TGCI 26: Forget bonds. Welcome to the world of NOTES investing!

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Episode 26 – Forget Bonds. Welcome to the World of Notes Investing!

Show #26 - Dave Van Horn - Episode Art

Summary

Pancham interviews Dave Van Horn, CEO & Founder, PPR Note Co. Dave shares why notes investing can prove to be an excellent option to traditional Wall Street investing, and reveals how you can earn better returns without taking on undue risks.

This show starts with Dave sharing the basics of notes investing. What are some primary factors that you should consider before investing in notes? And, can someone with zero prior experience also invest in notes? 

Next, we talk a bit about performing and non-performing notes, and reveal the best option for you. Listeners will also learn how to conduct a proper due diligence before investing in notes. 

Other topics discussed on this show are the advantages of investing in a notes fund, liquidity notes vs. income notes, expected returns, frequency of distributions and much, much more. 

PanchamHeadshotTGCI
Pancham Gupta
TGCI 26 - Dave Van Horn
Dave Van Horn
Show #26 - Dave Van Horn - Episode Art

Timestamped Shownotes:

  • 00:32 – What are notes? Pancham explains the nuances of notes investing in simple terms
  • 01:02 – Pancham welcomes Dave to the show
  • 03:02 – What attracted Dave to the notes investing in the first place?
  • 03:29 – What is a note?
  • 04:58 – Mortage vs. Note – Understanding the difference
  • 06:17 – Factors to consider before you start investing in notes
  • 09:33 – How can someone with zero experience start investing in notes?
  • 10:54 – Performing Notes vs. Non-Performing Notes – Which is the best option for you?
  • 11:53 – Can you invest in notes via the crowdfunding route?
  • 12:30 – What are some prominent platforms for buying and selling notes?
  • 13:48 – How to conduct due diligence while investing in performing notes
  • 14:58 – Dave shares how due diligence for a junior lien differs compared to due diligence for senior liens
  • 18:00 – What are some important factors that affect note pricing?
  • 20:54 – Can you invest in notes as a passive investor?
  • 21:30 – Can you run into compliance risks as a notes investor?
  • 22:13 – How can you mitigate risk and generate better returns by investing in a notes fund?
  • 22:40 – How does a liquidity notes fund work? What kind of returns can you earn?
  • 24:45 – What about income notes fund?
  • 25:52 – What is the frequency of distributions when you invest in a note?
  • 29:06 – Taking the Leap Round
  • 29:17 – When was the first time you invested outside the Wall Street?
  • 32:35 – What fears did you have to overcome when you first invested outside of Wall Street?
  • 34:30 – Can you share one investment that did not go as expected?
  • 38:09 – What is one piece of advice that you would give to people who are thinking of investing outside the Wall Street?
  • 41:43 – Dave shares his contact information

3 Key Points:

  1. Understanding the BASICS of notes investing
  2. Performing Notes vs. Non-Performing Notes – Which is the best option for you?
  3. How to conduct a proper due-diligence before investing in notes

Get in Touch:

Read Full Transcript

Welcome to the Gold Collar investor podcast with your host Pancham Gupta. This podcast is dedicated to helping the high paid professionals to break out of the Wall Street investments and create multiple income streams.

Here’s your host Pancham Gupta.

Pancham: I am so excited for the show today. The reason is that this is one asset class that has not been known to many people as an investment. It is called real estate mortgage notes. In short, it is known as notes. Investing in notes is one way to make your money work for you without the hassle of fixing toilets, tenant issues, etc. However, it’s not that easy to get into this market as the market is fragmented and at some level in efficient even with such issues, you can make an excellent return if you know how to analyze them and get into it. Today, my guest, Dave Van Horn is no stranger to this strategy. Dave has served as a president and CEO of PPR note company, a holding company that manages several funds that buy, sell and hold residential mortgages nationwide. Dave has raised over 100 million dollars for both notes and commercial real estate. Dave also owns considerable portfolio of residential investment properties, as well as various commercial holdings. He’s a national speaker and investment blogger on bigger pockets. Dave, welcome to the show.

Dave: Thank you. Thank you

Pancham: I’ve met you at a few conferences and your own conference which you know, you hold in Philadelphia. It’s been great to have you and thank you for your time.

Dave: My pleasure, love getting together with you. Thank you. Thank you for being on.

Pancham: So are you ready to fire up my listeners break out Wall Street investments?

