation was 1.2%. In the past 20 years the annual average has stayed under 4%. If you are buying notes with an IRR of 8-12% you are pretty protected from inflation risk on your portfolio. While inflation could be on the rise, it is a far reach from surpassing the returns from note investing. You have to go back to the early 80's to see inflation hit 10%.

Would like to get your input on how you like to answer the inflation question.

I like cash flowing investments as they have a better chance of surviving any downturns in the market.  With notes we focus on cash flow protected by equity in a property. 

It is like solving a mystery.  It could be due to delinquency, forbearance, modifications, a mistake in the documents, or a mistake in the servicing records .  Getting copies of the docs and servicing history with notes should solve the mystery.

@Chris Seveney When I read that statement I also wondered if someone was creating a note without any true consideration? We've seen some notes where they created paper just in hopes of selling it that we've declined. We want to see that the note was an arms-length transaction and created either out of the sale of the property or the lending of money.

Hello @Larry Walters Like @Chris Seveney I've used their trading platform but not the fund.  I've also been to their physical offices in downtown Orlando.  They are a professional and experienced operation.  I'm sure you know this but for anyone new to the world of notes, investing in a fund and investing in notes directly are very different things.

Originally posted by @Chris Seveney:

@Charles Robbins

I would say the ability to get a note and mortgage to acquire a home has helped a lot more people than it has hurt. My wife is from a country that does not allow lending or loans to acquire housing.

Last time I checked only people who have lost a home are those who do not pay.

I remember going to a mortgage closing on a personal home decades ago and the closing agent pushed the 3 inch stack of papers over for signing and said:

"This all says... You Pay, You Stay.  You Don't, You Won't."

Still cracks me up.

My prediction is a federal extension to June 30th 2021. Who knows at the state level. I'm interested in seeing how the $25 billion in rent relief fund gets administered to be certain it goes to pay the landlords that have had to keep making their mortgage payments while not being able to collect rents.