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Many people make the mistake of leaving their money sitting idle in an account. It is time to tap into the opportunities there are as Dan Deppen sits down again with Fred Moskowitz for this episode. Fred runs a note fund and is an author, speaker, and educator. Together, they talk about retirement accounts and the importance of utilizing alternative investments in them. With his new book, The Little Green Book of Note Investing, Fred shows us a couple of great ways to take a deep dive into the industry from the perspective of someone who is learning about it. They also discuss how notes can be used even for HSA accounts.

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The Little Green Book Of Note Investing: Using Alternative Investments To Fuel Your Retirement With Fred Moskowitz

I’m joined by a returning guest, Fred Moskowitz. How are you doing?

I’m doing great, Dan. Thank you for having me back on the show. It’s exciting to have another great conversation with you.

Thanks for coming back. The last one was good. It seemed like a good timing to come back and I know you also have a book coming out. I thought we’d check in to see what you’ve had going on.

Thanks for asking. I’m excited about this project. It’s been a long time in the making and it’s finally coming out. The book is called The Little Green Book of Note Investing, and we take a deep dive into note investing from the perspective of someone that’s learning about this amazing asset class and how to get involved. Whether that is active as in buying your own notes for your own portfolio, or getting involved as a passive investor by investing in a note fund. Debt investments should be a part of everyone’s portfolio. I liked the narrative behind this asset class and it certainly warrants a good look and a good consideration to see if it’s right for you.

It’s interesting because if you look at people’s normal retirement portfolios, it’s like I work for XYZ company and they’re like, “Here’s your 401(k) plan. You can choose from these giant mutual funds.” There’s not a lot of control. If you look at the broader world of investing, there are all these other things out there that you can do. Debt is a big one that most people don’t even consider. They might have some bonds as part of a bond fund but not like what we do in note investing.

You bring up such a good point that resonates with me. Here’s what I see. I talked to many investors. I talk to people all the time. One of the things is I run across people who say, “I’m doing great with my investing. I love it. I have my 401(k) at work and participate in that.” I ask them a couple of questions because this opens up the conversation. The first question I ask people is, “Do you know how many different 401(k) and IRA accounts you have, and what institutions they are?” People move around from jobs and they lose track or they leave a 401(k) in an old employer, which is a huge mistake. People end up having these scattered accounts. That’s always the first question, “Do you know how many accounts you have and where they are?”

The second question I have is, “Do you know what’s your most heavily weighted asset class?” The third question is, “Do you even know anyone that works at the company at the institution or what their investment thesis is, what’s their objective?” When I ask those questions, that gets the wheels turning because people realize, there’s a lot more to it then than that. It’s such a huge mistake to leave money sitting idle in an account and you’re not paying attention. You’re falling asleep at the wheel and it does take work to be active with your investing, but when you turn to alternative investment classes, the potential is huge. I always encourage people to take a look at that and see if it’s right for you and your situation.

It’s interesting how people do move jobs definitely a lot more often than what they used to. I’ve had that too where I’ve had IRA accounts or 401(k) accounts at different employers and then roll them over into other plans. For me, I’ve historically have stopped using it now, but I try to use Quicken to try to keep track of some of that stuff, but it’s not that easy altogether. It seems like nowadays when a lot of people think of alternative assets, they think of Bitcoin or something like that, which has its own merits, but pretty volatile compared to some other things.

I like the narrative behind alternative investments where there’s a tangible asset backing your investment, whether that’s real estate or debt that’s secured by real estate, something like that. Another point, which you brought up was about diversification. How many people do you know where for them, diversification means that, “I have my 401(k) plan at work and there are six or so options to choose from. I spread my contribution out among all those and that’s my diversification.” That’s such a fallacy, but unfortunately, that’s what Wall Street leads us to believe through all the marketing and all the news headlines. People get this false sense of security that they’re diversified because they split up their investments between the six options in the 401(k) plan. Nothing can be further from the truth.

A lot of people are like, “I bought some Apple and I bought some Amazon, so I’m diversified now.” What originally drew me into notes was when I wanted to move some of my retirement into real estate because I’d always been heavy in stocks. I had lived through the dot-com boom and bust, and the financial crisis. It’s amazing how overnight those values can change by 30%, plus you have no control over it. You’re along for the ride.

