GI128: Investing In Real Estate Notes with Dave Van Horn

GI128: Investing In Real Estate Notes with Dave Van Horn

Dave Van Horn has raised over $200 million dollars for both notes and commercial real estate and he owns a considerable portfolio of residential investment properties, as well as various commercial holdings. His company, PPR Note Co, manages several funds that buy, sell, and hold residential mortgages nationwide.

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Announcer:
Welcome to the global investor podcast, a show that focuses on helping foreign investors and, or the lucrative us real estate market host Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of us real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Dave Van Horn. Dave has raised over $200 million dollars for both notes and commercial real estate and he owns a considerable portfolio of residential investment properties, as well as various commercial holdings. His company, PPR Note Co, manages several funds that buy, sell, and hold residential mortgages nationwide. So thanks so much for being on the show, Dave.

Dave:
Oh my pleasure. How you doing Charles?

Charles:
So it gives a little bit about your background both personally and professionally prior to getting involved in real estate investing

Dave:
Prior to real estate investing. Well, when I got out of college, I, well, during college, I worked for a contractor, a painting contractor, and continued doing that and then eventually became a small business owner myself as a contractor and a part-time real estate agent. And that’s kinda how I morphed into real estate. I really had no like retirement. So some of the other realtors that were training me were like their retirement, where the houses, they had their rentals, you know?

Charles:
Interesting. Interesting. So D is there another reason why you chose real estate as your investment vehicle when you started out?

Dave:
Yeah. Cause I got out of college and couldn’t really get a job in my field, which is ironic. I was a business major and look at me today. Right. I’m the seat. It’s kind of funny. My mom still says that to me, like, are you going to get a real job? Like I was telling her I was taking a course and she’s like, oh, that’s good. I hope, hope you’ll be able to get, you know, you’ll be able to be more like hireable, you know? And I’m like, I don’t know that I can already to see what do you want me to go? So you get, you know, I’m probably a bad employee, but at this point, put it that way.

Charles:
Oh yeah. I think all good entrepreneurs are bad employees. I would consider myself a bad employee. The so let’s break down kind of you, your firm as involved with a lot of notes and note funds. So after you guys have done 10,000 plus notes and what’s your firm’s investment, no criteria and strategy when you guys are give me just a little background of kind of like how the process works and then how your fun works.

Dave:
So in the beginning we were, we specialize in a junior lien space and it was because it had a lower barrier to entry and most of the time, unless they’re high value junior liens you’re not as geographic centric. So you could, you know, by junior liens almost anywhere, you know but a lot of times you know, then we grew in size and we morphed into more first mortgages. And today we do a lot of commercial mortgages, that kind of thing. A lot of it does revolve around population centers, you know, where there’s people we tend to do better than like say in rural areas, things like that. But most of what we buy today is through our JV partners, where we buy, you know, massive quantities and then they ha they run actual trade that’s. So today it’s not that you would not do business in any given state.

Dave:
You may limit your concentrations in particular states or based on we have like legal timelines and costs matrixes. So they’ll, but a lot of assets are discounted if they’re in a less desirable location too. Right. So you got to factor all of that in, so there’s, I have a partner that says that sometimes there’s no bad note, just bad pricing. Right. So it’s so they, they build those discounts in, you know, like into less favorable states or more litigious states or states that have longer foreclosure timelines, those assets trade at different amounts, you know?

Charles:
Hmm. Interesting. So when you’re, so where are you sourcing your notes from an, is it right now? Are you really doing junior liens or is it really senior?

Dave:
Actually, we do very, other than legacy asset portfolios, we don’t do a lot of junior liens at all. It’s mostly all personal mortgages and commercial loans and a lot of what we do some reverse mortgages, like Hakam loans from HUD most of our assets, other than those from some GSEs government agencies most of them are through trade desks all institutional, like we don’t do any, you know, contract for deed type stuff or, you know, seller finance notes. We’re really, we really don’t do that. We’re really you know, institutional originated mortgages, you know, mostly one to four family is a big piece of it. But then we do short-term business loans, which are hard, you know, hard money loans. We also do commercial construction loans. So we, we don’t necessarily originate them, but our partners do so today we you know, outsource more than we did in the beginning. In the beginning, we, we were asset managers today. We’re more of, you know, capital allocators, so to speak with good operators. Yeah.

