All Forum Posts by: Zach Bollman

@Jay Hinrichs Now I'm interested to see what the law is on note partials falling within the definition of a regulated security. Just a thought, but I'm going to guess that fractionalization could constitute a regulated security in many states. As a work-around, assignment of the note shouldn't be considered a regulated security within the meaning of state securities law.

Based on your experiences, when dealing with partials, do note holders seeking to liquidate part of the note generally rely on fractionalization or assignment? 

@Jay Hinrichs Interesting issue. Obviously state-specific, so I'd be interested to see what the legislation states. Generally speaking, creating a legal work-around shouldn't be too terribly hard. Of course, this is without seeing the actual legislation at issue.

@Marco Bario Thanks for the reminder to look into partials! I had considered partials as a means of diversifying with less capital, but realized that networking is the key to identifying partials, so I switched back to pursuing full notes as they are more readily available to new investors. Partials, especially short-term partials of 1-3 years of payments, seem to be ideal given my current capital and goals. Thanks again!

@Dan Zitofsky Thanks again for the replies and great information. In the other thread, @Jay Hinrichs mentioned commercial notes, which I did not realize he was referring to, and it seems you have been as well. In light of this, your advice as well as Jay's makes much more sense: I had been looking at the risks and additional requirements of owner-occupied notes. Seeing that much of the information around here, and note investing in general, focuses on owner-occupied notes, do you have any suggestions for where to learn more about commercial notes specifically? I am much more interested in commercial notes, and commercial lending generally. I would prefer to leave owner-occupied financing to Fannie... As always, thank you for your time. 

@Jay Hinrichs Thank you again for the great information -- I really cannot express how grateful I am for you taking the time to help me and others better understand note investing. This thread (as well as the other I started on here) have been a wealth of knowledge, and I hope these threads are helpful to others interested in notes.

Regarding your points: I really hadn't considered commercial notes. The owner occupied aspect of notes is what gave me concern, but I believe my concerns may simply be overstated, and are generally resolved in commercial notes. As I identified above, my comfort surrounds notes and commercial real estate as I deal with both on a daily basis -- just not as the note holder, and certainly not owner-occupied notes on the secondary market. As a result, I strongly favor the concept of note investing over single-family rentals, although I would be interested in getting my hands on a multi-family rental in the future....

Having dug around on the normal note websites which have been identified in this thread and the other, I noticed that nearly all notes are owner-occupied. Is there a specific place I should be looking to find commercial notes, or are most commercial notes acquired off-market through networks? I would be comfortable with a larger commercial note for the reasons you identified, but I can't seem to locate (m)any. Again, any and all advice is appreciated. 

Thanks!

@Jay Hinrichs Regarding holding a single note vs a single house: holding a single house means ownership over the property and an ability to maintain more consistent cash flows. Holding a single note means cash flow is determined by the debtor, and in the case of a foreclosure, means several months, a year, or even potentially longer to regain cash flow. This is my understanding at least.

To illustrate my understanding: If I own a single rental property that is rented with positive cash flow, it will remain so pending expenses and vacancy. If a tenant moves out, I find a new tenant and may miss out on a month or two of rent. Large or recurring expenses obviously can eliminate the positive cash flow. Conversely, if I own a single note and the debtor stops paying, I now have to attempt to get the note reperforming which can take months and potentially a significant amount of money. Should I foreclose, I'm looking at another significant expense and still no cash flow. In the end, the foreclosure process could result in zero return on the property for an extended period of time. Moreover, from a liquidity standpoint, I can sell the house at market value which generally appreciates over the long-term. However, for a note, there is no appreciation and I'll likely be required to sell at a discount. In the event I foreclose, I cannot sell the property until the title has been cleared which can create another headache. Overall, the exposure risk of a single rental property seems to be less than that of a single note when investing for cash flow and considering the ability to liquidate the asset.

I understand that this is oversimplified, but my goal is to illustrate the above point. Again, I have not held an investment property or a note, but a single property seems to pose less risk than a single note if both are acquired for the same value. Perhaps I'm missing something, such as the average note offering greater return than the average rental property and hence the higher perceived risk?

Any and all comments are appreciated. Thanks!

@Caleb Heimsoth and @Ian Ippolito: Thanks for the information. Unfortunately I'm not an accredited investor. Hopefully in the future this won't be a hurdle, but for the moment it is one that I cannot clear.

@Jay Hinrichs: Thank you for the response. I seem to be running into an issue with notes given my current available capital and unwillingness to create substantial exposure to a single asset. From the standpoint of building wealth as a younger investor utilizing a taxable account, it seems that investment properties offer better opportunity early on because (i) they can be used for leverage and (ii) depreciation creates tax advantages that go unrealized in a non-taxable account (i.e., a self-directed IRA). Generally speaking, do most investors hold investment real estate in taxable vehicles and notes in non-taxable vehicles?

@Dan Zitofsky Thank you for the great information. I fully appreciate the reality of buying a note secured by a property that I would be willing to hold and rent. Given this, I'm currently looking for notes near the back-end of their payment schedule since they are backed by a property I would be willing to hold and likely don't require a $50,000+ investment up front. 

As I mentioned above, my biggest concern is throwing $50,000+ into a single note without having any real experience as a note investor. Given my overall assets at the moment, $50,000+ into a single note is rather uncomfortable and creates massive exposure to a single asset. Again, perhaps this is just the inherent reality of the note space given my current financial situation. Overall, my long-term goal is not to accumulate a bunch of notes backed by class D neighborhoods, but for the moment, my interest is to find a note with a lower UPB to be a learning experience while keeping exposure down. After gaining a better understanding of the entire process through the hands-on process of acquiring and setting up note service, I would likely be willing to jump into more ideal notes for my current situation (e.g., second liens in class B/A neighborhoods, lower UPB firsts in class B/A neighborhoods).

Given your experience, is the ideal entry into note investing through larger performing notes? As you mentioned, note investors often cite not wanting to be a landlord, but the reason for secured investing is the ability to reposes the collateral which will require being a landlord until the title can be cleared. Thus, many note investors seem to pursue a logical fallacy in their investing: purchasing notes secured by properties they would never want to own. In my situation, I'm interested in note investing because notes are more familiar to me. I have neither owned a note nor an investment property; however, my prior work in banking and now as a real estate attorney have created a bit of comfort with notes as I deal with lending on a regular basis -- notes provide an opportunity for me to focus on what I'm familiar with, although the reality of becoming a landlord is always present. Given the above, what would you consider to be an ideal entry point for someone new to note investing?

Thank you for your time! 

@Chris Seveney Will do. Thanks again for all the information!

@Chris Seveney Thank you for the great information. I haven't come across many of these UPB notes around $10,000 — perhaps I'm looking in the wrong place. Is there an exchnage, or exchanges, you recommend for finding these notes? Would love to get some experience in the world of notes, but throwing $50,000 into something I've never really dealt with is unnerving. Thanks again for your help!