Fred Moskowitz joins the podcast again with advice for note investors. He discusses the need to understand the nuances of not just the state, but sometimes a local jurisdiction that you are buying a note in. We also talked about the importance of doing due diligence not just on an asset, but on the counterparties you are working with as well. Fred thrives in this industry because he values relationships and he was able to learn from the best. So this is also your chance to learn from an industry veteran’s expertise within the note investing arena for you to be able to start and hopefully grow your capital!
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The Due Diligence You Need In Note Investing With Fred Moskowitz
I’m joined by Fred Moskowitz. Fred, how are you doing?
Dan, I’m doing wonderful. Thanks for having me on.
I’m glad to have you back. This might be the third appearance so that might be a record. We are having this conversation a little bit after the Paper Source conference. We got to meet up face-to-face for the first time in a while. That was nice.
It’s wonderful to be back at live events in person and see people. As a long-time person in this industry, this is something I always talk about. One of the most important things for being successful in the note investing industry is getting out to live conferences, networking with people and meeting people because with those relationships, that’s where business happens. It’s all through personal relationships. It’s important to meet people and see each other. Sometimes we are working over the phone and email with different vendors and partners. We don’t have a chance to interact in person. I feel that’s so important. It’s great to have that back again after a few years of hiatus, for sure.
There is a lot of stuff that happens there that doesn’t happen elsewhere. I came away with a couple of tapes. Paper Source, in particular, I found to be an interesting crowd. There were a lot of folks there that have been at it for decades. Since the early ‘80s and even the ‘70s, with a lot of those folks, you are not going to meet them online. If you don’t see them at one of those conferences, you are not necessarily going to come across them.
Cumulative years of experience are in that room. That’s for sure. I agree with you.
It was interesting how they invested through all these different cycles through the ‘80s, ‘90s and the present. We are talking about some of the different economic things going on with interest rates and inflation going up. A lot of these folks have been fairly unfazed by it all because they had lived several years ago and other stuff and have seen it all.
It’s an interesting perspective. The note industry, it’s very similar to real estate that there are market cycles, which may last from 7 to 10 years typically. We have been through a very atypical market cycle because of the long length of it. It’s an interesting perspective to talk to some people with decades of experience and hear the perspectives that they bring to the conversation. I agree with you on that.
One of the most valuable things that you can do as an investor is make sure you have good legal representation. Click To Tweet
You gave a presentation and there is part of it as well. Maybe you could talk a little bit about that. I wasn’t able to catch the entire part of it but you did some talking about due diligence.
I did a presentation about due diligence. I wanted to bring attention to some of the lesser-known details about due diligence. Some of them are things that I encounter in the everyday details of working in the note business. I will share with you a couple of points. One that people may not fully understand is paying attention to jurisdictional nuances that come about in some of the cities and counties where we are doing note investing.
There have been a lot of counties. Some of the counties are Cook County in Chicago, Illinois and in Philadelphia where my home base is. There are some nuances there that have to do with the court system and the way things work. There’s an impact. One of the most valuable things that you can do as an investor is to make sure you have good legal representation specifically in that jurisdiction. You need legal representation for the state where the note is. For some of these, you want someone very local. They know the ins and outs of dealing in the court system and working with the different judges and so on.
If you don’t have that, you could get subject to all kinds of delays and complications that will be unnecessary and can be avoided. That was one of the points I wanted to stress on. I always love sharing my experiences and expertise. When I’m out speaking at a conference. I’m not getting up on stage to sell anything, pitch a note fund or anything like that.
I’m there to add value to others and share my expertise. When I was starting in this industry, that’s how I learned. People shared and poured into me. That’s how I learned so many things. I learned from some of the most successful note investors that are out there. I want to pass it on to others as well and that’s the approach I take.
What are some of the examples in Philadelphia? In general, Pennsylvania has been a difficult state with the attorney general at least as it relates to harbor contract for deeds but what are some of the other things that are going on there?