Dave: Absolutely. I mean, wow, nothing would make me happier. You know, this is this is a point I do like to make because some people will say to me, sometimes what I’m doing with my company is pretty disruptive to, you know, traditional Wall Street because if you think about it, we’re kind of connecting a Wall Street product to Main Street with no middleman and no fees, right? And you can invest with us almost 24 hours a day. And it is… I don’t like the word disruptive. I think transformational is a better word. I’m not really trying to put, you know someone out of a job or anything, but I do believe there’s a better way to do things and a better way to invest. And that’s really what I’m alluding to. So, you know, I used to sell insurance years ago and do some financial planning. So I understand well, how Wall Street works. In fact, I actually have a Market Watch forecasts are on our staff. And one of the things that attracted me to notes in the beginning was it because I used to trade options. And one of the things I liked about it was I saw something that I could buy at a discount with a high yield with collateral. And that was a lateral component that was really the game changer for me right now. 

Pancham: Thank you, we’ll get into this. So can you explain to my listeners like what are these notes in more detail, like from the very basic level?

Dave:  One of the things I like to tell people, you know, do you know what a note is? It wasn’t too long ago, I thought it was a musical symbol. Right? But the no all joking aside, a note is just a promise to pay. And I like to tell people that we’re all in the note business while most of us are, and it’s happening all around us, and we may or may not be cognizant of it. And what I mean by that is, the majority of people have, you know, credit card debt, auto debt, medical debt, mortgage debt….So there’s just so much, you know, student loan debt, right? So, there’s all this debt out there. And if you notice, they’re all notes. When you take out a credit card, you’re signing a note. It’s an unsecured debt. I like to say we’re all in the note business. It’s just what side of the note business are you on? Are you the person writing a check to the bank? Are you the person receiving the check? And are you the person investing in debt? Are you the person you’re buying debt at a discount? And that piece is not known by many people? Right?

Pancham: Right. Right. 

Dave: Yeah, it’s a very…you gave a lot of examples like, you know, a simple thing when you buy a house, you give a mortgage to the bank, and bank gives you the loan and there’s something that you sign in the bank. It is the note holder and you are the one who’s making the payment. So that thing that you sign is the note which is a real estate, you are correct. So with that, with a property, for example, my company primarily invest in one of four family residential mortgages nationwide and with a mortgage, there’s two documents – a mortgage and a note. The note is the promise to pay. The mortgage is the…that’s how you secure the collateral to the note, right? So your mortgage gets recorded, and it has a legal description on it, and that’s what perfects the collateral to that note. So there’s two documents, right? One gets recorded, one doesn’t. And it’s a little bit different than, say a credit card where you’re just you just have a note. There’s nothing else. Now a car loan. Sure the card title is similar to what like the mortgage would be. The car is collateral until you pay the loan off. Right? And in the DMV, it gets the title…It has this, you know, bank as the owner, so to speak. Or those books sometimes they’ll call them, you know, beneficial owner and things like that. But yes, it’s the same idea. In theory, the cars the collateral or a mobile home’s the collateral…That’s kind of…

Pancham: Right, right, right. Okay, that’s great. So what are some of the things that you need to be careful about before you actually invest in notes? So let’s say I’m a person who actually has no idea and I listen to this podcast, and I get interested in learning, you know, interested in investing in Note s, what do I need to be careful about?

Dave: Well, I know…If I’m, you know, talking with a newer investor, or investor, that’s new to notes, one of my first questions to them is what type of investor are you? So by that, I mean, you know, what is your experience level? What is your time commitment available? How much capital do you have to invest? What is your risk tolerance? Those types of questions because it might determine, you know, what part of the note business, you know. It’s a huge trillion dollar business. Which area you would go to? And, you know, it’s an important question because everybody’s different. Everybody’s coming from a different place. I’m a big fan of having people invest in what they know. And I do could give you two examples of that. One is, you know, I have a heating and air conditioning guy that works on my properties, for example. And one day we were out to lunch and I said to him, have you ever considered financing the installation of the heaters and air conditioning units that your company installs? And he says to me, there’s a company that does that? I said, Yeah. I know, there’s a company that does that. Have you ever thought of owning it? And he’s like, no, you can do that? I’m sure you can. That’s a situation where that gentleman would invest in what he knows. Because he understands the heating and air conditioning business and what would that do for his business. He could collect the deposit, right? And most of what he’s financing would be his labor. And if they defaulted on that… the borrower defaulted on that, he could put a mechanic’s lien on the property and turn it over to a collections attorney. Meanwhile, he would make more business, you know. He gets these residual service contracts. It would increase the number of service contracts. That is where someone is investing in the note business by investing in what they know. Nobody says you have to do the note business the way I do it. And another example of that is I run a fund out of Dallas for private practitioners who are dentists and doctors and chiropractors. I was out to lunch with a dentist about seven years ago with him and his father. Same question. Have you ever considered financing dental work? He said, no, there’s a company does that? I said, Yes, I know. Did you ever think of owning it? And in fact, he went back and with an orthodontist, they took their retirement accounts and started a finance company. And I saw him about a year and a half ago, and he said to me, Dave, you’re not going to believe this. The finance company we own is worth more than my dental practice. Wow. So that’s investing in what you know. So no one says, you know, it’s an infinite number of ways to do the note business.

