Welcome back to How To Scale Commercial Real Estate. We are joined by Fred Moskowitz. Fred is a mortgage note investor and industry veteran who has been buying and selling notes for over ten years. He focuses on residential notes and believes it’s a solid and stable asset class in the current market environment. Fred continuously monitors risk and does his best to stay ahead. Let’s join Fred as he shares his journey with us!
Highlights:
[00:00] – [06:39] Opening Segment
- Fred Moskowitz is a note investing veteran and has managed a mortgage note investment fund.
- He focuses on residential and performing notes and believes the current market conditions are good for performing notes.
- Risks in the note-buying industry include increased regulation and threats to property.
[06:39] – [13:22] How to Shop for and Buy High Yield Notes
- You should be proactive in notifying your HOA and HOA board of any delinquencies or issues with the property.
- You have the right to protect your interest in the property by reinstating delinquent taxes, association dues, or a senior mortgage.
- Several vendors and services will monitor your property at a low cost.
- It’s not a problem as long as you stay on top of it, but if there are any issues, you can get help from a note servicer.
[13:23] – [19:36] Fred Moskowitz on the Importance of Notes Investing
- Fred discusses that they can buy notes that originated 3, 5, or 10 years ago.
- Those notes can be rated and locked into those loan documents that will never change.
- They always will pay the same payment, the same interest rate as In the promissory note.
- If the interest rate environment continues to rise, that will impact pricing.
[19:36] – [20:25] Closing Segment
- Reach out to Fred
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- See links below
Final words
Tweetable Quote
“Be a lifelong learner, never stop learning.”- Fred Moskowitz
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Connect with Fred Moskowitz by following him on http://www.Fredmoskowitz.com
Or http://www.giftfromfred.com
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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Want to read the full show notes of the episode? Check it out below:
Fred Moskowitz: [00:00:00] As you have more experience, you may be willing to take on a little more risk, maybe buy a note that has a problem.
and that warrant’s a lower purchase price. If you know how to fix that problem, you could benefit. You could benefit because problems come up with notes and it’s like anything else with enough time and enough money. Any problem can be solved
Sam wilson: Fred Moscowitz manages a mortgage note investment fund that is considered an industry veteran within the note investing arena. Fred, welcome
Fred Moskowitz: to the show. Thank you. Thank you, Sam.
Great to be here.
Sam wilson: Hey, the pleasure’s mine, Fred. There are three questions. I ask every guest who comes in the show at 90 seconds or less. Can you tell me, where did you start? Where are you now? And how did you get.
Fred Moskowitz: Yeah, absolutely. I started out working as a computer [00:01:00] engineer in the technology sector, had a great career with that, but through all the turmoil, the bursting of the.com bubble and everything that happened there, I realized that I needed to have other sources of income so that I wasn’t taking that risk of relying solely on the paycheck for my job.
And so from that, I got involved. Active investing in different types of assets, rental, real estate built up a portfolio there. And then after some time I got involved in mortgage note investing, which is the whole idea is buying notes. And then you step into the shoes of the bank. You become the one receiving those monthly payments and I’ve started to scale.
And grow that business. And over the years it has evolved. Eventually I formed my first note fund and started raising capital . Through offerings. And and that brings us to where we are today. [00:02:00] Is
Sam wilson: there a particular type of note that you’re buying? I know that there’s such things as first liens performing notes there.
Second liens. Yes. The non-performing notes. Is there a flavor that is the one that Fred really likes.
Fred Moskowitz: Yeah, absolutely. I focus on residential notes, performing notes, and we buy all over the country nationwide. But as you mentioned, yes, there are so many types of different types of notes, different niches, and they all have different business models around them.
But some do better in certain portions of the market cycle and others. But right now in , the environment we’re in, I find that performing notes on residential properties is a very solid and stable asset class. And so . That’s where , the majority of my focus is at this time, at this point in the market cycle,
Sam wilson: Got it.
Got it. So that’s where you’re seeing opportunity. What are some risks [00:03:00] maybe in some of the other types of notes that are being bought right now that you’re avoiding.
Fred Moskowitz: It’s about managing risk and doing good due diligence. Some of the risks that, that I see in the industry, there is a growing trend for increased regulation from government.
