Building Wealth through Mortgage Notes: A Comprehensive Guide for Beginners w/ Fred Moskowitz

A lot of people, they're not good with investing. They don't know what to do with their money but here's an option that allows people to be involved in real estate without having to own real estate, without having to manage property Welcome to super entrepreneurs podcast. I'm your host Shahid Durrani. Today we have with us Fred Moskowitz. Fred is known as the alternative investment expert, and he is on a mission to inspire people to change their lives. Their lives. Welcome to our show, Fred. Thank you, Shahid. It's great to be here. It's great to have you as well, my friend. So can you share with us what exactly is mortgage notes for anybody that they're not aware? And how it can help create wealth for entrepreneurs. Yeah, absolutely. So here's the thing that a lot of people may not realize more people than not are very familiar with mortgage notes, because if you think about it the majority of homes are purchased using bank financing. You you're going to buy a property, whether it's for you to live in or an investment property and you go to the bank, you go to a local lender for a loan. And what gets created in that process is two things, a note, a promissory note. And the mortgage is what what gives a collateral, the collateral to the bank securing their loan. And a lot of people are familiar with this from being the perspective That's the borrower, right? They buy property, they get financing and now they own the property and they're making payments every month to the lender. The mortgage is actually the It's a legal document that gives the security interest in the property to the lender. And that gets recorded on title in the public record against the property so that a lien. Yeah, it's a lien, exactly. So if the property's ever sold or refinanced or anything like that, then the lien will get paid off. And clear title can be conveyed either to the next owner of the property or to the next lender. And so here's the thing, Shahid, a lot of people are familiar with this. As I said, from being the borrower, a lot of people are familiar with investing in real estate. Thank you. Yeah. People invest in single family homes, in apartment buildings maybe short term rentals. And what we're doing here is instead of talking about investing in real estate, we're talking about investing in the debt in the paper, which is the notes and mortgages associated with all these properties. And I love this business. It's really interesting part of the real estate business. And most people that are real estate investors, even don't pay any attention to it, most people, when they think about a note in a mortgage, they think of being the borrower and not as being the lender now as investors, We're able to buy these loans on the secondary market. And when you do that, you're basically stepping across the aisle and becoming the bank. You're stepping into lender, and now you become the one receiving the monthly payments instead of the one making monthly payments. So another term that you may use for this is private lending. That's a associated term, but not exactly the same thing. Private lending is when you are originating the loan where you're giving the cash and creating that note and mortgage. What I talk about is mortgage note investing from the perspective where you're buying an existing loan that was created. Yeah, because banks often here's their business model. They'll create loans they'll originate a loan, and then within a few months, they'll turn around and sell it on the secondary market. And why do banks do that? Because they want to recapitalize and then they can turn around the very next day and originate a new loan for someone else. And so it's think about that high velocity of money. They want to create their money, the debt. Yup. Roll, roll their capital and then redeploy it because banks make their money on this high volume, low margin transactions of creating loans. And that's their model. And so there's a whole secondary market where loans are bought and sold every single day. And if you look at what goes on in wall street, where loans get bundled, packaged, purchased, created, securities get created, bonds get created, all of these types of transactions that, that's what goes on behind the scenes. People will occasionally get letters from the lender saying, Hey, your loan's been sold starting next month. Send your payments to the new lender. Here's their name and address. And by the way, don't worry. None of the terms of your loan will ever be changed. Interest rates, the same payments, same. And so this goes on. A lot of people have experienced this because it's a common practice. Who is earning the interest on the loan then? You said turnover for the bank. So the bank sells it secondary market so once they sell it they're presumably not earning anything on that anymore. They go for the new, the next mortgage that they're going to get for someone else. So that's how it works. That's correct. And so the interest who gets that interest, the new investor that purchased that loan from that day forward, now they're receiving the cashflow. Yes. And