I can’t speak too much to contract for deeds. That’s not an area I’m knowledgeable in. In Philadelphia specifically, there’s been some inordinate delays and shutdowns in the court system that were done with no rhyme or reason. It’s just at the whim of the folks running the court system. To get things done, you want to have legal representation that knows how to get things done. If not, you are going to get subject to delays, continuations and all of this unnecessary expense and time.
Business time is the most valuable thing that we have. It’s impacted by your cost of capital in running a successful new business. That’s what it comes down to, especially in Philadelphia. It’s a great city. It’s where I am and I love it but you need to know how to get things done and know what you are getting into. That’s what I always recommend to people. Do a little homework beforehand. Ask for referrals from some of the vendors that you use and colleagues that you know. They will be more than happy to help you with that. That will make all the difference. It’s working with competent professionals and the right people.
Having the right attorney is key because I have some that are on top of everything. They work in most of the states I operate in. I have had other firms that I have worked with in other states that are more than happy to deal with delays and then keep sending me bills. They don’t seem to be too concerned about getting things wrapped up. It’s like the 80/20 rule. There’s a wide variation in the performance of some of the different attorneys you can work with.
How about you, Dan? What were some of the big takeaways that came to mind for you from the conference?
One of the biggest things I got out of it was talking to some of these people who have been at it for 40-plus years. There were a lot of folks there who are a little older demographic that you are not necessarily going to get the opportunity to bump into online. A lot of them had fascinating stories. It was interesting how they have gone through all these crazy market cycles.
Some of them were set back in the ‘70s, invested through the high inflation period in the early-‘80s and all the ups and downs talking about some of the economic conditions. We have got inflation and mortgage rates. Going up, these folks were pretty unfaced because they have seen it all. A lot of them seem to have the ability to understand what’s going on and they are going to adapt their investing through whatever the conditions are.
It’s a wealth of experience and expertise. Being able to adapt your business model to the market conditions is so important for any of us as investors because there’s one thing for sure, you can’t control the world we live in. Change is inevitable but what you can control is how you adapt and respond to the change around you.
When you meet successful investors that have been at this for decades, you see these patterns. People adapt. They change and make adjustments. They don’t sit on the sidelines and wait. That’s one of the hallmarks of successful investors. With our note fund, we have made some changes and adaptations to coincide with the market we are in.
We made a big shift to performing notes and focusing on that. Speaking with investors and the people that we are in contact with every day, people want security. They want to invest in a fund with notes with a good solid track record and good security behind them. When the customers are asking for a product, it’s up to us to bring a product that matches what they want.
You may set up a note fund with specific parameters and a business model but things change. It’s time to adapt to that. You are always providing a great product and value to your customers and investors. That’s something that we seek to do and something to be mindful of. Always watch the changes that are happening and adapt to them. If you have to pivot, you pivot but always be ahead of the curve and take action swiftly. When you have experience and expertise, that empowers you to be able to make good decisions quickly and on the fly.
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That adaptation message is key. I started with notes around 2017. Pricing years ago was a lot different than what it was now. In some ways, it was a little bit easier. I noticed that there were a lot of people around that time that had started maybe before that like closer to the end of the financial crisis when pricing was even better.
When the market shifted, we had this one up in real estate prices and note prices adjusted. There were a lot of people that said, “My model doesn’t work anymore. I’m out.” They didn’t adjust and were gone but there’s no reason to do that. You have to adapt your model to what the conditions are. I have done something a little bit similar to what you are talking about.
Years ago, I was doing a lot more non-performing but what I noticed was the premiums for non-performing notes were going up and the pricing spread between a non-performer and a corresponding performer was getting tighter. I reached a point where I’m like, “Most of the time I may as well buy the performer.” You are not necessarily going to make what I call a novelty return. Everybody loves the stories of, “I bought this non-performing. For $0.10 on the dollar, it got paid off.” You don’t necessarily have to have those kinds of wins to have a successful business.
I feel that pricing for all kinds of assets has gone through tremendous growth, whether it’s notes, real estate work, residential real estate, commercial real estate, everything. There is a lot of capital. A lot of liquidity was put into the monetary system over the past years. We are seeing the impact of that with inflation, rising asset prices and assets of all types. It’s making for some interesting times. That’s for sure.
