GI339: Mortgage Note Investing with Nic DeAngelo

GI339: Mortgage Note Investing with Nic DeAngelo

Nic DeAngelo is the CEO and Founder of Saint Investment Group. A firm that acquires institutional-grade real estate assets nationwide with 600 mortgages across 29 states. Additionally, Nic’s company operates the Saint Income Fund, which makes debt and equity investments across various property types. Saint currently has over $200 million in assets under management and has consistently distributed over $14 million to investors over the past 10 years.

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Nic DeAngelo. He is the CEO and Founder of Saint Investment Group. A firm that acquires institutional-grade real estate assets nationwide with 600 mortgages across 29 states. Additionally, Nic’s company operates the Saint Income Fund, which makes debt and equity investments across various property types. Saint currently has over $200 million in assets under management and has consistently distributed over $14 million to investors over the past 10 years. Nic, thank you so much for being on the show!

Nic:
Charles, good to see you. Great catching up with you beforehand. I’m excited to chat today. Yeah,

Charles:
Definitely. Well, thank you so much for coming on. It’s great to have you with what you guys do at st. So before getting into what you’re doing at St you, you tell us a little bit about how you got into real estate investing, and then I know you were more on kind of like a acquisition fund. Can you tell us about that before you went into more like actively managing the deals?

Nic:
Absolutely. So I got into real estate full-time in or in and around the 2008 global financial crisis. And at that period in time, and I was doing some marketing and I was working with some of these guys on leasing beforehand, but really going all in was at that point the problem was nobody was hiring, right? It was many companies were holding onto your life. So I did a full court press. I basically offered to work for free, got rejected to work for free. So that was a really fun chin check. But what I ended up doing was broker or cutting a deal with a couple family offices where I would help them with acquisitions. I would only get paid if a deal goes through and there were fantastic deals in the marketplace and they just didn’t have the bandwidth to find them. So I was absolutely 100% unpaid.

Nic:
I leaned into the acquisition sides with them. I had built some relationships, helping them with leasing early on. So I had the benefit of learning from multi-generational family offices, learn how they did things, how they thought about things, how they underwrote deals, what their biggest considerations were, what their long-term, 10 plus year, three generations. And I was blessed to be dealing with the patriarch in those situations, the person that’s leading, you know, multiple generations of the family. So it was a huge blessing for me. And then on the acquisition side, we did a number of fantastic deals that we were really proud of. Bought a lot of things well under market. Eventually from there what ended up happening was we bought a lot of deals and their bandwidth, again, was a little strained. So they said, Hey, look, Nick, you set the, the game plan for these properties.

Nic:
You set up what we were we, what we should be acquiring, moving forward with what benchmarks, what timeframes to be doing such, and our team’s bandwidth is a little more limited. Why don’t you get involved on the asset management side? So I ended up taking over the asset management side. So I was handling acquisitions and asset management, and then we had some great returns, some great you know, great experiences on that side. And then in 2015, I launched Saint Investment Group to start working with more retail investors and to bring the same models that we were working with family offices to kind of the broader investment world.

Charles:
So with those investment, what was that investment philosophy maybe from when you started in 2008 over those years of working with these generational very wealthy family offices and dealing with people that had really been running those offices? Kind of how did that form your whole investment philosophy going forward and maybe how that changed, I guess, from when you got into the business, what you, when you were deal finding to when you became a little bit more seasoned? Sure.

Nic:
So we were leaning into distressed assets. I still to this day have a huge, huge affinity towards distressed assets. I see huge opportunities there. Yes, there are higher risks at certain points, but with solid organized due diligence, I think most of those can be identified and either mitigated or you can walk away from the deal and not do it. And so I love that aspect about it. So we typically buy off market. We’re typically looking for assets that other people don’t have access to. That’s a core fundamental common acquisitions model. What was interesting and what I learned from the multi-generational approach was two things. One is they hedged their risk early on in that time in the market by buying so deeply discounted. That was the hedge. They needed some degree of a hedge. That was a long-term advantage that that specific deal had. Okay.

Nic:
So at that time in the market, it was buying so low that the upside and, you know, the, the market risk really was mitigated in a big way because we were buying so cheap. That was the, you know advantage to those deals at that point in time. And then also they were looking at the asset class in 10 years, 20 years, is this asset class likely to stand up? These guys, they had no problem flipping a deal if market conditions changed, but they didn’t want to make that a core business strategy that was more of a one-off here and there they were looking for long-term appreciation, long-term growth, long-term tax advantages, cashflow, et cetera. So I learned really that long-term approach. When we look at anything today, we still carry that with us. Is this asset class? Is this strategy? Is this you know, cash flow gonna be something that’s probably pretty entrenched for a decade plus as a mentality that we have today? So that was, those were the two big things. There has to be a unique advantage to the deal, something that sets it apart and there’s a reason to do it, a lever on that deal. And then the second is that long-term approach, thinking 10 years plus ahead.