Pancham: That’s great. So that dental example is amazing. How many years did it take him to…

Dave: Well, we were out to lunch about seven years ago,

Pancham: Seven years. Okay, great. So what you’re saying is that really if there is a listener of this podcast…is a person who has a W-2 job, for example, or they have their own small business, what would you tell them? In this case? Like they don’t have any experience with either, you know, other than owning their own home, maybe one or two rental properties? They have never invested in notes. Would you say that it’s a good thing for them to invest in or learn? Like, what can they do to get into this?

Dave: Well, even in the real estate business, I first started using notes. When I would sell one of my rental properties to another investor. I still own second mortgages of where I held a second mortgage. And I even have a property where I own the first mortgage on the property that I sold to a colleague of mine. So, you know, when you go to sell a property, there’s nothing that’s more fun than cash flowing off a property. You no longer own or have maintenance to do. No. It doesn’t get any better than that. Right? So right. And you can also become a private or hard money lender for, you know, a fellow real estate investor who’s doing your project. Right? So I did that for many years. I still do some of that.

Pancham: So really, I see

Dave: Oh, yeah, I don’t think that will ever go away for me. Because it’s, you know, it’s a fun, lucrative, it’s a business. 

Pancham: I understand. 

Dave: You know, I had been a contractor for many years. I worked in construction for many years. So for me, it’s an easy business. And I used to own a title company. So I understand how the paperwork is done, you know. I’m investing in what, I know. Right? What I have experience with. So I think there’s an advantage into finding a way to adapt the note business to what you know, what you currently do or what you’re comfortable with, and what you’re familiar with, you know. You know, if you’re going to do it actively now, there’s active note investors, you know. Some people invest in performing notes. That’s the easiest way to invest in the note business. 

Pancham: So what is that? Can you explain what is a performing note? And what is a non performing note for our listeners?

Dave: Well, performing note is a note that’s paying a non performing note. It is a note that’s delinquent or non performing. It’s not being paid on to get into non performing business. I think you really need to understand collections and compliance. And it’s basically the collections business. And I think there’s a lot you need to know. There’s a lot of regulatory stuff. The performing note is a little bit different. It’s very, it’s much more passive, especially if it’s with the servicer, and the servicers sort of like property management for a note. Right? You know, they just charge a nominal fee and they send you a statement every month and they send the payments to you and they do all the accounting. That’s pretty easy to do. I mean, you know, my 86-year old mom is a note owner, you know, but you can also be a funded investor. Now, our funds are only open to high net worth folks. But there are other funds out there that you know do crowd funding and things like that. Sort of like Lending Club does. Right. Lending Club is you’re investing in unsecured notes. Right? And you can do it with small amounts and that’s the note business as well. It just is unsecured notes. It’s mostly credit card that you know…

Pancham: Right, right, right. So if like if I want to invest in a performing note or buy a performing note, is there a marketplace for this which is backed by a note or not? I’m not talking about credit card or unsecured notes. I’m talking about a secured note on a one to four single family home. 

Dave: Yeah, we actually sell one every week. We have an email newsletter that pushes out a note every week. We have a warranty as well. Our warranty is investment principle minus payments received. So basically, you can’t lose your principal when you buy a note from us and we’ve been doing the warranty for many years. Our company started in 2007. But there’s also other places, you know that sell notes like paper stack and auction.com…Very fragmented. There’s trade desk, there’s note funds. They all sell notes. So now whether or not you know, you know, you want to know who you’re buying from and things like that. So yes, I do, you know, recommend that the bulk of what we sell is through trade desk, though it’s not on the retail side. It’s more on the wholesale side. Got it?