You’re along for the ride and you have no control, exactly. Isn’t it better to have some amount of your investment portfolio of your retirement accounts, invest in asset classes that are isolated from the market swings? The values don’t change and better yet, they generate income for you on an ongoing basis. There’s nothing better than investing in something where you get paid while you wait. I always encourage people to get out there and take note of new opportunities because there’s a whole other world out there. That’s one of the big premises of my book. The theme in the book is to take note of new opportunities because it requires some work. You’ve got to put in some work to learn, educate, and further your own knowledge, abilities, and relationships in order to be successful in this business.

As we get deeper into 2021, it might be good because from the performing note side of the house, property values have run-up. There’s a lot of equity behind those and you can still buy them at decent yields. On the nonperforming side, we may see the next wave of delinquencies here at some point. The timing could be good for that as well.

Performing notes are very powerful. It gets back to that point of getting paid while you wait. Having a percentage of your investments into income-producing debt assets like this where you’re getting paid, you’re generating a nice return for yourself and your investment is backed by a tangible asset. That’s powerful. It’s almost like having the foundation of a building, having a rock-solid foundation. That’s going to carry you through in tougher times or more volatile times.

You can buy them at yields that are higher than the historical stock market returns. You’ve got equity to protect you so you can recover. If something goes sideways for the most part, there’s still a risk. You’ve also got this optionality with them. You’re always buying them at a discount and the borrower may pay off. You get decent yield with equity protection and then a little bit of upside on top of that. It’s hard to find that. I don’t know where else to go get that. I’m sure there are other places you can, but I don’t know where to go.

It is not easy to find. With a note fund that I’m involved with, we see a lot of notes that are being refinanced out. They’re being paid off, whether it’s because the property sold or refinancing that’s happening. Especially in this low-interest rate environment, we see a lot of notes where they’re being paid off for one reason or another. A lot of people are taking advantage to refinance, lock-in at the lower rates and better financing terms, which when you have that happening in a larger, broader portfolio, it drives up your rate of return. Because of the discounts involved when buying notes, when that note pays off, the whole rate of return spikes up. That has a massive impact in the overall portfolio.

What are some of the other things that you cover as you go through The Little Green Book?

We do an end to end look at the notes business, and how does someone get involved in valuating notes. We talk about the basics and the mechanics of the note, the note documents, the note mortgage, the assignments, all of the mechanics of the physical components of a note file when you buy a mortgage and how that works, but we also get into how to conduct due diligence. That’s from the perspective of analyzing individual notes or maybe you’re considering to invest in a note fund. How do you do due diligence on a note fund, which is a little bit of a different approach, but just as important.

It’s extremely important because people have had various experiences. Some of the operators I know out there, a lot of them like you, are very rock solid and they have everything together. There are some other folks out there that if you look them up, you find all sorts of issues. That’s a good point. Doing due diligence on the fund that you’re looking at investing in is so crucial.

When you’re considering note funds, you need to consider it from this perspective. The due diligence that you perform on the operator and evaluating them, that’s as important if not more important than the asset itself. You’re going to be relying on their expertise and experience in order to manage a very large portfolio and utilize their skills, experience and strategies to be able to add value and make it a lucrative investment for the passive investors. I’ve heard this analogy in the past where when you’re evaluating a fund, you have to think that you’re betting on the jockey more than you’re betting on the horse. That’s so true. The people involved are the people that you’re building a long-term relationship with them.

A lot of note funds have a longer-term time horizon. It’s 3 to 5 years. That’s what I always tell people because there is a cycle here involved. You need to look at it from the perspective of having a 3 to 5-year time horizon. If you like how things went with the note fund with the particular operators you’ve invested in, when that note fund winds down and closes, you’ll probably be able to join a new one with them and keep that relationship going. That’s something we see with our own investors. I like to take the perspective of we’re entering into a very long-term relationship and I’m going to do everything I can to make sure that things go well, and that everyone benefits together.

Most note fund operators don’t just do a fund. There’s fund 1, 2 and 3. A lot of times their investors are rolling over from one fund to another over a long period of time versus some short-term relationship.

