#236 Understanding The Benefits of Real Estate Note Investing ft. Tom Berry of ILS Capital

Tom Berry and ILS Capital

The episode begins with Peter introducing Tom Berry, a seasoned real estate investor and the founder of Investor Loan Source. The host engages Tom in a conversation about his career journey, exploring how he made the leap from sales to finance and ultimately to real estate. They touch on the intriguing concept of note investing, giving listeners a taste of Tom’s experiences in this niche.

Tom reflects on his humble beginnings and his passionate pursuit of real estate. Initially focused on physical properties, he shifted gears to note investing due to market constraints. This transition has not only expanded his business but also deepened his expertise in a growing sector of real estate investment.

Understanding Notes

The discussion deepens as Tom explains what note investing really means. He describes a note as a loan secured by real estate and clarifies the different types of notes—performing, non-performing, and re-performing—highlighting their unique risk profiles and potential returns.

Tom breaks down the complexities of note investing, comparing it to owning physical real estate but with added flexibility. He emphasizes the various forms of note investments, from single-family homes to larger commercial properties, underscoring the necessity of understanding each type’s risks.

Why Invest in Notes?

In this segment, Tom discusses why investors might prefer note investing over traditional real estate options. He points out the limitations posed by conventional bank financing—such as stringent credit requirements and slow processing times—arguing that note investing can offer a more flexible alternative.

Tom identifies three primary reasons people might turn to note investing:

1. Non-bankability (struggles with traditional loans)
2. Project non-bankability (projects that don’t fit bank criteria)
3. Timeline non-bankability (time constraints).

He presents note investing as a viable solution for those who might feel shut out of traditional financing avenues.

Risk Management and Due Diligence

The podcast shifts focus to the critical aspect of risk management in note investing. Tom introduces the concept of loan-to-value (LTV) ratio as a key metric for mitigating risk. He stresses the importance of thorough underwriting and due diligence, including credit checks, financial assessments, and property evaluations.

Tom shares his personal approach to managing risk, highlighting careful underwriting practices. He underscores the importance of using risk reduction tools, such as LTV ratios and cash-on-cash returns, to navigate the potential ups and downs of note investments.

Benefits of Note Investing

Continuing their conversation, Peter and Tom explore the benefits and drawbacks of note investing. Tom discusses the potential for consistent cash flow and the flexibility it offers compared to traditional real estate investments. He also addresses the tax implications of note investing, emphasizing that it primarily generates interest income.

Tom highlights the advantages of note investing, such as consistent cash flow and the ability to diversify a real estate portfolio. He acknowledges that while note investing may not offer the same tax benefits as traditional real estate ownership, it provides a simpler tax structure. Tom points out that investors can enjoy “mailbox money,” where they receive monthly income without the ongoing management required in physical properties. This can be especially appealing to busy professionals seeking passive income streams.

Long-Term Strategies and Considerations

The podcast closes with Tom and Peter talking about the long-term strategies for successful note investing. Tom discusses the importance of staying informed about market trends and economic indicators that can affect the performance of notes. He also highlights the need for a solid exit strategy, particularly for non-performing notes.

Tom emphasizes that note investors should regularly assess their portfolios and be prepared to pivot based on changing market conditions. Understanding the economic landscape can help investors anticipate potential risks, such as shifts in interest rates or housing market dynamics. Additionally, having a clear exit strategy is crucial, especially when dealing with non-performing notes. Tom shares that being proactive in addressing potential issues—like initiating modifications with borrowers or exploring legal options—can safeguard investments.

He also points out that diversification across different types of notes and asset classes can mitigate risks and enhance overall returns. By maintaining a balanced portfolio and continuously educating themselves about the note investing landscape, investors can position themselves for long-term success.

Tom also invites listeners to check their website at www.ilscapitalfunds.com and their lending arm at www.ils.cash to know more about them and what they have to offer.