Pancham: Got it. So let’s say you get an email from you, Dave or one of your companies or some of these companies, and you get one of these guys get very excited and they want to buy a note. How do they do a due diligence on that? Like, what are the questions that they need to ask the person who’s selling the note? What kind of things they will have to take care of? 

Dave: Um, wow, that’s a loaded question. I know we can break it down. We can break it down. And the first question is what asset class is it? So you have you know, are you buying a performing note? Are you buying a non-performing note? Are you buying a first mortgage? Are you buying a second mortgage, and they need diligence. It is totally different. So I’m talking mainly for performing notes and the first lien. Well first liens are basically sold on fair market value. Right? It’s based on geography, condition and location, occupancy, those types of things. Lien reports. You’re trying to find your back taxes, HOA fees. They’re your typical red flags. In the junior lien space, they’re sold based on unpaid principal balance. They’re not sold on fair market value. So it’s very statistical in the junior lien space. It’s less about geography. It’s more about senior lien status. It is more valuable than even equity. So which is a concept for most. Especially real estate investors to get their mind around? But first liens, you know, it’s definitely different. It’s different when you do a modification on a first lien because you’re usually addressing back to taxes, whereas with the junior lien, you’re addressing the IRS. So there are different approaches and different exit strategies. So you do you don’t want to apply first lien due diligence to a junior lien, or vice versa, because it’s different. When we do like a junior lien, for example, you will pull a credit report to determine the senior lien status with first liens, you know. I don’t think we ever pull a credit report. We put a lien report though, and with a junior lien, you would never put a lien report. And that’s just some examples of the differences and due diligence, or in the modifications as well.

Pancham: Right. So basically, the guy would have to go and do all those things and many other things to kind of analyze the note properly, and then say, oh, you know what? Everything checks out, let me go buy it. And at that point, they will start getting the, you know…assuming it wasn’t performing one, you start getting the monthly checks or quarterly, whatever the frequency is.

Dave: Yes, there’s so there’s a lot of…there’s a couple points of diligence that you would look at when you’re say, I’m buying a, you know, a first mortgage from someone who I don’t know. Obviously, I had to do diligence on the seller, I had agents on the asset. I have to do diligence on the actual note paperwork and documents, right? I do an exceptions report, right? I want to know if there’s any missing documents or assignments or launches. I want to make sure the notes in the mortgage are intact. I want to see what, you know, are the original docs there or not, because if I buy one, especially if I want to sell that loan through a securitization, I want to make sure I have all the paperwork. Otherwise, it’s going to limit the value of that note when I go to exit that deal or go to sell it. So it’s what the quality of the paper is. So it’s, I’m checking the underlying asset behind the note. I’m checking the note documents themselves. I’m checking the seller. You know, a lot of that’s the administrative side of the world and when that asset comes into my company now I have to, you know, place it into servicing record, the assignment, those types of activities. So there’s the administrative component, and then there’s, you know, what’s the borrower intent? What’s the exit, that type of thing. So and what’s the risk? There’s a risk management level there too. So in the risk management side on managing things, like you can have a tax monitoring service or you know, those types of things.

Pancham: Got it. Okay. So thanks for explaining all that. Is there any classification in the note business in terms of you know, how in the real estate…let’s say multifamily, you have a five star plus A property, Class BC, class C in mobile home parks. You have, you know, five star parks, four star parks and all that in the notes business, you know. Performing versus non performing? Do you have classifications within each one of them, you know? 