the banks made their money. They charge their points, their origination fees and all that. Maybe they held the loan. Yeah. They held the loan for six months. And if you think about an amortization table, amortization schedule, the first couple of months, it's all interest, the principal balance goes down very little. So the bank collected that for a few months and that's how they get their money. They do this at a very high transaction volume. Okay. Yeah. So what are some of the key advantages for entrepreneurs when they're considering mortgage note investing compared to any other type of assets? For entrepreneurs in particular this is going to really be important. Entrepreneurs are focused on working in their business, growing their business. But maybe many entrepreneurs, they were working for an employer previously. And they had a retirement plan here in the U. S., a 401k plan, retirement benefits, all of that. When you become an entrepreneur, you don't have that anymore. So it's on you to create establish an account, establish a retirement account, contribute to it and all that. And so when you Leave from your employer, you change to a new job, or you change to becoming an entrepreneur. You have all those retirement accounts, that capital, you can put it to work by investing in mortgage notes. And now what happens is, specifically for an entrepreneur, it's on you. to take that initiative and do that. And so there's opportunity. A lot of people, they may be there. They're not good with investing. They don't know what to do with their money, but here's an option that allows people to be involved in real estate without having to own real estate, without having to manage property and handle all of these. All the headaches that come with managing and owning property. Don't get me wrong. Real estate is a great asset class. I love it. But for some people, it's not for them. It's not for everyone, right? They don't want to deal with owning rental properties and tenants and managing maintenance repairs and all that. It's a lot of work. It is. So as I said, it's not for anyone, but when you're a lender. When you own a loan, you don't have any of those responsibilities. When the water heater bursts or the, he, the heating unit, the air conditioning unit, you're, the bank needs to be either replaced. Yeah. The bank's not the one that gets the phone call to say, Hey, my, no, my heater broke. Yeah. So the property maintenance is res responsibility of the owner. And so lender banks and lenders have figured this out for many years ago. They'd rather be a lien holder on title than being a property owner. That's their business. So through note investing, it allows people to, to get involved in this space, to step right in because as I said, there's a huge secondary market for buying and selling of real estate. loans. And so there's a lot of opportunity there. Yeah. Wonderful. How can they manage risk effectively when it comes to buying these mortgage notes? What is the due diligence process to, to ensure they're safe as an investor? Yeah very important. And this is something I cover extensively in my, in the book I wrote about node investing. Due diligence is super super important. It's critical, but the main areas where you manage risk are Evaluating the property, the real estate, because that's your collateral, and you also evaluate the borrower, their credit history, their track record, as well as the records on the note, the accounting records on the note the payment history. solid and tight or are there missed payments or other issues in the past? Other areas to focus on for due diligence is the ongoing management of the note, which I always recommend when I work with investors and teach investors, you want to use what's called a licensed loan servicing company. And a loan servicing company, they exist to handle Collecting the payments. They'll take phone calls from the borrower. They manage the accounting. Yeah. They manage the accounting on the note, all of these things. They generate the tax statements that have to go out at the end of the year. They manage a lot of the compliance notices as well. And so they do all of this for a very low cost. It's usually To give you a range, Shahid, between 15 to 30 a month per note. And that's it. And so what I always like to say is think of a servicing company like this, the same way that a property manager manages your rental property. Yes. The servicing company manages the note on behalf of the lender. And it's a critical part of our business because it allows, it's what allows. Really scale and ramp up a portfolio. Cool. True passive income from what I'm hearing. So what are some of the practical strategies they can. Implement to build a stream of cashflow. Yeah. Great. Great question. For someone to get involved in mortgage note investing, there's really two ways, two ways to do it. The first way is to go out and buy individual notes and build a portfolio. Like we've been talking about. And the other way is you can invest in a note fund, which is professionally And it's a lot less work. And here's the thing, it either way can be very good. There's no right or wrong answer. It's a very individual