The government, both at a federal level and at a state level. And so that’s always something to keep an eye on for us that are active , in the industry. Other areas of risk are looking at. Since we’re buying notes that originated maybe several years ago, we have to look at current market conditions and seeing if there’s there might be any negative impacts that are there.
So that’s always a concern. And with any type of note, there are always threats to the lean threats to the lean could be taxes going delinquent or homeowners association. Going delinquent or a senior lean that might be [00:04:00] ahead in, in priority. Not being current. So there’s all these different risks that are out there.
However they can all be managed. They can all be managed with the proper. Processes and systems in place. And so it is important to do that. People sometimes think, oh, node investing can be passive. I’ll just buy some notes and put them off on the side and that’s it. But it does require constant monitoring.
And you can either do that yourself, or you can outsource that through different service providers to help you, especially if you have a larger portfolio, you’re absolutely gonna need help with.
Sam wilson: Why does someone invest in a note buying fund versus going out and just acquiring a handful of individual notes on their own?
Fred Moskowitz: Yeah. Great question. Great question, Sam. It really comes down to how much time do you have available and how much time do you want to dedicate to being. An active node investor [00:05:00] node investing takes a lot of time. It’s really a full time business to be successful for you to be effective. And so if you are seeking to dedicate yourself to that being an active investor is a great way to go, going out, buying those notes, creating those relationships with the people in the industry, to be able to have access to buying notes and sell notes.
For many people they don’t have that time or they’re focused on. Their own business, their own career. And so a better option is to be a passive investor in a note fund, the same way with investing in an apartment syndication. Right. For instance, for me, I do not wanna own a large 500 unit apartment complex.
I have no business doing that. However, I love the asset class. So yes, I will invest passively in a syndication and benefit from. And with node investing, investing in a note fund, it’s the same idea, , the passive investors, [00:06:00] you as a passive investor, you’re able to leverage the expertise, the experience, and the relationships that the fund managers have and benefit from that.
And so it creates a win-win relationship.
Sam wilson: What are some things you’re doing on? I know you, you mentioned some of these risks we’ll kind of circle back in the conversation. You mentioned some of these risks. What are some things you’re doing to stay on top of those? I mean, I can imagine that if you get a super lean, such as, city or county taxes.
Yep. Right. They’re gonna probably notify you as the lender of record, I would assume. But how do you stay in front of those things? Just to kind of offset some of that risk, I’m thinking. Maybe HOA and HOA, I’d probably imagine probably also gonna yeah. To notify.
Fred Moskowitz: Absolutely.
But absolutely. , you need to be proactive with that. Now there are several vendors and services that will do monitoring on your behalf and they will check regularly. You can check it yourself as well. If you just have a small [00:07:00] portfolio of notes. Sure. It’s a. Phone call down to the tax assessor’s office to make sure that taxes are paid.
Yes. In most states you are supposed to be notified and, and all this, but not every state. And so I wouldn’t rely on that. And if you’re getting a notification that’s really far along in the delinquency, so . It’s better to get ahead of the curve with that. And as the lender, you have the right to protect your interest in the property.
And part of that is you can reinstate delinquent taxes. You can reinstate delinquent homeowners, association dues. You can reinstate a senior senior position mortgage as well. And so these are different ways that are part of the rights and remedies that are in the mortgage documents.
Sam wilson: Got it. Got it.
but other than hiring a third party service or not third, that’s not the right word. Third part third but hiring a third or an independent company that, that monitors this for [00:08:00] you, is it otherwise just a manual process of just, Hey, every once a quarter, we make 500 phone calls and make sure everything’s paid up or what’s the process there for you?
Fred Moskowitz: Yeah, absolutely. It’s something you can do annually or biannually is usually enough frequent enough to check on that. And there’s some great monitoring services out there that will do this at a very low cost. They’ll send you a report and then you can look over that and see, but in general it’s not a problem as long as you stay on top of it.
And if there’s any issues, you can . The right help involved, but definitely having a note servicer in place is key. They are one of the key members of your team to be successful and they handle a lot of on the ground. A lot of the hands on activities that go on.
Sam wilson: Right. That’s really cool.
I love it. What is something, what is a mistake that you have made in the note investing business and how would you tell someone [00:09:00] else to avoid
Fred Moskowitz: it? Oh, great question. So a mistake that I made early on was buying small value notes, small loan balance notes, and here’s why. for someone that’s not familiar, just getting started, they may see a small balance note, a note with a principal balance of $10,000 or $5,000.