Dave: There is and it’s usually based on pricing. That’s why you’ll see such a range in prices. You might ask yourself, why they are priced differently. First mortgage wise. The cheapest first mortgage I ever bought was 12 cents. But I see first mortgages that have sold for 80 cents. Right? And you might say, why is there such a difference? And some of it’s the market, right? The pricing is different in different markets. So no prices are in direct correlation. Real estate values. So in real estate, values go up, note prices go up. When real estate prices go down, note prices go down. So that’s first. And then you also have quality issues like I mentioned, right? There’s, you know, if there’s an asset that’s missing collateral, it sells trades at a lower price. Right? If there’s an asset that has pristine collateral and sells at a higher price, and same way with the asset behind it, if there’s an asset with partial or no equity, that’ll sell much cheaper than an asset with full equity. There’s different things that happen. And you also have seasoning especially with a performing note. So if I had a performing note that’s been  performing for less than 12 months, that won’t sell as high as the note that’s performing more than a year or more than two years. So as a note has pay history, the value of the note goes back up as well. And it will go back up to par almost. Right? Oh, and you might say, why would someone pay 80 cents on the dollar? Because I see especially newbies where they get stuck on the price for the dollar, right? So here’s an example. Would you pay $800,000 for a million dollar first mortgage, if the property was worth 1.5 million with $100,000 of repairs made? And the answer is you might. Right? Yeah. So your biggest risk there would be that the borrower started paying you. But what if the property was vacant? So would you pay 80 cents? And the answer is you might? Because yeah, very good statistical odds. That you’re not going to modify it because it’s vacant. You’re going to get depressed. You’re basically buying the property. And it may have a bed BPO or bed value or, or whatever. And you, you know, you find a good deal that way. So I wouldn’t get stuck too much on what I’m paying. It’s really what are you making on the deal kind of thing? Right? 

Pancham: Right. Okay, that’s great. So in terms of the person who is a passive investor, not wanting to go into notes actively, but actually, he likes the idea of investing in notes, but doesn’t want to do any of the work that we just discussed on the due diligence and all that and they want to invest in the note passively, you know, what kind of returns these investors can see from investing in funds which are backed by notes?

Dave: Yeah, I mean, there’s first of all, there’s a difference between investing in a note and investing in a note fund and I do both. Right? And I just want everybody to know I do both. And when you invest in a note you, you really don’t know what you’re going to make. You know what the payments supposed to be. But you don’t know if the payments are going to continue. You don’t really know what you’re going to make on a note. So you exit at the note, right? You really don’t know exactly. And it’s just going to, you know…If you had a rental unit, you really don’t know what you make because you don’t know if you have a vacancy or whatever, right? It’s kind of the same thing. And when you own a note, you also have a lot of compliance risk, and you take on all the liability. You’re even responsible for all the vendors you hire. So even if you hired a vendor, and they violated, I don’t know. Fair Debt Collection laws or something, you can be sued for much more than the value that can be slapped by a regulator for much more than the cost of the note. So whereas when you are in a note fund, you have limited liability, and you can’t be sued. I mean the fund can be sued, but you can see it directly. And you’re investing in the management team. You’re in a diverse pool of loans. So if one loan went bad or, you know, you defaulted it wouldn’t be the end of the world. Whereas if you owned one note and it defaulted, you would have 100% default rate. Right? Whereas if you’re in a note fund, you’re spreading that risk around. There could be hundreds of notes and that funds could be spread throughout the country, which could, you know…well diversified. You have limited liability. You also have access to product, you know that you might not normally have. You might have buying power in numbers as well. Like where you can get better pricing, you know. The fund sometimes can be a more consistent option for people. We have two right now. We have a liquidity note fund, and often times we have an Income Fund which is longer term. So our liquidity fund has a 60-day liquidity option at like 4%, and we have a six-month option at 6% which is very liquid and people will say how can you provide liquidity? And the way that we do that is the only assets in this fund are reperforming loans. And that means they’re paying and our typical reperforming loan has a coupon rate north of 12%. And our average cost of capital is right around 5% in that fund, and we can sell a note in about 15 minutes. We have about 7500 registered note buyers at my company. So we can sell a note very quickly. And my partner john, who runs our acquisitions and dispositions could actually package up a pool of loans in a matter of a couple days. So it’s not hard for us to provide 60 day liquidity, for example. So 60-day liquid mortgages are very liquid, right? It’s not like real estate, like if I was in a multifamily apartment investment. I’m tied up for years, right? The opposite, right, we have liquidity. I’m not so sure you can sell a house in 15 minutes, you know.

Pancham: Right, right. Now that that makes total sense. So when you said just for my listeners to get their head around this. You say it’s a 60 day liquidity. What that means is that I invest my money today. I can have it back within 60 days after 60 days. 