question. And I always start with this, how much time do you have, right? If you're busy, professional, busy entrepreneur, maybe you don't have a lot of time because you're focused on your career, you're focused on your business. And so for someone, Excuse me, for someone like that, a note fund is a great option because it's really passive. You're turning your capital over to the fund managers and they'll go out, they'll find the notes to buy, they'll manage them, they'll earn less. Yes, you give up you earn less for sure. That's the trade off, but for a lot of people, they're happy. They're earning a decent return and they like the fact that they're aligned with professionals that are managing the portfolio. And this allows you to leverage. truly leveraged expertise, the experience and the relationships of the fund managers, and you're earning a passive return. Now, the other way is to go out and build that portfolio where it's more hands on. It takes a lot more time and it is a business in itself that you're doing. Yeah. And so for someone that wants to get in there, roll up their sleeves and get involved, that's a great option. But so I always come back to that question about time. How much time do you have? How much time do you want to dedicate to this? But isn't it true, Fred, that if initially someone said sets up a process, they could do it themselves. If they outsource the servicing of it, they have a creative system. They could keep adding nodes. Earn more and create a portfolio just like you would for any other assets, absolutely. Absolutely. Okay. Good. Yeah. So when it comes to retirement accounts, , and they wanted to invest in, in mortgage notes using those accounts, are there any tax implications? Yeah. There's always tax implications. Yeah, for sure. Uhhuh. Yeah. So this is, this is something to consult with your your accountant, your CPA to see what your individual situation is going to be, but I'll give you some general distinctions. Mortgage note investing by itself, it generates a lot of tax liability. It's an activity that generates capital gains and interest income. And so you're going to have a tax liability. Now, that being said, if you can do note investing inside of a retirement account. Now you're getting tax preferential treatment, right? And if you're using a Roth, like if you're using an IRA, you're tax deferred or traditional IRA. If you're investing in a Roth IRA, there's no tax at all. It's completely tax free. And so that can be really powerful. And so just as general guidelines, I always like to say this, if you're investing in real estate and owning property, that generates a lot of. So do that outside of a retirement account so that you can put your personal tax return gets to receive those tax benefits, but then do your note investing inside a tax preferred account like a retirement account. And that's. I like that. I like the idea of doing that. And of course, everyone's situation is different. And so look at what's right. Consult with your advisors to see what makes the most sense. But those are some general distinctions that I always like to talk about. Thanks for sharing that. And it's always recommended to speak to an expert in any, anything that you do, in any angle, any investment. Yeah. . Yeah. Wanna make sure you speak to any investment Shahid, right? , whatever you're gonna do. Yeah. You're going into it with the intent of generating profit, right? . Always. And so you wanna understand upfront. What's the tax implications of this activity I'm doing and is there any strategy or planning I can do up front before I start to optimize the tax treatment? And so that's where you, I always say, don't, you don't go to your accountant, to your CPA, just to do your tax returns once a year. That's an ongoing relationship. You should be consulting with them periodically throughout the year for your business, for to do planning, as well as your personal side, your investments you're doing. I don't care if you have crypto, stock market real estate, anything. that you do, or you're investing in someone's business, you want to consult with your tax advisors to get the best strategies and planning up front, because it's a lot easier to do and cheaper to do your planning up front than to do the thing and then later have to go back and restructure things because it wasn't optimized. Good advice, Fred. Thank you. So when it comes to long term is there anything that they should be considering when planning for this type of investment? Also what would be the exit strategies that they should be looking at? Yeah, great question. Went with node investing. It's great. I love it as a long term strategy. Okay. Good. What's going to happen here. Here's some interesting distinctions. Most common mortgage notes are written for either a 15, 20, or 30 year term. That's the timeline. However a borrower can pay off their loan at any time early. And in the United States, this statistic, the average lifespan of a residential mortgage in the United States is between five and seven years, even though it's a 30 year note, five to seven years. Why is that? Life happens, right? Think about it. People move because of a career change, job