Distressed Note Investing: Is it Time to Stop Spinning Your Wheels with Stocks?
Having significant wealth in the stock market today can mean living with stress. When volatility hits, it’s hard not to feel uncertain about your holdings. And with today’s low interest rates, bonds don’t provide the stability they traditionally did.
Regardless, many individual investors find themselves primarily invested in stocks. It’s not a surprise since most wealth managers tend to concentrate their client’s assets in what they know best.
While the recent decades have been great to equity investors, as we know, there is no crystal ball on what comes next. With record government deficits, excessive money printing, rising interest rates and other factors, no one can be sure exactly what the future holds.
Plus, Wall Street likes to focus on recent history. If you go farther back in time, you’ll see decades where stocks dropped or stayed flat. According to a research report by Invesco, Learning from History, Bulls, Bears and Fish, equities don’t always bounce back quickly from drops:
- From 1900 to 1929, recessions were frequent, and the Dow’s losses approached 50%. Stocks stayed flat for 22 years.
- After the Great Depression hit, stocks took 25 years to return to pre-1929 levels.
- Equities experienced a 16-year bear market from 1966 to 1982. [i]
If we get a return to this type of market, the wealth you see in stocks today may not be something you can count on for the future.
The Purpose of Alternative Investments
Of course, stock investing has its place in your portfolio. But institutional and ultra-wealthy investors usually take a different approach. While they hold some stocks, they balance it out with alternative investments that move independently of stocks and often generate recurring income. Alternative investments can serve to buffer the volatility of your stock holdings so that you don’t see wild swings in your net worth.
Using Real Estate to Diversify Your Portfolio
Real estate is a time-tested alternative asset class that offers many benefits. However, hands-on real estate investing can mean headaches, including tenant problems, late rents, and emergency repairs. Additionally, with recent substantial gains, buying more real estate now may mean taking on more risk than you’d like.
Fortunately, there are other options to add real estate to your portfolio. One opportunity is distressed real estate note investing. While unfamiliar to most individuals, many hedge funds have relied on this unique investment for years to build sustainable wealth.
What is Distressed Note Investing?
Banks are in business to lend money, not restructure overdue mortgages. If a property owner stops paying, most banks prefer to sell these mortgages, or “notes,” in bulk to private equity firms (such as Revolve Capital) at a steep discount. Banks do not have the internal system in place to renegotiate contracts with Homeowners. It’s not their business model, and they like to remove them from their books.
With distressed note investing, you can acquire mortgages on properties where the buyer has stopped making payments. As an investor, you can negotiate directly with the homeowner to restructure the debt and establish a passive income stream. If the buyer isn’t cooperative, you can negotiate a deed-in-lieu of foreclosure (which allows the homeowner to avoid the foreclosure on their credit). If the home is abandoned or the owner uncooperative, you can foreclose to regain title. Then you are essentially purchasing for the price of the discounted mortgage note. You can learn more in our previous article.
Key Takeaway
Stock investing can take its toll, especially during uncertain markets. Fortunately, today individual investors have more choices than ever. More and more, investors are taking a cue from what institutions and wealthy families have been doing for decades. That is, considering alternative investments such as distressed note investing for a portion of their assets.
Interested in learning more about buying distressed real estate notes?
With over $1 billion of notes purchased, Revolve Capital is an industry leader in the distressed real estate note market. We also specialize in helping individual investors participate in this unique niche. Revolve Capital purchases its assets direct from banks, so you avoid third-party brokerage fees or problem notes. We also stand behind our notes with a buyer’s guarantee, that you are purchasing what our BPO’s show that you will receive. Reach out to our team today to determine if you qualify for Revolve’s Membership program.
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