Charles:
Interesting. So is there a certain criteria or strategy when you’re looking at say the majority of your debts are going to be a first position, one to 40 units of residential properties? So is there something other than using your heavy, how you had it before for your strategy for every state? Obviously, if it’s more litigious or if it’s harder to work in, there’s going to be a different amount that your formula is going to come up with to pay. But other than that, is there are you looking for certain notes when you’re sourcing them that are discounted because they’re, non-performing up to a certain amount or kind of what your sweet spot of what you’re looking at when you’re sourcing these

Dave:
Actually that part of acquisitions, but they do have criteria and it’s also market driven. So the, you know, what happens in it? You know, they’re how do I say this note values are a direct correlation to real estate values. So in an up real estate market, they’re trading at a different margin than in a downmarket. Probably the biggest market conditions, probably unemployment, you know, unemployment tie this sector of our, this channel of our business, those well whereas you know, a lot of our commercial stuff we’re tied into originators. So whereas in the non-performing loans, they’re already existing and we’re buying stuff that’s in default. So defaults, tick up one unemployment’s high, that kind of thing. And then we also invest, you know, we’re looking at areas like a mortgage servicing rights, for example, where it’s just a countercyclical way to invest in the business where like, say interest rates go up, mortgage servicing rights could become more valuable, valuable in those cases. So there’s different channels with data channel that we can diversify into to, you know, spread some risks around. Interesting. Yeah. Get a better risk adjusted return.

Charles:
Dave, what is your role at at your company?

Dave:
Well, I’m president and CEO and my primary role, especially up until recently, it was always on the capital side, capital raising side. Okay. Marketing, things like that. I would oversee them, but I also do oversee our REO department, which is real estate. Okay. That’s because I have a strong real estate background and you know, we have an REO agent that dispositions hundreds of homes a year, you know, that kind of thing. And there were sprinkled throughout the country.

Charles:
Interesting. Interesting. So with what we’re seeing now with what’s going on with COVID, how has that changed? I mean, it kind of, we’re on, I would say the downswing of that, but how did that affect your business over the last in 2020 and 20 early 20, 21?

Dave:
Well, it was you know, it’s interesting at first it was hard to tell what was going to happen, but I guess the biggest impact was moratoriums. Right. Because it it’s clogged up the courthouses. Right. So we’re just starting to come out of that. I, I just got a report today. It’s about 60%, roughly, you know, is, is functioning again, you know, where you can get it through the courthouse systems. So w w you’re going to see a bunch of pent up demand basically a clog totally foreclosures and trying to get through. So we anticipate it’s going to take a little bit longer prior to like, when we were completely shut down, we were actually shifted a lot of strategies shifting things around. There was different pricing based on that, for example we were doing deed in lieu, things like that, where we were trying to, I won’t say circumvent the courthouse, but in a way that’s what it was.

Dave:
Yeah. So it did, it did limit revenue. For example, in certain buckets of certain revenues, sectors of the company would be impacted by the moratoriums. But the good news is it is asset. It is asset backed. And right now you’re seeing real estate values are still pretty high and people are still looking for deals. It’s still sellers market. So we’re getting really good execution on what we do sell. We’re actually selling stuff much higher than we thought a lot of stuff that’s going into the foreclosure sale. We’re putting it full, you know what we’re owed, you know, full bid, you know, like, cause, cause if it comes back, we make more is really what happens, you know? So yeah. We’re actually hoping stuff doesn’t sell it sale. I know that sounds bizarre.

Charles:
No, that’s what happens in those cases,

Dave:
But most cases you’re hoping that it doesn’t sell sale. You’ll have better execution when it comes back. You know?

Charles:
So the strategy with you guys is you’re finding notes, most likely non-performing, you’re trying to turn them to performing and then sell them as that kind of how it goes.

Dave:
Is it they’re occupied if they’re vacant, you’re, it’s just, you’re buying property really. It’s just one extra step. You got to clear the title if it’s vacant. So like when we buy a lot, for example, I mentioned reverse mortgages when we buy reverse mortgages. They’re usually all vacant and deceased borrowers, so we’re really buying property.

Charles:
Okay. Interesting. I was looking at your website when doing research and it’s a, you guys are pretty much in every state. Is there, I mean, it was crazy. I was looking for states, you weren’t in, but you’re everywhere really heavily. And I think it was a New York, Florida, and California, obviously those are biggest states, but is there a state that you, like, I mean, what are the states that really know people are looking for where it’s a little easier for you to, where you could pay higher for, I guess, where there’s less chance of getting the hassle with going through so much with courts and the foreclosure process isn’t as difficult, I guess.

Dave:
Yeah. I mean, you know, the old rule of thumb would be you know, D to trust states instead of just judicial states. You know, states like Texas and Georgia were quick states, but those assets trade higher. Right. So, so they factor that in, or there’s not as many available, right. Because they get gobbled up like Texas, probably the number one state for some of that you know, where it could be you know, lender friendly or just like landlord friendly states, you know, so they exist. But I think a lot of it has to do with what’s available in the marketplace at any given time. So we don’t necessarily, we can only buy what’s available to right. So, and then some states just don’t have a lot of assets. So if I was in Wyoming, there’s not a lot of Wyoming loans.