change, or maybe they want to move into a better neighborhood, better school district. They've outgrown, their family has grown, they need a bigger house, or the opposite. Take care of their parents. Yep. Take care of their parents. Or they want to downsize. Maybe someone wants to have less maintenance an upkeep on a property, and so they might move into a community where that's handled for them, and buy a property there. So all of these different things that happen, and so loans get paid off early. You never know when that happens. And so it ends up that that lifespan five to seven years, it, it really it's very true. You see that. So for us as investors, we're constantly buying notes. We always have notes that get paid off unexpectedly. There's an element of randomness in the portfolio that comes from that. And so the big lesson of all this is for investors, a big part of your job is to keep your money deployed. When that capital comes back, you want to turn around and reinvest it as quickly as you, you can reasonably. And so that's that's the job of an investor. Investors don't make money when they have cash sitting there in their account, not doing anything. That's idle. That's earning zero percent. So Fred, what steps could someone take after watching or listening to this episode that may be interested in this type of investing, what would you recommend as the initial steps that they should take immediately to get the ball rolling? Yeah. Great question. I always like to start with With basic education, right? Take some steps with basic education. Read some books on node investing. There's several good ones. I do. Yes. I've written a book on node investing. It's called the little green book of node investing. It's available on Amazon. And there's other good ones as well, but education always start first. By learning maybe you take a class or workshop, do some education and align yourself. This is very important. Build some relationships, align yourself with individuals that are involved in this business. They know what they're doing, can provide guidance and and Share relationships with you because that's a big part. A big part of the business. It's building relationships. Everything's done through who we know and the proximity of the people were around. I feel that. Is true in many industries, many businesses, but yeah, in the note investing space it's really solid. One of the things skills you want to work on is get good at building relationships with others because that's how that's how business happens. Yeah. In the real world, yeah. Relationships. Yeah. And life in general is just one big relationship, we need to have those relationships to grow or to evolve. If you try to do it alone as just next to impossible. Can you recommend any kind of organizations or any networking events, for example, that people can participate in. Yeah. Yeah, absolutely. There there's a lot of different events. I'm personally involved with I do a lot of speaking and speaking at conferences and events. I list a lot of information on my my website, my social media. But. There's things happening ever everywhere in person, online, virtual. And it just takes doing a little homework to find what's out there, find what resonates with you and find the people that resonate with you. Not every, not, I'm not everyone's cup of tea. As an example. But maybe someone else in the industry is. And so you want to find the people you that resonate and then build relationships with them. That's what's really, what it's really all about. Wonderful. Thank you so much, Fred. If there's anything else you would like to share please go ahead. Thank you. Thank you. I want to invite all listeners out there to connect with me. I love building relationships. It's a big part of what I do. Yeah. And so we don't have a lot of time to talk here today, but. I do when you reach out to me, right? So connect with me, whether it's on social media, you can visit my website, which is fredmoskowitz. com. And if you prefer an easier spelling, you can visit giftfromfred. com. Dot com and he'll take you right to my website and I have a special report that I'm happy to send out about node investing. If you wanted to learn more and read some more information, happy to share that with anyone that wants. Yeah, Fred. It was great speaking to you today. It's, we're always trying to find the best. Highest value for our audience, and I'm sure that what you shared today is going to help people grow their wealth, grow their income, passive income because at the end of the day, as an entrepreneur, we can't just rely on one source, we need to have multiple sources of diversification. Yeah. And I'm grateful to have you on the show. Appreciate your time. And in the audience, you guys should definitely take a look at this information. Check out Fred's LinkedIn. He's quite a sought after speaker for what he does. And I'm really happy to, that I'm able to share his information here today. Appreciate you guys. And I appreciate you, Fred. Thank you, Sheed. I appreciate you. And thank you again for having me on. I love having the opportunity to bring value and share with others. Thank you. Great. No, my pleasure.