Charles:
Was there anything else other than a deep discount, which obviously is a great way to start a deal that they were looking for? You said long-term, you know, the property classes, but say, you know, obviously we’re pretty sure that multifamily and some of the other asset class that are very popular are gonna be around in 10, 20 years. Was there anything else specifically they were looking at, they want to see in a market, they want to see a class of property, let’s say? So

Nic:
We started off with specific asset classes and these, these groups were more retail interested at that time. And again, this is a long time ago, we’re talking, you know, much more than a decade ago. So at that time, retail was still a good word. And I don’t hate retail today, but it’s, you gotta snipe it. You gotta make positive it’s the right deal. There’s a lot of bad retail deals also, but they were retail preferred, right? They, they leaned more heavily into that and, and liked that asset class. What I would say is that once we leaned into due diligence, we started getting more advanced. And early on it was more of a portfolio diversification approach. We were looking at, hey, maybe mostly retail, but if we had a deal here or we had a deal here, it would balance things out. And that was the approach.

Nic:
We had one deal that changed the game completely. We bought a deal that was so ridiculously below market, it was roughly 50% off, right? So on our side, we’re like, our bets are so hedged just on the entry point of this deal. We’re buying so far below market, it’s way below replacement costs. What could go wrong? The local market looks good for the top layer of economics. What we found was that it was actually a declining market in major ways. And not just ’cause the global financial crisis. It was a declining market that really, if we had understood basic the deeper economics of that local market and that local area, we would’ve realized the trends were in the wrong direction. So that was probably our worst deal we ever did. It was a mixed use retail office location located directly from a courthouse. The problem was a few things.

Nic:
One, the leasing market was drying up. Two, the local economy jobs were declining. Three was an aging population. So there’s things that we hadn’t really scrubbed for. We just looked at what were leases today, what was the velocity today, we came out ahead on that deal. We came out by the skin of our teeth. We met, did a massive leasing effort to two years just on leasing effort on that. And what ended up happening at the end of the day was we sold it, had great returns on it. And I personally was like, never again. We will never get in this situation again. So at Saint we released huge amounts of economic data. ’cause We are obsessed with it now. We’re not looking at top layer data. We’re looking at, you know, middle, lower, deeper. We’re going as deep as we can go on local economic, state economics, national economics, what are the drivers for all of these things?

Nic:
Because that deal gave me such shell shock on the fact that it almost was really bad and we were all in, everything looked good, you know, partners myself, it would look like a very positive deal on the front end. So now we’ve completely overhauled our acquisitions model and consider completely different strategies knowing that a deal can look good on the top layer. But the the, you know, if you dig below the surface, if you understand the true drivers of leasing AKA cash flow and appreciation, AKA, what’s the long-term outlook? Now that we have better underwriting and due diligence on those pieces, we see markets very differently today.

Charles:
Interesting. Interesting. So can you kind of break down what you guys are doing now? Yeah. Mainly like the same income fund. What how that works and kind of what your strategy and offerings are behind that.

Nic:
Sure. So part of the transition, you know, again, we did quite a few syndications. We worked with a lot of joint venture partners, really enjoyed that model. But we started working with more and more investors, more high net worth. And what we consistently saw was equity deals were great, syndications were great, everybody liked the returns, they liked the tax benefits, but there was this piece that we saw that was missing. And in a lot of these gentlemen and individuals portfolios, they were looking for something that was fixed, that was stable. They were okay with slightly lower returns if the consistency, stability, and long-term outlook and cash flow were there. So what we did was we got tasked with some of our partners. They said, Hey, how could we maximize a cash flow approach here? A consistent return over a really long period of time with really the most stable assets we could find.

Nic:
And because we were used to, you know, really we were buying at the courthouse steps. We were buying foreclosures $10 million a week, many weeks, right? We had great relationships with banks. They had been hounding us to start buying mortgages. We had done a number of those deals and really enjoyed them because we found that even if we didn’t, you know, go for the property on that, and we just worked with the property owner, we had these huge amounts of payments in the future that were consistent revenue month after month. And they were very con, you know, conservative. We were doing low LTV deals. So we saw was this was a great cash flow opportunity. So we leaned more heavily into that. We bought mini mortgages, we partnered on a mini mortgage, we brought in a whole portfolio of mortgages and created a fund around that, the same income fund.