Dave: Yeah. You could actually notify us the following day and say I need my money back within 60 days, we’re obligated to pay you back. Right. And that would be if it is a 60 day fund, it’s a 4% rate. And, you know, just to give you a…if you looked at Fidelity or Vanguard, Vanguard has a liquidity fund that’s paid 1.9 for the last 13 years. Right? So now we’re not saying we’re Vanguard or anything but right but we are backed by mortgages and we’ve been doing this for a while and when we know how. We know what our run rate is, and we know how liquid we are, and we also have reserves as well. Now our Income Fund is different. It has a one year option at 8% and a three year option at 10%. It also has a higher minimum. It’s 50,000. The liquidity fund has a $25,000 minimum and both of these funds are capped at a million dollars. So we do cap investors. We do that for a reason. And, you know, we don’t want a family office, you know, saying here’s 30 million, and oh the next day we need it back, you know. That would just wreak havoc on our funds. But both of these funds give you the ability to compound as well. So, our one-year option at 8% and our three-year option at 10%. So let’s take the three year option at 10%. For example, if you decided to compound that, it would actually work out to be 11.6% return, and we do get a lot of qualified plans a lot of Self-Directed IRAs and 401K’s and that type of thing. So it’s pretty good rate inside a qualified plan that’s tax free or tax deferred. 

Pancham: Right. And all of this…Is your distributions monthly on these funds? 

Dave: You can chose the compounding option. It would be paid upon maturity. If you chose otherwise you are paid on the first business day of the month.

Pancham: I see. That would be simple interest.

Dave: Yes, this is actually compounded by, you know… The software actually takes it out to how many days are in that month. So like, that’d be already might be different than August or something. 

Pancham: Yeah, yeah, makes sense. Oh, that’s great. Thank you for sharing all of your knowledge. Dave. It’s been great. Any anything else you want to add to this before we move on to our next section of the show?

Dave: Um, well, for me, the note business has been, you know, great as an investor as well. And I love the ability to help other investors, you know, share, build and preserve their wealth. I mean, that’s really what makes it fun for me. I’m not saying it, you know. I’m a real estate investor as well. And I invest in many other things. And it’s, it’s one of my favorite investment vehicles, even as an investor. Even if I didn’t own you know, a note business.

Pancham: Right? No, absolutely. 

Dave: And I, you know, share the passion that you have in terms of investing in real estate and also in general in this business unless you like tenants and toilets and townships and phone calls from your property manager about bedbugs or whatever that is that that you know. 

Pancham: Hey, yeah, thank you. Thank you for sharing that and we will be back after this message. Do you ever feel overwhelmed by the thought that you have no time after work and family time to learn about investing? Do you feel left behind that you are not putting your money to work for you? Do you want to create passive income but you do not know where to start? Is so I have good news for you. I have created an investor club which I call the Gold Collar Investor club for accredited investors. I will be putting together investing opportunities exclusively for this group. These are the opportunities where I have done my part of the due diligence for you and will be investing my own money alongside you. If you are interested, please sign up on thegoldcollarinvestor.com/club. I repeat. thegoldcollarinvestor.com/club. I will reach out to schedule a 30-minute phone conversation to discuss your investing goals. Once you sign up, this can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some cash flow. And in case you are wondering what is an accredited investor? An accredited investor is someone who has earned more than 200,000 as filing single or more than 300,000 filing jointly for the last two years. Another way to qualify as an accredited investor is if your total network is more than $1 million excluding your personal home. It includes your stocks, cars, etc. Just not the equity in your personal home. If this is you, I would highly encourage you to sign up. Let’s move to the next section of a show which I call taking the leap round. I ask these questions to every guest on my show. So my first question is, Dave for you. When was the first time you invested outside of Wall Street?

Dave: Oh, wow. You know, it’s funny you say that. When I was a young man I worked for you know, a corporate America job and they gave me you know, how you had no defined benefit plan or whatever and they gave us these choices and it was like, different types of mutual funds and I remember putting my investment dollars in there and I couldn’t make any combination work, no matter what. I did it and it was a nightmare. And then I left that job and I rolled my money over into you know, I tried an annuity and I didn’t make any money in there and then I tried a broker that was related, you know, a family member and we did okay, me and my father for a while. We made some money and then we lost money there. It was actually a very reputable company. We invested a lot of money with it. It was doing jackets for the Iran-Iraq war, and everything on paper about this company was stellar. And you know, the owners ran off with all the money and the company went under. You can’t prevent, you know, thievery. And it taught me a lesson there. And then I went into…that’s when I started to teach myself to trade options and spend a good bit of money and time learning the options trading business. And not that I was an expert at it or anything, but I started trading options. I did that for a while. And then I came upon the note business. So I guess it was along that time when I guessed the option piece is when I after that point, I was like, you know what? And simultaneously I was doing real estate since I bought my first property when I was 29. So in 1989, I bought my first rental property and I’m working on a package deal now where I’m selling off a package of properties and negotiating with a young man who, you know, I wish much success. So I guess, with regular real estate was 1989. I guess because the real estate for me worked much differently. I had a lot more tax advantages, right? I definitely made a lot more money in real estate than I ever did in the market. Yeah, for me, I know, I think that’s true even today. For many people it could depend on who you talk to.

