The purpose of this article is to answer some of the main questions we’ve heard from prospective investors over the years about investing in real estate mortgage notes. We also wanted to point out some of the advantages of this unique asset class as a means of reaching targeted consistent passive returns while diversifying your investment
So with that in mind, let’s get started with the first question you might
“What Exactly Are Mortgage Notes?”
Whether most people realize it or not, they actually already have experience with notes. When a person buys a home in the United States, they typically obtain a 15- or 30-year mortgage (or Deed of Trust) and sign a promissory note outlining the terms of the loan. It’s this promissory note that usually requires a borrower to make monthly payments of principal and interest.
Most residential mortgages like these aren’t held by the originator for the duration of the term since most borrowers either move or refinance within 5-7 years of obtaining a mortgage. The rest of the loans in a bank or lender’s portfolio tend to pay until the end of their term, as intended. But not all borrowers pay their mortgages as promised, at which point the loan is consider to be in default, and that’s where a company like PPR comes in.
Mortgages are considered “non-performing,” as a result of non- payment on the debt for at least 90 days. When this happens, the bank will make an attempt to get the borrower back on track via their loan servicer or their own loss mitigation department. They can also sell the loan on the secondary market through a loan exchange or trade desk. The original bank might choose to sell the non-performing loan to recapitalize as much as they can in order to do what they do best, which is make loans for other borrowers. The new owners of the mortgage are now owed that original debt and have recourse to the collateral – i.e. the property – if the default isn’t cured.
A company like PPR, for example, buys these non-performing mortgage notes in bulk, usually at a discount. Once purchased, these mortgage notes are then placed with a team of licensed loan servicing professionals. They then work with the borrower to get them back on a payment plan, if possible, so these non-performing loans are paying once again. And in cases where they can’t, the owner of the note can exit through the property (via receiving the deed in lieu of foreclosure, formal foreclosure, and possibly via REO sale).
It’s through these now-performing loan payments, borrower refinancing, and/or REO asset sales that a firm like ours can pay its investors their targeted returns.
Who could benefit from investing in real estate note funds?
We like to say that investing in a real estate note fund is like investing in real estate without (the hassles of) the real estate itself, so this strategy often appeals to busy professionals and those who want a purely passive investment.
As you’ll see below, real estate or mortgage note funds can be a great option for investors who are looking for an alternative investment to stocks or government/commercial bonds, don’t have the time or expertise to perform all the requisite research themselves, need something diversified and scalable, and don’t want to have to actively manage the investment, all the while enjoying attractive and often consistent returns via a real estate-backed asset.
Before we dive into some of the main advantages of note funds, we want to state that we had PPR’s note fund offerings in mind when compiling this list, so while they are generic and summary in nature, we can’t guarantee that all note funds managed by other firms offer all the advantages listed below.
What are the Main Advantages of Note Fund Investing?
- Passive income. Sometimes referred to as “mailbox money,” the returns generated by mortgage note funds are passive in nature, requiring investors to have no active involvement while also providing the tax benefits that come from “unearned” income.
- No property management required. Participating in a note fund requires no in-depth knowledge of the nuances of mortgage notes, nor their acquisition, maintenance and disposition. The fund’s portfolio management and operations teams handle the day-to-day work of managing the assets (mortgages) via advanced systems and technology and experienced staff.
- Diversification. Investing in a fund typically enables an investor to enjoy more diversification while also not requiring the deployment of capital needed to purchase all of the fund’s assets. For example, if a single asset in the fund (that owns a large number of assets) were to lose some or all of its value, this typically wouldn’t have a large impact on the overall fund returns and thus wouldn’t affect an individual investor to a significant degree. Investing in a note fund means that you’re investing in multiple notes (and also multiple real estate markets geographically), thereby spreading the risk among all the assets owned by the fund.
- Asset-backed investment. The mortgages owned by a note fund are backed by the real estate securing the loans. Contrast this to stocks. If a company is suddenly rendered obsolete by a disruption in technology or superior competition, for instance, the value of its stock certificates can plummet since that value isn’t necessarily based on tangible real assets.
- Favorable real estate-based investment option compared to owning actual real estate. As opposed to owning rental property where lost rents are difficult, if not impossible, to recoup, missed mortgage payments get added back to the principal balance owed in a portfolio of loans. Further, with a note fund investment, there’s never a need to visit individual properties or meet a tenant or contractor in person.