Nic:
So now we have very competitive returns, over 600 single family mortgages in that fund because we found that the number one asset class that we felt would have a 10 20 year outlook that was very positive were single family homes. The problem was, you know, I bought a number of homes in my day, you know, half a dozen homes in my day. They’re a nightmare to manage, right? They are super difficult. You’re dealing with small dollars, you’re dealing with very needy tenants, and that’s all fine, but it’s really hard to scale with that. So we liked the mortgage aspect, we liked that single family homes have a really good, you know, fundamental background. You see a 6 million home shortfall on the supply side. So we don’t see that being even close to reaching equilibrium of supply and demand for at least a decade. If you look at current numbers, and I really like the outlook of that. So if we’re buying low LTV very conservative deals, I think we have 10, you know, a decade or two ahead of very, very, very consistent, solid returns, solid outlook. So that’s why we leaned in heavily to that, to pay above market fixed income returns with a really strong back, you know, asset backed model.

Charles:
So can you tell us a little bit about, you said you were sourcing them from banks. What, what kind of mortgages are these? Are these non-performing? Are these performing? Are they a mix of it? And you know, how do you how are you valuing those as they come, come across your desk?

Nic:
Good question. Good question. We’ve, again, I, you know, I kinda mentioned I like distressed assets. I think that there’s more value there. I think that there’s more value that can be forced and generated there, and there’s more you can pick up on the spread. We focus on non-performing, so we call ’em npls. I like that marketplace. The issue is, if you buy with high LTVs where the, the homeowner has very little equity, they don’t really have a huge incentive to work with you, right? And they’ve already been jerked around by, I don’t know, whatever the big bank is, chase, Wells Fargo, PNC, you pick one. If there’s low LTV, then they really don’t have a lot of chips on the table. So we target big bank loans, you know, large scale loans. Sometimes we even buy from the government. We buy from Fannie and Freddie and hud, et cetera. And we are, we are targeting really around that 50 to 55% LTV. So the homeowner is very incentivized to work with us and we want them to work with us. Our business model is to get that loan reperforming so everybody’s aligned to work together and to start getting their payments on track and to modify that loan to get them on track. And we see that with a really positive long-term success outcome.

Charles:
Interesting. When you’re buying mortgages, other than having a strong loan to value position as as the as the lender, what, what would you else would you say that really minimizes your downside when you’re doing this business strategy?

Nic:
Sure. So you gotta think about exits, right? You know this, right? You’ve done plenty of syndications, you know multifamily, you know, kind of the, the business model for commercial, well, you gotta think about exits. So in a worst case, best case, mid case scenario, how are you exiting? What’s your downside coverage, et cetera. So it’s nice to say we have a really solid LTV, we do, but the real question is what do we do on the backend of that? So on that side, we are always thinking about what the next stage would look like. And really, once they’re performing, there’s two models that we can lean into. On one side, we can collect the cash flow, we can have that consistent return over a very long period of time. And then on the other side, we can exit by selling bulks of these and selling these off to institutions where we get a pop on that.

Nic:
Because when they’re non-performing, we’re taking a discount, right? Because there’s inherently they are not paying at that moment or they’re carried balances or whatever. So we get a discount on that side, and then essentially we can sell for, you know, full or close to full value on the backend once it’s reperforming. So that kind of creates the consistency and it gives us a number of options on the backend to not only work with the homeowners, keep ’em in their homes, but also either, you know, take higher returns in the short term or look for a longer term cash flow output. Okay.

Charles:
Interesting. Interesting. What would you say other than having a lacking of 6 million homes what are some other kind of, say, drivers for the single family mortgage market that you’re finding? Obviously you’ve kind of carved out of a huge niche in there where you’re finding these NPL loans. Is there anything else that you see that’s really driving certain markets, maybe it’s difficulty of constructing, maybe it’s like not in my backyard for new developments.

Nic:
No, there’s, there’s so many positive blue sky indicators for, for the single family home market to invest in. I’ll just go down a checklist of number of big things that we’re seeing right now. One is, if you look at the biggest developers look at, you know, Lennar Homes, look at, you know, many at that scale, there’s only a handful. There’s only a handful. They are developing somewhere between 30 and 40,000 homes a year each, right? And that again, we have a 6 million home shortfall in the United States, right? <Laugh>, so what do you mean 30 to 40,000 homes? Why aren’t they leaning into this more heavily in interviews? You look at them and you’re like, okay, okay, so it’s gotta be the tariffs, right? And they go, actually, we’re kind of a big enough fish. We saw zero impact of tariffs. We have no cost increases in multiple categories.