And today, my favorite stuff…like…I don’t deviate too much. I believe in investing in what I know or what I had job experience at. So I’ll give you some examples. I like ATM machines. I like merchant cash advance. I invest in business notes that are commercial notes as well. They’re they are counter cyclical to what I do at PPR. That’s why I like them. I also invest in insurance contracts like life settlements because they’re not tied to any market. So I used to be an insurance guy, right? So these are businesses that I understand the note business, the banking business, the real estate business…And I really don’t want to deviate anymore from that. I want to stick to you know…If you came to me, you know I had somebody recently…Do you want to invest in this restaurant? I’m like, I really don’t do restaurant. You want to invest in this movie? I’m not a movie guy. No, there’s nothing against restaurants or movies. It’s just not my wheelhouse. You know, I rather stick with what I know and, and love and have some experience in and stuff that I can understand pretty, pretty well. I feel more comfortable. And that’s just me. I’m not saying everybody has to think like I do.

Pancham: No, that’s great. Thank you. So my second question is what fears did you have to overcome when you first invested outside of Wall Street? Did you have any fears? Anything?

Dave: You know, I was always you know, I was never really afraid to fail type person. I don’t like the word failure. To me, it’s really learning and there’s been times you know, I’ve lost money. Many times. Not that I’m proud of losing money, but I really don’t believe you can grow to another level without some type of loss. Like, I don’t believe you can become a millionaire or a billionaire, you know. You know, I’m not proud of this, but I lost a quarter million dollars on some deals. And but I don’t think you can become a billionaire without having that experience because that experience made me change a lot of things a lot. So I learned a lot from that experience. I learned all kinds of things. So I would have never learned that without that. But really, the biggest fear I’ve had and that I’m actually embarrassed to admit was fear of success sometimes. So I wasn’t a wealthy child, or, you know, I was really a blue collar guy growing up and all and as I became more and more successful, you know, there was some fear of success. I know that sounds bizarre. 

Pancham: Yeah, no. It’s actually not. Thank you for sharing. That definition of success is actually fairly… At least one of my coaches have told me that it’s fairly common…

Dave: I feel better today. And I think that’s from the people you surround yourself with. Because a lot of times, you know, you have all this noise around us. And when you’re young or you’re growing up, you, you know, I didn’t have a lot of good role models growing up, you know, and as I got older, I was able to change that, you know. 

Pancham: Great. No, thank you for sharing that, Dave. Alright, my third question is, can you share with us one investment that did not go as expected? I know you mentioned about $250,000.

Dave: Well, I mean, sometimes there’s, you know…One time obviously involved in a real estate deal, commercial deal, and everything was unbelievably great. The projects were phenomenal. I don’t really hear people talk about this, especially with like multifamily apartments or mobile home parks and things like that. And I was working with a company. In fact, that’s one of the companies I learned how to raise capital with. And these were excellent projects. These projects, the numbers were amazing. The projects were beautiful. They were well run, the numbers were great. And guess what happened. The owners got in a fight and started suing each other. And they literally destroyed the entire investment. It had nothing to do with the market. It had nothing to do with the asset. It had nothing to do with the management team had nothing to do with any of that. And another time that I had lost some money was on a land deal. And the land deal again, stellar deal, stellar team…Excellent people. Excellent people that knew what they were doing. Now, this was different. They didn’t cause it, but the market did. They had a great commercial project. It was an excellent area. It was in a booming area, all the demographics lined up. I know nobody wants to hear this story because everything was perfect on paper. Everything was perfect on the on the location. The project was excellent. But the market, the real estate market tanked and really the bank’s tanked. There was no financing. I can’t lease up the project.  It was a development project, a new construction project. If you can’t lease or it was commercial office condos and if you can’t lease half of it or sell half of it, they won’t build it and basically you’re stuck with a piece of land that the taxes just eat up all the investment dollars over. And that that asset probably sat there nine or 10 years before it finally just went belly up and sold. So I’m not proud of that. I don’t know that I would have changed anything. I learned a lot by that but what I also learned that, you know have more than one bucket, have more than one investment call, have more asset you know. I I’m not destitute or anything. It’s not like, you know, if you have a roof over your head and food in the fridge and you got your health and somebody loves you, you’re in pretty good shape, right? I’m checking a lot of boxes, but you know, these things can happen. And I think some of them are like, in that case, there’s not much you can do to prevent that. Right? It was the market and when the banks stop lending, people couldn’t buy a condo unit for commercial reason, or their businesses weren’t doing well. So they weren’t taking out loans. Right? And same way with if you can’t lease it if there’s not a lot of people in the market for that because they’re afraid of the economy in 2008. That’s exactly what happened. This was right around the time of the crash. The banks pulled back they changed their guidelines. Nobody was expanding their business. Nobody unemployment was high. Right? So you know, in prior, leading up to that everything was booming. So I know, it happens unfortunately. And you know, not proud of these things. But no, there’s a lot to it and you learn. They’re not failures, it is feedback. And I just learned from them. 