The advantage of that is with a lot of the ups and the price of real estate. A lot more of these assets have equity coverage. It often justifies that higher price. What were some of the other things you talked about on due diligence or maybe some of these more subtle aspects of it that people may not have been thinking about?
Some of the other things were taking a look at who you are doing business with. Do due diligence on the counterparty to your transaction if you are buying or selling a note, working with an investor or purchasing anything. You want to look at who you are doing business with. Do a little homework there. Unfortunately, not everyone is as upstanding as we would hope in the industry. There are some bad apples out there and it goes for any area of business.
It’s so important to make sure you know who you are dealing with. Spend some time and money to check people out and do some due diligence on the counterparty to your transaction. It’s something that doesn’t get spoken about enough. It’s so important. We hear these stories of people losing their money or partnering up with someone and then things don’t work out as planned. You go look and see that there’s a history of this happening with this individual. What I always say is sometimes all it takes is ten minutes of Googling a person or a company to see what’s going on. That can help you avoid so many headaches that could come up. I can’t stress it enough.
No matter who you are going to be doing business with, spend some time looking into that a little bit. Make sure you are comfortable with them. Get referrals and ask colleagues. We all know each other in this industry. It’s not hard to pick up the phone, make some phone calls and ask people. That will go a long way towards avoiding some not-so-pleasant circumstances.
That’s a subject that’s not talked about enough. Most investors don’t do necessarily the homework that they should with their counterparties, especially someone whom they are investing money with. I was having an offline conversation with someone who is an interesting character. We both know him but he’s good at poking into things and scrubbing. He had done a bunch of background checks on various folks in the industry.
I’m not going to say names but it was mind-blowing some of the stuff out there. They are some of the ones I would not have expected where people have big judgments against them or had bankruptcies and other things that are not necessarily consistent with the way they present themselves that way.
That’s important. As a Fund Manager, I feel it’s so important because we are working with our investor’s capital. They are trusting in what we do. We don’t want to put that capital at risk. You can’t be careful enough. Let’s put it that way. Doing a thorough process of due diligence is part of what we do. Part of the value add that we bring to investors is the assurance that with these types of business processes, we conduct on an ongoing basis and help weed out a lot of the bad actors that are out there.
They are lurking out there. To your point, they exist in every industry but sometimes, they show up in places where you wouldn’t necessarily expect them. What were some of the other takeaways that you had from the conference?
Some of the other takeaways that I had is there seems to be a huge interest in the industry, which was good. I was so pleased to see many self-directed retirement custodians at the conference as vendors participating there. One of my favorite strategies is investing in notes and using your retirement funds. That’s so powerful because note investing is an activity that generates tax liability.
There are not any ride-offs or deductions. I have depreciation as you do in real estate. If you can combine that with some of the tax advantage tools that the IRS gives to all of us, it’s right in the tax code about using self-directed IRAs or self-directed Roth RAs or HSAs, Health Savings Accounts. That’s a relatively new one but use those together with note investing that you are doing. That allows you to grow your capital and how to tax advantage environment.
That can be powerful. I love speaking about that. Whenever we have an investor come to us talking about the fund and asking us about it, one of the first questions that I always like to bring up is, “Are you looking to invest using retirement account funds?” A lot of times, the answer is, “I didn’t know you could do that. You are able to use retirement account funds?” The discussion goes in a different direction because I’ll give them an overview of that. Something that I was pleased to see was all the different self-directed IRA custodians were present at the conference presenting their teaching and sharing their expertise and education with the attendees. I love seeing that.
I’ve got a lot of my retirement funds in a quest account where I have a lot of performing notes sitting in there. Those are nice. I bought fairly low-risk performers, even though I have got one that I’m having that turned on performing in there. For the most part, I’m getting low double-digit yields and it’s pretty stable, which is nice, especially with the stock market tanking. If I look at my other accounts that are invested in stocks, it got this steady growth in my IRA and is not as volatile as some of the other options.
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The stock market is great. It has its place in each person’s portfolio. I always talk about making sure that you are diversified into different asset classes. That’s so important.