Nic:
And so, okay, so we’re scratching our head a little bit more. So why are you leaning into only 30 to 40,000 homes developed a year when there’s such a big need? And the reality is to, the typical answer from the biggest home developers is that they like the profitability at those levels. So when I read between the lines, what I see is that they actually don’t wanna flood the market with homes. And they like that cramped, you know, high demand market that even if it’s, you know, not in balance. Now, I don’t love that and I think homeowners don’t love that we’re seeing a, an affordability crisis on that side. Now we’re talking 50 year mortgages, right? <Laugh> just to, you know, chip away at the monthly payment a little bit. But that’s one is that just the big developers aren’t really hitting their stride on it.

Nic:
Now, you mentioned regulations, you mentioned some other things. States that need it the most are typically the most regulated. I live in California, it is a joke. Regulatory costs here can be 30, 40% of deals. That’s insane, right? If we chipped away at that, that could reduce cost to homeowners or home buyers by 20 something percent, probably, right? So if we cut that in half, so there’s huge regulatory concerns. But if you look at the backbone of just mortgages across the us, let’s just look at what that looks like. The baby boomer generation, the largest generation we’ve ever had, also the wealthiest generation we’ve ever had. US history owns something in the 40 percentile range of every mortgage in the United States, right? So these are a huge cohort of homeowners. Now some of them are starting to move slightly, but the reality is the vast majority are locked into mortgages.

Nic:
If you look at fi, over 50% of mortgages in the United States are below 4%. They can’t afford to move. That’s over half. And then if you look at over 70% of mortgages in the United States, they have a rate below 5%. So really they can’t afford to move. So we’re talking over two thirds of the country has a very low incentive to move, which further slows down the supply side of the equation. Then you can dig into all kinds of things of, in the, since 2008, over 80% of mortgages that exist in the United States today are either owned, insured, or guaranteed outright by the US government at one stage of the lifecycle. Not all at one time, but at one stage of that mortgage is lifecycle. So it is such an entrenched asset class. The US government has such a focus on supplying and supporting housing. And the biggest issue is we still have a massive supply shortage. So while I’m never rooting for, you know, some outcome like housing affordability crisis, the reality is we can’t invest on that. And we do see an outlook where we likely are gonna be in the scenario for 10 years plus. So is, it’s very investible, even if we don’t love the scenario as, you know, the outcome being very high cost to the the, the home buyer. Yeah,

Charles:
It’s definitely for people that are doing anything around that asset class, like build to rent, if they’re fixing, flipping houses, if they are like us and multifamily. I mean, right now it’s been a tough few years, but as that starts coming back, it’s gonna be something because of that lacking lack of housing and the affordability of getting into it. And it makes perfect sense about Lennar and these other large ones. ’cause Why would you build 80,000 and have that much more risk exposed when you can make pretty similar pricing on 40,000 homes? So it makes perfect sense.

Nic:
It’s an interesting market right now. It’s an interesting market. And again, I think the, the buyers have the, the short end of the stick here. If it was up to me, if you, if you said, Nick, you have to solve the housing crisis, right? Which again, I’m not even, I’m not a politician, I’m not in government, but if somebody, you know, was twisting my arm and said I had to solve this, I would, you know, to some degree of federal federal, a federal push to reduce the barriers to entry at developing at the state level. Because if you remove those barriers, you’re consistently seeing more affordability, you’re seeing more options for buyers, you’re seeing better pricing. And you know, we’re, we’re solving the wrong problems at the government level. We’re looking for 50 year mortgages when we should be increasing supply. So that’s, that’s how I would solve it. But in the meantime, until there’s some degree of a real true resolution here you know, we’re, we find it a very investible market with very good fundamentals. Yeah,

Charles:
The 50 year mortgage is gonna be put us in the place of like student loans. It’s gonna be in the place, it’s just gonna be driving up the asset prices and just making it more and more difficult for people to move homes or anything like that because of that. And obviously that’s Washington’s take on trying to solve a problem like, like you said, which just needs more inventory

Nic:
And yeah, your grandkids are gonna have to co-sign for the 50 year mortgage. That’s the new

Charles:
<Laugh>. Exactly. Exactly. So we were talking before about when you’re working with family offices and different traits you found, I would like to kinda hear for your common, you know, common traits you see among your most sophisticated and also maybe your, your wealthiest passive investors that work with you in this, you know, income fund. What are some pretty much some common traits you see between them?