Pancham: All right, thank you for sharing that. My final question is, what is one piece of advice would you give to people who are thinking of investing in the mainstream that is outside of Wall Street?

Dave: Invest in what you know, but also do your diligence. And I’ll give you a tool that I like, and maybe your audience will appreciate it. I utilize a company called Prescient. And the reason I like Prescient is that they’ll do backgrounds on principals or the actual companies, and they have three, three levels of service. Believe me, I’m not a partner in this company or anything like that. And it doesn’t have to be this company per se. It could be a company like this company, but they’ll actually do international and domestic. They have a very quick turnaround and there were a couple situations where I utilize this company. And, you know, one was a situation where I was doing a JV business relationship. And I do recommend doing a background on individuals and the company. Because in this particular case, the individual came back looking very well, but the business company did not come back looking very well. And actually, we didn’t move forward. And I believe these, these background checks, they’re very robust reports, even the less expensive ones are 35, 40 pages in depth will really give you a detailed background on the individual or their business. And they’ll even do social media hacker. Everything. They’ll dig deep. 

Pancham: Wow. 

Dave: I believe they have locations in the states in Chicago and DC, I believe, and I believe they have one in London. Internationally might take a little longer, but it’s usually less than a week. It’s a couple days, I believe, domestically. International could take a little longer a week or so maybe. But if you’re going to invest significant dollars into someone or something, I highly recommend that this type of approach as part of it. Besides just, you know, financials or something like that, you know.

Pancham: Oh, that is great, good advice. And is it different from you know, the general background checks that people do or these lawyers do? 

Dave: You know, I believe so. There is there is usually crime…It may not be, although criminal is important. It might not show other things that didn’t, you know… I wouldn’t mind seeing everything because some of it is character related. Or some of it is, you know…Believe it or not the one I was looking at…Oh, it almost shows to the level of you got a parking ticket, you know. Like that kind of detail. It’s pretty detailed in some ways, you know. So I love it. At least if nothing else, not saying it would prevent anything. It’s just like, you know, audited financials. 

Pancham: Right. 

Dave:  Enron had audited financials, but at least you know that you’ve done some level of diligence. Like, for me, I have a lot of investors that I represent, right? And a lot of my investors are family and friends, right? I have, you know, cousins and brother-in-law, you know. My brother in law with Ms. invested in me. My mother invests with me. My cousin invests with me. I wouldn’t be able to sleep at night, not knowing that I hadn’t done some level of diligence on some of these areas. 

Pancham: Great, great advice. Thank you so much for sharing that, Dave. So how can listeners reach you?

Dave: Oh, well, the probably the easiest way is pprnote.com or on Bigger Pockets. We answer questions every day. And we also have this stress mortgages group on LinkedIn. They’re probably the best place.

Pancham: Okay, great. Thank you so much for your time and sharing all the knowledge that you have, you know, share with our listeners. Thank you.

Dave: My pleasure. My pleasure. This was fun. Thank you again. I appreciate you having me on.

Pancham: Thank you, Dave. I hope that you guys enjoyed that show and got some perspective on notes. I really appreciate you joining me today. Thanks for listening. If you have questions, email me at p@thegoldcollarinvestor.com. This is Pancham signing off. Until next time, take care.

 

Thank you for listening to the gold color investor podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook at The Gold Collar Investor. The information on this podcast are opinions. As always, please consult your own financial team before investing.




Show #26 - Dave Van Horn - Episode Art

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