I liked that as well. That was one of the things that originally drew me into the real estate world. They said it’s not either-or or you should be all in stocks or all in with real estate or notes but having a mix can work well. Notes don’t have quite some of the same tax advantages as regular real estate or rentals do. You might talk about that a little bit because one of the benefits a lot of people have is they don’t have to deal with tenants or toilets but there are some other factors to consider as well. It’s not necessarily a free lunch in that.
Some risks have to be managed for sure. You have to make sure that the taxes are being paid and the insurance is up to date on the property. There can always be threats to the lien whether that’s unpaid taxes, unpaid homeowners’ association or immediate senior lien if you are in a junior position. Those are all risks that can be managed on an ongoing basis. It’s important for you, as an investor, to be cognizant of that and make sure you have a process in place to manage those risks. If that’s something that seems too complicated and complex, then maybe a better option would be a note investor by investing in a note fund where the fund managers in their team are taking care of a lot of that risk management activities on an ongoing basis.
It’s important to do that, pay attention and monitor things on an ongoing basis. The tax advantages, getting back to your original point with self-directed retirement accounts and the HSAs, it’s super powerful. Notes do not give any tax advantages at all, instead, they give you tax liability. It’s so important to have a tax strategy for yourself and your portfolio.
One of the most important areas of value that your CPA and tax advisors can give to you is tax planning. You don’t go to your CPA so that they do your tax return for you every April. That’s not what they are there for. That’s an important service they provide but it’s also the strategy and planning that goes on throughout the year. It’s super important. I always encourage people to make regular appointments to meet with their CPA and tax advisors, make sure you have a plan in place and you are constantly reviewing and updating that plan based on the different activities that you have going on.
Here’s my last question. You mentioned some of the benefits of note funds. What are some of those advantages for folks who are getting started putting money in a note fund versus figuring out all these processes and buying notes on their own?
Investing in a note fund is a great option for anyone that’s getting started. Maybe they are not comfortable or don’t have the expertise yet. When an investor participates in a note fund, they are entering into a collective partnership almost with the fund managers. If the investor is able to be a passive investor, she or he is going to benefit from the expertise, experience and relationships that the fund managers have.
That goes a long way because relationships are the most important thing in this industry. When you have access to those relationships to be able to buy notes, that’s powerful. For someone starting out or maybe someone interested in note investing but doesn’t have the time, maybe they are a successful professional or business owner, a note fund is a great option for them if they wanted to do passive note investing as well as benefit from the relationships and the expertise of the fund operators and managers.
It’s probably a good spot to wrap it up there. Thanks again so much for coming on. I appreciate it.
Thank you so much, Dan. I appreciate it. It’s always great to come to your program and catch up on the new things happening in the note investment world.
Before we leave, how can folks get ahold of you if they want to learn more about what you do and some of your funds?
There are a couple of ways. I’d love to invite everyone to check out my book on note investing. It’s called The Little Green Book of Note Investing. It’s available on Amazon. I’d love to connect with investors. Please visit my website. You can connect with me there. It’s at FredMoskowitz.com. For easier spelling, you can go to GiftFromFred.com and connect with me there. If you prefer texting, you can text the keyword MONEY to the number (251) 461-4433 and then follow the prompts and we can connect that way. I give you a few different ways. I always loved speaking with investors, learning about what they do and interacting in that way. Thank you so much, Dan.
Thank you, Fred. I appreciate it.
Important Links
- Fred Moskowitz
- The Little Green Book of Note Investing
- Amazon – The Little Green Book of Note Investing
- www.FusionNotes.com
About Fred Moskowitz
Fred Moskowitz is a note investor and a best selling author who has trained countless investors from all walks of life on how to create passive income streams of their own. In the note industry, Fred manages a mortgage note investment fund and is considered an industry veteran within the note investing arena. Fred is an advocate for spreading awareness about self directed investing and enjoys teaching investors how to accelerate their financial growth using self directed investment vehicles such as self-directed IRA’s and self-directed HSA’s.
Fred takes pride in educating investors to help them grow and profit in the note space, as well as being a trusted and valued resource in the arena of alternative investments. His book, titled “The Little Green Book Of Note Investing”, has recently launched in 2021.
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