Dave:
There’s not a lot of Vermont loan, you know, just cause they’re just, you know, small states are not a lot of population, you know, so some of that’s a function of that. And then some of it is you know, directly correlated to how much distress they had in an area or how long their foreclosure timelines are like New Jersey or New York or, you know, they tend to be longer timelines. There are some things you can do to accelerate some of that stuff too. And that’s where, you know, having a good legal team is helpful, also compliance. You want to, you know, be dialed into the compliance of a particular state, know what licenses are required, those types of things. And that becomes a whole nother matrix.

Charles:
Yeah. So you’re generating, you’re sourcing a lot of these loans from originators and what’s your exit strategy? Where are you really? Where are you selling these what’s the secondary market? Are they going to institutional people? Are they going to private investors? Are they going to private equity?

Dave:
Yes. Yes. And yes. Some of them, you know, we have a big portfolio. We probably acquired, for example, in the last year, just into one channel, that’s 68 million in assets that portfolio gets securitized and sold and sold off. So and then we have other assets that we disposition ourselves where a lot of it becomes REO property, especially if they’re vacant, that kind of thing. And then and then we do, you know, we do modifications as well. And then once those modifications are seasoned, especially in this market, there they go back to almost par you know, they’re getting good execution right now. So it almost, you know, it almost right now, it almost always pays us to hold the assets still are performing with some history and then selling them

Charles:
And you get better. And it’s usually like, what do you have to usually a seasoned them? Or how long do they have to perform for the 12, 12 months? Okay. That’s where that

Dave:
You don’t have to, you could sell them earlier, but you’re going to get, you’re going to catch a tailwind if you do that. You know, so, and it’s, that’s not always the case. It’s a function of this market we’re in right now. So, you know, we started back in 2007, so we’ve been through multiple cycles and you you’ll see, you know, the way the market dictates things, you know, you shift gears to get better execution, you know,

Charles:
Interesting. So we have a lot of listeners that are mostly on the equity side and that’s why like bringing on different investors that are kind of making money in real estate and all different types of portions of it. So why would you feel it? Note investing is a superior to the traditional, I guess, real estate investing strategies that you might hear you know, multifamily, all this other stuff, whereas a lot more active, I would say, or semi-passive if set up correctly.

Dave:
Yeah. You’re not gonna like my answer. I don’t know that I think it’s superior. I just think it’s different in how it’s scalable, you know, since it’s a paper asset still backed by real estate and I do all the other, you mentioned. So I, you know, I do multifamily and I do you know, regular real estate and I do so it, it’s not a case where I think, you know, one’s better than another or anything they’re just different. And you know, I believe everybody should have some, you know, section of paper assets in their portfolio, just like you should have some real estate or multi-family or commercial real estate. So I, I kind of have a lot of that different types of holdings. I just happen to have a business in it and, and you know, it’s very scalable, very scalable, and it can be passive if you outsource certain things. So for me, it was kind of figuring out, you know, if you figure out what your strengths are, you could outsource the rest and you know, hopefully that serves you well, you know?

Charles:
Yeah, for sure. I like the diversification portion of it. Did you, when you’re, can you give us like how the fund works and a sense of how your usually timeframes work on it? Because obviously if you’re passively investing or not obviously, but passively investing in other kind of equity side of real estate investments, you’re really 5, 7, 10 years. Can you kind of explain the process with how your note funds work? Cause it’s a little different and how it’s structured and how someone who’s never invested in a note fund you know, kind of what they can expect.

Dave:
Yeah. Like our, our terms are shorter and we have the ability to compound you know, we’ll have like liquidity options where you can invest for six months, one year. Our longest term is usually three years and, you know, you, you hit on a pretty good cause. You know, I’ve done a lot of syndication over the years, probably 20 years over 20 years now. And you know, a lot of syndications could be 3, 5, 7, 10 years long, especially in a longer larger commercial projects, things like that. So we kind of fit in a different niche, right? Just like there’s some short term business loan funds or hard money funds that are, you know, maybe a year in length there, you know, the short term as well. So I think there’s a place for all of this where as an investor myself, I’m running investor groups too. You know, investors like short-term, long-term, mid-term type of capital. Sometimes you marry the investment to tax strategies or, you know, which master are you serving? Ni I like to marry my money or type of money to the type of investment. Yeah. You see a lot of that. And then some people like the ability to compound or, you know, just to diversify into another asset backed investment vehicle, you know,