Right. They’re out there that you’ll see them out there. But what I found over time is that it’s the same amount of work and expense. As it it is for a $5,000 note or for a $50,000 note or a $500,000 note, same exact expenses, same amount of time and effort. And so why focus all of that on the small notes, because the ratio of the work and expenses to, to what you’re making on that it’s not good, not good at all.
And. [00:10:00] Go into larger size assets, as best as you can because that’s gonna be the best use of your time and your resources.
Sam wilson: Yeah. Well, I mean, that’s that goes hand in hand with kind of the theme of the show, which is how to scale commercial real estate. I was at the title of it. Yeah. But that over and over, which is like, it’s just as much work to close one, single family residence, as it is to buy an entire apartment complex, it’s exactly the same amount of work it’s like, , it’s almost the same amount of papers.
Maybe a few more, but not. Not dramatically, like, so you can find a 10 million apartment complex or a hundred thousand dollars house it’s, one might be slightly quicker than the other, but still in the end, it’s just not a dramatic difference in the amount of work it
Fred Moskowitz: takes. Yeah, exactly. I love that Sam.
And that, like you said, it’s the theme of your show, the ability to scale and ramp up. That’s what has the most impact you in your business and your growth [00:11:00] trajectory?
Sam wilson: Absolutely. Let me go back to maybe some more tactical things that you’re doing inside of your business. So you’re buying first position, performing notes at the moment, I guess.
How do you do that at scale? I mean, is there. There big note buying platforms out there that you just filter through and buy ones you like, is there relationships with banks? Is there, how you doing that?
Fred Moskowitz: Yeah, this is highly relationship based, highly relationship based. And so, I’ve been active in this industry for.
The past dozen years. So we’ve built a lot of relationships with note sellers with other hedge funds with note funds and we buy and sell notes between each other all the time. And so having those in place, it really allows for better access of notes. Yeah. There’s some exchanges where you could go and buy like a single note here and there, but.
[00:12:00] Eventually, when you’re buying in bulk with larger purchase prices and larger volume of notes, that’s gonna give you better access. It’s almost like you can shop at a different store. When you’re doing this and it opens up a lot more possibilities, a lot more opportunities. So in summary, to answer your question, it’s through personal relationships we all know each other.
In the note industry, we go to note conferences and industry events see each other. And so it’s super important to maintain those relationships on an ongoing basis. ,
Sam wilson: let’s talk about interest rates for a second. This is a good question. I just thought about is there a correlation between the price that you pay for the note and the interest rate that loan is paying as interest rates have climbed?
Yes. Are you gonna now pay more for a note that’s paying five and a half percent than you would for the one that was generated originated three years ago, that’s paying two and a half.
Fred Moskowitz: Yeah, absolutely. That will [00:13:00] impact the pricing. It’s all based on the yield and when notes are bought and sold, it’s not so much about the loan balance itself, but the yield based on that loan balance and the loan may be discounted to get it to the appropriate yield for the marketplace.
And so that, that does influence, but keep in mind, Sam. S we may buy notes that were originated three years ago or five years ago or 10 years ago. Right? And so the rate is whatever it was locked in into those loan documents that will never change from the point of view of the borrower. They always will pay the same payment, the same interest rate as.
In the promissory note, but move, as things, change things evolve. If the interest rate environment continues to rise. Yeah. That will definitely impact pricing. For sure.
Sam wilson: Right? Yeah. I would imagine that the price of that loan [00:14:00] would go down as it’s trading hands between you and whoever’s selling it.
Like if say they’re selling it to you, it’s gonna cost you less in the front to buy it. Cuz the yield’s lower. Is that right?
Fred Moskowitz: It may go down, but it may go up. There may be a stronger equity position backing that note. There may be a change in the profile, the borrower of their track record. If the note today has.
Let’s just say a little bit of a blemished payment history and then two or three years into the future that gets cleaned up. The borrow is on track with all their payments. The note could be worth more actually for that reason. And so there, there are some different influences for sure. But what ends up happening in this industry?
If you think about it, notes have a life generally of five to seven years before the property gets refinanced or sold. And so you constantly get notes that are being paid off. And so at that time, you’re redeploying the capital at the current market conditions. [00:15:00]
Sam wilson: Got it. That makes a lot of sense. And I like the idea I’m kind of imagining, like, and I know you’re buying these in bulk, but I’m kind of imagining like this matrix where you, like you put, I mean, there’s a whole bunch of different things you’re considering.
Yeah. That can kind of spit out. Hey, here’s the actual value? Here’s the price I’m willing to pay for that? No, like, oh, okay. We’ve got a. A borrower that pays on time. It might be at a 3% interest rate, but they’ve never missed a payment. There’s all these different things. The neighborhood is amazing.
The demographics in the air and the zip code are incredible. And so it’s okay. Well that note’s worth more than maybe, I’ll note that didn’t have
Fred Moskowitz: those characteristics. Yeah. A absolutely. And another thing over time is have, as you have more experience, you may be willing to take on a little more risk, maybe buy a note that has a problem.
and that warrant’s a lower purchase price. If you know how to fix that problem, you could benefit. You could benefit because problems come up with notes and it’s like anything else with enough time [00:16:00] and enough money. Any problem can be solved, right? If there’s a document issue, title type of issue, it may take a year to, to do the legal work and the expense to clean that up.
But in the end now you have a clean file, all tightened up, and the value is now greater than what you bought it for.
Sam wilson: Oh, yeah, no, I’m an investor in a fund that does just that. I mean, they bring on some, really some really hairy deals, but the returns are exceptional because they’ve figured out how to do it.
And it’s like, wow. They’re, I mean, they’re buying stuff with hair on it, but we all know it going in. It’s like, well, okay, good. And I think that’s a cool, a really cool model. And again, it just shows the opportunity that’s out there for those that, that understand and know how to seize it.
Fred Moskowitz: Yeah. It’s just like, Buying larger multi-unit properties. Multi-family if an asset has been neglected and it can be repositioned, there’s a lot of opportunity there for a seasoned operator to come in and increase the [00:17:00] value.
Sam wilson: Yeah, absolutely. Tell me this what’s one thing a mentor or a coach told you that you would say is probably one of the, or the best piece of advice you’ve received about your industry.
Fred Moskowitz: The best piece of advice that I’ve ever received is this. Be a lifelong learner, never stop learning. And I’d love to share a little quote with your audience, right? I’m a Philly guy. I’m from Philadelphia. And I love to look back at one of our founding fathers, Benjamin Franklin, and he left us with this beautiful quote.
It’s beautiful. And it goes like this and investment in knowledge always will. The highest interest and what that, that means is always invest in yourself in your learning, in your development, right? Attend workshops, attend conferences and events where you are around. People that are ahead of you in your industry.
And you can learn from [00:18:00] them, learn, stay up to date and grow your knowledge because no matter what happens, that can never be taken away from you. And so, it’s always like the first place to start invest in yourself, invest in your education. No matter what level you’re at, you’re never going to like hit some level and say, okay, I’m done.
I know everything. It’s not like. It’s not like that. How many people do you know that once they graduated high school or graduated college, they never cracked another book again. And that’s such a shame. It’s such a shame, right? I mean, always seek to be learning, expand your knowledge, learn different things.
And that is gonna open up your mindset and open up all the possibilities for. I
Sam wilson: absolutely love it. Couldn’t said it better myself. Fred, thank you for taking the time to come on the show today and share with us the note investing business, how you guys are finding opportunities, what it means to invest [00:19:00] in a fund, the types of notes that you guys are buying some of the risks that are out there in the marketplace.
And yeah, I mean, there’s just been very informative. Appreciate you taking the time to come on this show today. If our listeners wanna get in touch with you or learn more about you, what is the best way to do that?
Fred Moskowitz: Thank you, Sam. The best way to connect with me is to visit my website, which is Fred moskowitz.com.
However, if you prefer an easier spelling, you can always go to gift from fred.com and sign up there and have a special report about node investing, happy to send out by email to any of your listeners.
Sam wilson: Fantastic. We’ll make sure that gets in the show notes there. Gift from fred.com and we’ll also put Fred Moskowitz in the show notes.
As well. Fred, thank you again for coming on the show. Thank you so much, Sam. I appreciate it.