This is not a transactional relationship by any means. You have to approach it that way. In particular, if you’re investing using retirement account funds from a self-directed IRA or maybe a self-directed HSA self-health savings account, you have a long-term perspective because you’re not going to be utilizing that money for a long time. You want to build those relationships up because what you want with those types of accounts is to keep your capital at work as close to as possible, 100% of the time. You don’t want to have uninvested capital sitting there idle because that’s going to result in a 0% return on that money and that drags down the return in your overall portfolio.

I’ve done the math on that before. If you look at your retirement accounts over a couple of decades, if you have stretches in there where it’s earning zero, that makes a massive difference by the time you get to the end because now those gains you would have had aren’t compounding out in the future years.

With the book, I spend a lot of time talking about the power of self-directed retirement accounts. Whether it’s a traditional IRA or Roth IRA, as well as health savings accounts, which are not utilized enough. People don’t know how they work and how to properly utilize them. It’s such a powerful tool. HSAs are a hybrid between a traditional IRA and Roth IRA. Here’s why. With the traditional IRA, you have a tax deduction on your contribution. You grow the account through your investing. When you withdraw, now you have to pay taxes at the end. With a Roth IRA, the big benefit there is you’re paying your taxes upfront, then you grow the money. In the end, when you withdraw, that becomes tax-free. It comes down to you pay your taxes upfront or in the future. I know one thing is for sure with the way things are going in our economy, the government, and what they’ve been doing. I have a pretty good feeling that taxes are going to be a lot more in the future than they are now. I would rather pay them at lower rates now than potentially higher rates in the future.

At some point, they’re almost going to have to go up. Chickens are going to have to come home to roost.

Here’s a great analogy. I love this analogy. It’s the farming analogy, agriculture. Would you rather pay tax on the seed or would you rather pay tax on the harvest after you’ve done all the work? That explains Roth IRAs in a nutshell. Let’s get back to HSAs, Health Savings Accounts. The unique thing with those accounts is that your contribution is a tax deduction. You grow the account tax-free and then at the end, when you withdraw, as long as you’re reimbursing yourself for qualified medical expenses, that’s tax-free as well. That is so powerful because you get the tax deduction going in and then coming out, it can be tax-free as well.

I always encourage people when I talk to them to look into that. It’s a more complex strategy, but if it makes sense for you, definitely talk to your CPA, talk to your advisors and learn how to leverage the power of HSAs. Any custodian like your self-directed IRA custodians, they all can handle HSAs and you can self-direct. This allows you to invest in what you know in those alternative assets like real estate, notes or any alternative assets. You can do that through an HSA. That’s another thing that I wanted to highlight that I cover in the book. I feel strongly about this. I encourage folks to look into that.

I’ve always seen the self-directed HSA as an option, but I’ve never actually delved into it to look at doing it. I’ve got my self-directed IRA, but that’s been it on the self-directed side. As we get into the New Year, where do you see the note industry heading and how do you think things are going to be relative to what we saw in 2020?

What I’m seeing is a lot of movement. I’m seeing assets being sold to create liquidity, which creates opportunities for sure. I’m also seeing a lot of people or a lot of instances where people have gotten scared because of the pandemic or their current environment and backed out of no transactions at the last minute.

Is it individuals or bigger institutions?

Both, individuals and funds like larger size transactions where there’s a contract that’s not getting executed on. This happened to me multiple times in 2020 where there was a transaction that someone backed out or an entity backed out. I got the phone call, “Are you interested to jump in? We know you’re liquid. Do you want to jump in here?” It was a good opportunity so we quickly were able to assess that opportunity, do our due diligence and jump in. Let me tell you, it feels good to get those phone calls. That all is based on your reputation as a note investor, your reputation in the industry. As you know, the note investing industry is a small world and we all know each other. We do conferences, we talk to each other, everyone knows each other. It’s great to have opportunities come to you that way.

When you’re reliable, they will. Many people, especially on an individual basis, tend to be flaky. If you have a reputation as someone who has a defined model, and the seller knows that if it fits Fred’s model and the pricing is right, they’re going to be able to close. That’s nice. That’s where you see a lot more things come your way. I’ve seen a little bit of that flakiness too where a lot of the investors in 2020 have been scared with what’s going on. I saw this change at the end of 2020, but for the most part, it seemed like the buyers were scared. They were cranking their price low. A lot of the sellers were like, “The underlying real estate values have been soaring.” They’ve moved their pricing up and there’s been this mismatch where there hasn’t been quite as much trading as you would expect to see, but that appears to be loosening up and shifting.

I see opportunities pop up in the secondary market. If you’re aligned with a fund manager where they’re uniquely positioned, they’re able to add more value, that ultimately creates more upside for the investors, which can be powerful. Some other things I’m seeing in the note industry, we’re seeing an increase in regulation from government entities, state and local. That is heading on an upward trend. You want to be staying abreast of those changes. The environment changes constantly. You want to be paying attention to that in the regions where you’re investing. There are many of these jurisdictional nuances where you have to pay attention and watch that. Regulation in the note industry and in the business environment in general is definitely going to be increasing for sure. More regulation, more government oversight involvement. You need to be positioned appropriately for that.

I always went in this assuming the rules would always be black and white. Sometimes it’s not even that regulation changed but an official, an interpretation changed. The rules are fuzzy gray and not black and white, which makes it a little bit of a challenge. If you tell me the rules, I can play by them, but I hate those scenarios where it’s like, “It could be this, it could be that. You’re good, but they may come back later to question you again.”

The one thing that you can be certain of is there will always be change. We’re coming into an era where there’s going to be changing for sure due to the new presidential administration, which is coming in. They’re going to be making changes in this area of business regulation. Some of those changes will be positive for small business owners and entrepreneurs, and others won’t be. You need to pay attention to what’s going on. You need to align yourself with good advisors, a good team to help guide you and navigate those waters of uncertainty.

It sounds like you’re pretty well set up. It was very exciting to have a book come out. I know how much work those are. I wrote a poker book years ago. People that haven’t done it don’t realize how much goes into creating those.

It’s a lot of work but for me, it’s been a labor of love. It’s been such an opportunity for me to connect with a wider audience, share some of my ideas and concepts with a larger, broader audience. I talk to investors all the time and people are looking for guidance. They’re looking for experts to follow, to align themselves with. This has been such a wonderful project for me, but you’re right. It’s a lot of work and I’m not talking about the writing part of it. That’s one piece of it, which is a lot of work in itself. Writing a book is definitely a long slog. Sometimes you get unmotivated and you have to push yourself to keep going, make incremental progress. That’s the best way to approach it. When the day comes where your manuscript is done and then you have to get the book produced and published, which is a lot of work in itself as well. It’s something I underestimated how long that was going to take, but I’m happy that it’s at the end. It’s finally launching now. I’m excited. I can’t wait to see the outcome of that, and to touch other people’s lives, get them thinking about new ideas, and getting them exposed to new opportunities.

I’m looking forward to checking out myself. I haven’t gotten my hands on it yet. Fred, thank you so much. I appreciate having you on. We’ll do it again. Maybe we’ll schedule that in once a year.

I love that idea. January is a great time to assess your business, assess what you’re doing, think about things you want to achieve in the upcoming year. Most importantly, look back at the previous year and acknowledge all of your wins. It’s easy for all of us to lose sight of that. We get busy and wrapped up, but that last week of the year, take some time. Get in some serious thinking time under your belt and go back month by month and write it down, make a list. It’s easy to make a list of the top 20 or 30 great things that have happened to you in the past year. If you go through it month by month, look at that, and take a moment to acknowledge the new relationships you’ve built, acknowledge the wins, the achievements, the growth, and the development. Take a moment to take that in and celebrate that. That’s important and that helps you to build momentum moving forward into the new year.

Sometimes it gets busy with the day-to-day you almost forget a lot of the good things that happened or some of the successes you’ve had. Fred, thank you so much. I appreciate having you on.

Thank you, Dan. It’s been a pleasure coming back on your program again. If anyone is interested to connect with me or reach me, they can visit my website, FredMoskowitz.com and select the button to connect with me. Thank you.

Thank you.

Important Links:

• Fred Moskowitz
• The Little Green Book of Note Investing

About Fred Moskowitz

Fred Moskowitz is an educator, author, and public speaker who has trained countless investors from all walks of life on how to create passive income streams of their own. As a fund manager, Fred manages a mortgage note investment fund and is considered an industry veteran within the note investing arena. Fred teaches the concept that individual investors are able to step into the shoes of the lender, through note investing, and effectively “be the bank”.

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