- Keep your money working for you. No property to invest in? No idea where to find investments? No problem! You don’t have to wait for a great performing note or investment property to come along to get your capital working for you. Many funds offer reasonable minimum investments – PPR, for example, has an option starting at as little as $25,000 – so there’s no need to have your money sitting idle.
- Liquidity Options. While investing in real estate assets is typically seen to be illiquid, firms offering real estate-backed note funds may offer multiple term lengths with different liquidity options and targeted returns. For example, PPR’s fund options include terms ranging from 6 months (6%) to 36 months (12%), so investors can balance a shorter-term (more liquid), lower-rate option with a longer-term, higher-rate option to give them flexibility.
- Boost your return through Compounding. Some funds offer a compounding alternative, whereby rather than receiving your returns as income every month, you reinvest those returns over the length of the investment option. Doing so can significantly boost your return. For example, choosing to compound in the 3-year, 12% targeted PPR fund increases your overall annualized return to 14.3%.
- Limited liability. A landlord is potentially liable and subject to litigation for “slip and fall” events and just about anything that happens on their property. By contrast, for a note fund investor, due to the nature of his/her role as a limited partner, there’s no risk associated with personal legal liability. A note fund investor’s only real risk is financial, and that’s limited to loss of invested capital.
- Privacy/Anonymity. When investing in a privately managed note fund, often through a “private placement,” your personal or corporate name isn’t made public, unlike when owning real estate.
- Professional Management and Experience. When you invest in a fund such as ones offered by PPR, with its 16-year track record of performance, you benefit from professional management and years of experience as well as expertise in acquisitions, loan modifications, dispositions, and portfolio management. You don’t need to have experience managing notes yourself.
If you have any immediate questions about our current offerings, please schedule a call with our Investor Relations department here.
- Notes can be bought and sold much faster than hard real estate. Through the secondary market, a note fund is able to buy or sell their notes much faster than actual properties since they’re dealing with paper assets rather than hard assets. They can also do so without incurring the selling costs or opportunity cost of exiting real estate. This allows fund managers to buy in bulk and often at significant discounts, allowing for the opportunity to realize the targeted returns for their investors.
- Lower Minimum Investment. While investing directly in real estate or individual mortgage notes often requires a sizable outlay, investing in a note fund typically requires a much lower minimum. For instance, PPR has options that require amounts as low as $25,000 for the most liquid and shortest-term option, and only $50,000 for the longer, higher targeted return options, making it easy to add new money or re-invest your earnings.
- Flexibility of Funding. Investment in note funds may come from taxable cash accounts as well as retirement accounts such as IRAs – or a combination of these sources. That’s right – you can use retirement money to invest in private placements. In fact, about half of PPR’s fund investors do just that. (Just ask one of our Investor Relations staff how other investors do it.)
- Peace of mind. Because investing requires risk, and returns are never guaranteed, it pays to work with firms that are independently audited, adhere to strict SEC reporting requirements (e.g. Blue Sky and other filings) and have consistently paid out returns to its investors. PPR’s 16-year track record gives its investors peace of mind.
- Elimination of “gaps” in earning a return on invested capital. With other similar styles of investments such as hard money lending, typically investment capital is moving into and out of specific investments every 3-9 months, or even quicker. With note fund investing, your capital stays in play for a set term. This not only frees up your time since it requires no active involvement, but it also gives you comfort that your invested capital will be earning a return for the entire period you select.
- Simpler Due Diligence. With note fund investing, you don’t need to know how to perform due diligence on the borrower and specific property attached like you would with hard money lending or even individual note investing. Nor do you need to know about property management or the other issues that come with actual real estate.
- Less liability. Note fund investors, thanks to the professional management team overseeing the portfolio, are shielded from the personal liability that individual note owners and landlords face in an ever-litigious society.
We hope this quick overview of the advantages of mortgage note fund investing was helpful.
So, if you’re intrigued, and hopefully less confused, about the advantages of investing in mortgage note funds, we succeeded in our mission.
If you have any questions or want to learn about the investment options PPR currently has available to accredited investors, please schedule an appointment with our Investor Relations team, and we’ll do our best to help.
To your success!
The PPR Investor Relations team
With regard to the note funds PPR manages, you can get more information here: