What Exactly Is Note Fund Investing?
Note Fund investing technically means investing in shares of a privately-held company like PPR that manages a portfolio of mortgages (aka notes), but participating in a note fund really means investing in the company managing the fund. Even more specifically, by investing in a note fund, you’re investing in the management team behind the fund, as well as the systems and staff that support the company’s operations.
As important as the managemen t team and systems are, don’t forget that the entire note fund management enterprise is back-stopped by the real estate securing the notes themselves. For example, in a recent trade, PPR acquired $32M worth of notes (based on Unpaid Principal Balance) secured by property worth $79M.
That said, let’s dive into some of the advantages for you, the investor, of adding note fund investing to your portfolio…
What are the Main Advantages of Note Fund Investing?
- Favorable Investment in the COVID era. As opposed to owning rental property where lost rents are generally never recouped, missed mortgage payments get added back to the principal balance owed. It’s also notable that requests for mortgage payment forbearance are currently below 9% nationwide and below 4% in PPR’s portfolio of loans. Further, with a note fund investment, there’s never a need to visit a property or meet a tenant or contractor in person.
- No fees. Even self-managed stock index funds have fees that eat into your returns, and brokers earn their living entirely from fees they charge investors. Not so with note funds.
- Asset-backed investment. The mortgages owned by a note fund (i.e. by you, the investor) are backed by the real estate securing the loans.Contrast this to stocks. If a company is suddenly rendered obsolete by a disruption in technology, the value of its stock certificates can plummet since that value isn’t necessarily based on tangible assets.
- Passive investment, i.e. “mailbox money.” Participating in a note fund requires zero work on the part of the investor. The fund’s operations team handles the work of managing the assets (mortgages) via what are typically highly developed systems and staff. Compare the passivity of fund investing to owning real estate, with the well-known “tenants, toilets and termites” responsibilities.
- Scalability. Keep your money working for you. No inventory to invest in? No problem! You don’t have to wait for a great performing note or investment property to come along to get your capital working for you. The minimum investment in a PPR note fund is only $25,000, so there’s no need to have your money sitting idle.
- Liquidity. By “liquidity,” we mean having access to your invested capital when you need it. For example, PPR’s Liquidity Fund offers a shorter term than the Income Fund. With the Liquidity Fund, you’re earning a healthy return while still maintaining access to your capital.
- Boost your return through Compounding. When you invest in a PPR Note Fund, you have the option to compound your return, meaning you can re-invest your monthly Preferred Return payment. Compounding in this way over time can significantly boost your return. For example, choosing to compound in the 3-year, 10% Income Fund increases your overall annualized return to 11.6%.
- Limited liability. Landlords are on the hook for “slip and fall” and other lawsuits. General note fund investors are shielded from such liabilities by the nature of the investment.
- Privacy/Anonymity. When investing in a note fund, a “private placement,” your personal or corporate name isn’t made public, unlike when owning real estate.
- Professional Management and Experience. When you invest in a fund like PPR’s, with a 12+ year track record of performance, you benefit from our professional management and experience in acquisitions, workouts, and portfolio management. You don’t need to have experience managing notes yourself.
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- Peace of mind. When investing in a fully audited Note Fund like PPR’s, consider its pay history and adherence to SEC reporting requirements (e.g. Blue Sky and other filings). PPR’s 12+ year track record in both regards is impeccable.
- Tax advantages. Your returns from note fund investing are taxed at a lower rate than earned income because they aren’t subject to the taxes that go along with earned income (FICA, social security, etc).
- Your money is working, not you. With fund investing, your capital is doing the “work,” so none of your time or effort is required to earn a return. Contrast this to earned income or even profits from a business you own but must work in.
- Lower Minimum Investment. PPR’s minimum investment is currently only $25,000 for the Liquidity Fund and $50,000 for the Income Fund, making it easy to add new money or re-invest your earnings.
- Flexibility of Funding. Investment in PPR’s note fund may come from cash as well as retirement accounts such as IRAs – or a combination of these sources. That’s right – you can use retirement money to invest in private placements. In fact, about half of PPR’s fund investors do just that. (Just ask one of our Investor Relations staff how other investors do it.)
- Own your retirement. See the point above? It bears repeating that you’ve got options for your retirement funds far beyond Money Market accounts and Wall Street products. By diversifying your retirement funds into private placements like mortgage investment funds, you’re taking control of your portfolio and quite possibly speeding up your timeline to reach financial independence.
- Simplicity. As opposed to owning real estate or even performing notes, there are virtually no actions needed on your part post-funding; it’s a “set it and forget it” investment. So are stocks, true, but mortgage investment funds are backed by tangible assets and offers more predictable returns across a variety of market conditions.
How about Note Fund Investing vs. Hard Money Lending?
- Elimination of “gaps” in earning a return on invested capital. Hard money lending can be profitable, but it typically means that your capital is moving into and out of specific investments every 3-9 months. With fund investing, your capital stays in play for a set term. This frees up your time since it requires no active involvement and avoids idle capital not earning a return.
- Simpler Due Diligence. With note fund investing, you don’t need to know how to perform due diligence on the borrower and property attached to the hard money loan.
- Scalability. As a hard money lender, you could (and will, eventually) have difficulty finding appropriate deals to fund. With a note fund, as you have additional capital to deploy, you can simply add it to your original investment.
How about Note Fund Investing vs. Investing in Performing Notes?
- Diversification. A fund investor may have more diversification in numbers without deploying the amount of capital needed to purchase all of the fund’s assets. For example, if a single asset in the fund that owns a large number of assets were to lose some or all of its value, this typically wouldn’t have a large impact on the individual investor. Investing in a note fund means that you’re investing in multiple notes (and also multiple real estate markets), thereby spreading the risk among all the assets owned by the fund.
- Buying Power. By pooling money together, fund participants purchase mortgages in bulk, which in effect gives the group access to wholesale pricing.
- Sourcing. Fund managers have sources of assets that the individual investor doesn’t have. Many major sources of assets like banks and servicers sell loans only in large packages and only to carefully vetted buyers.
- Simplified Due Diligence. Besides reviewing the management team you’re investing with, you wouldn’t need to know how to perform due diligence on each loan purchased by the fund, and you wouldn’t need to pay for any of the services that process entails.
- Scalability. Note funds tend to be well-equipped to grow in response to changing market conditions, and their professional staffs and proprietary software and other systems allow them to scale more easily than an individual investor could. For example, if the opportunity to purchase a large pool of mortgages became available, a note fund managed by PPR has the resources to move on the trade, whereas an individual investor would likely find it challenging to do so.
- Less liability. In a note fund, there’s no need to worry about the kinds of personal liability that note owners face in the current regulatory environment.
Ready to Fund your Future?
Are you intrigued by the thought of investing in a mortgage investment fund? Maybe even excited? Or still fuzzy on the details of how it all works?
Our goal was to get you thinking and to expose you to a investment that few know about and even fewer participate in.
So, if you’re intrigued, excited, at least a little less confused, or just annoyed that you didn’t know about this years ago, we succeeded in our mission.
If you have any questions about investing in one of our note funds, please let us know, and we’ll do our best to help.
To your success!
The PPR Investor Relations team
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