Charles:
Interesting. So the one thing was when we had people that are investing in our syndications passively, and they might have a self-directed IRA of some sort. And one thing that’s kind of a drawback, I guess you would say is, cause they have the unrelated business taxable income that you BTI. Is that something that now, because there’s not the best tax benefits when note investing, let’s say, cause it comes out as ordinary income is with the BTI. Is that something that you can kind of void now because you’re not in, you’re not actually buying the property with debt on it, or I’ve heard people go both ways on this because there is debt involved. They’re just on the other side of it. But

Dave:
So most of what we see is you have, it usually applies for investors in investing in a note fund that utilizes leverage. But not when you’re buying a note. Cause when you’re buying a note it’s interest income or, or a capital gain, you know, when you exit the note. So it’s really does that fun utilize leverage, and that’s where the UBIT kind of sneaks in and a note fund and some note funds do and some note funds don’t and that’s why I think it’s, I won’t say confusing, but it can be. And yeah, you know, it’s just something that is there and just gotta be aware of. I mean, it’s, you know, a lot of times you’ll see people put regular capital and as you know, if there’s you, it depends how big UBIT impacting you and whether you can offset it with something.

Charles:
Yeah. Interesting. Yeah, of course. I don’t wanna put you on the spot there, but if anybody just speak to your accountant about that, but it’s just something like that.

Dave:
I’m not a CPA, so

Charles:
Yeah, neither of us are. So it’s just, it’s just something that when you’re passively investing, we you’re doing with your, your a self-directed IRA, should it be something that you keep that as a, because it could will offset or change your returns? What are common mistakes you see, note investors make

Dave:
Maybe not doing enough due diligence on a note seller, for example, or maybe not having their end game in mind or, you know, I guess one of the first decisions is how active or passive are you going to be? You know, do you want to be, you want to go buy a couple of notes and collect cashflow or do you want to run an active note business like mine, right. So they’re completely different things where one has employees and all the, all the good old trappings that go along with that stuff. Or do you want the, you know, I just want cashflow from an investment and I’m pretty passive those types of things. But, and, and I mentioned it earlier, like staying up to date on the compliance and the legal aspects of the industry and you know, knowing where those pitfalls are, could be, you know, that kind of thing.

Charles:
Interesting. Okay. What do you think are the main factors that have contribute to your success over 30 years in real estate, both equity and debt side?

Dave:
Probably maybe time persistence networking for sure. Because you know, we have a big you know, investor audience and a investor base and, you know, one of our fortes, you know, is raising capital, you know, so that’s one of our core competencies are one of our big strengths

Charles:
In the commercial real estate. Just off the top of here, like in the commercial real estate is a very small market kind of industry, I guess when you’re talking, especially within like, let’s just say multifamily, is it with notes to where it’s very clear people know the other funds. And I heard before someone was saying that you know, if you you, you know, you re it’s again to a bad relationship with a note seller, something like this and that person’s like the black blacklist that guy from, or person or business from mine is that, is that

Dave:
It can happen with funding, you know, especially you know, a lot of times we have to close quicker maybe than multi-family sometimes, you know I watch my acquisition team. Sometimes they do diligence at a couple of days and have to perform very quickly. But then sometimes they may have up to a month, well, a month is, could be shorter than multi-family, which might be it’s called 60 or 90 days or something, you know, where you have. So that to us, that’s like, oh man, that’s all the time in the world. That’s a lot of extra time. Right. But the especially if they’re looking at a lot of assets, you know, I’ve seen them look at thousands of assets and have to do their diligence on thousands of assets instead of one asset. But, you know, sometimes one asset could have a couple of hundred units, right. So it’s not like you’re not doing anything, but yeah. I mean, you know, you see it though.

Charles:
Interesting. So how can our listeners learn more about you and your business? Dave?

Dave:
Probably the easiest way is our website PPR note co.com. I do have a the distress mortgages group on LinkedIn and I’m on bigger pockets, a lot answering questions and stuff like that. People are trying to do the note business. But yeah, you can go to our website, reach out to us, set up a call with one of our investor relations persons, you know?

Charles:
Okay. So I really appreciate Dave. I will put the links to your firm into the show notes. And I want to thank you so much for coming on today and looking forward, connecting with you in the future.

Dave:
My pleasure, Charles. Good luck with everything. Take care. Talk to you soon.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar , LLC, exclusively.

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About Dave Van Horn

Since 2007, Dave Van Horn has served as President and CEO of PPR Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, Real Estate Investor, and Fundraiser. As the latter, Dave has raised over $200 million dollars for both notes and commercial real estate. Dave also owns a considerable portfolio of residential investment properties, as well as various commercial holdings.

 

In addition to his investments and role as CEO, Dave’s biggest passion is teaching others how to build and preserve wealth. Dave is a co-founder and board member of Strategic Investor Alliance, a purposeful planning and networking group for accredited investors. Dave is also a national speaker and weekly investment blogger on BiggerPockets.com.

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