Nic:
I see two things from the most sophisticated, most successful investors that we have. You know, we’re, we have a hundred percent passive investors today. So see, you know, hundreds, we have hundreds of passive investors and we see some common traits. These are the top two. One, they’re big learners. They want to understand what’s going on and how it’s working. They’re usually not speculative investors. So bitcoin, they might be like acute 5% of their portfolio, but they’re certainly not betting the farm on things that are, you know, long shots, et cetera. They are trying to understand what’s going on on the broader scale. They are sophisticated, they’re knowledge, you know, they’re, they’re knowledgeable and they, they want to dig in and understand the real thesis behind decisions. That’s one. And then two, they take a very serious look at a balanced portfolio. So they’re not going all in on one asset class.

Nic:
They’re not going all in on one model, and they’re diversifying. And so again, these kind of go hand in hand, right? Always learning and then improving your portfolio portfolio strategy has evolved dramatically. We, we know for sure today because we can analyze this, we see what the true numbers are. We used to do the 60 40 portfolio thing, right? Back in the day, that was the normal 60 40, 60% stocks, 40% bonds. If stocks went up, bonds went down. If bonds went up, stocks went down. They’re not correlated in the same way, they now have reversed that correlation. So if stocks are up, bonds are up, and if bonds are down, stocks are down. That has reduced the effectiveness of the 60 40 portfolio. So we are seeing the most sophisticated investors looking at the most sophisticated models of investing. So if you look at BlackRock, if you look at Blackstone, if you look at, you know, sophisticated investor groups like Tiger 21, where in order to get in the group you have to be 10 million liquid, might be 15 million now, but at least 10 million liquid to even be in the group.

Nic:
They’re, they’ve completely changed portfolio strategy. They are seeing hard assets, AKA real estate representing somewhere between 27 to 40% of the best performing portfolios, right? ’cause If, because I think people are waking up, I think they’re seeing that the stock market, you know, Nvidia today represents 8% of the s and p 500 value. The 500 best companies in America, quote unquote represents 8% of the value. If you look at the Mag seven, magnificent seven, it represents what 35% today I think is the most recent number of s and p 500 value. So leaning too heavily into stocks or traditional investments does not have the same hedge, does not have the same protection, does not have the same diversification. So you’re seeing the most advanced, most sophisticated investors leaning into the most successful models. The Blackstone, the BlackRock, the Tiger 21 models that were putting more money towards real estate. In the past we saw that five to 10% allocation in real estate. Today it’s bumped up 27 up to 40% for some really successful groups. So that’s kind of the big shift that we’re seeing right now with the sophisticated investors.

Charles:
Interesting. Interesting. So what, what advice would you have for maybe a small business owner? They’re building their business you’re an entrepreneur as well it’s outside of real estate, but they’re looking to diversify their investments. How would you say for someone to go about that?

Nic:
So I’ve been able to build a number of companies sold, sold several along the way. You know, things that were ancillary to real estate that benefited what we were doing on the real estate side. This is what I’d say the biggest mistake I made was not taking chips off the table. I liked the growth, I liked being obsessed with the growth. I liked that high octane growth, but you really are putting all your eggs in one basket. So I kind of took that, what was it, the Carnegie quote where, I mean, it was Carnegie or it was Warren Buffet, but it’s it’s, it’s something about putting all eggs in one basket is, is fine as long as you’re watching the basket. But what I found was the, the biggest risk was that there are market downturns and things bigger than your business.

Nic:
So what I would’ve done previously, and what I see consistently the sophisticated, older, you know, successful investors do, is they build a core business. They’re a business owner, and they’re taking chips off the table and investing on the side. I consistently see that model and every time I see it, I go, duh, I was stupid for not doing that previously in the successful businesses that I was building in the past. And so just that, taking the chips off the model and placing those in more sophisticated, you know, consistent long-term outlook investments, really has benefited these people in a point where they can focus on their daily business. They don’t have to manage those investments from a pa from an active perspective. They can be passive, but they really get the benefits of both sides growth and they hedging against both. So I really like that model and I see a lot of people using that today.

Charles:
Yeah, it’s nice to have that assets that are uncorrelated to what your main business is, and that you don’t really have to worry about either after you’ve made that, you know, you’re doing your due diligence and you’ve made the investment.

Nic:
A hundred percent. A hundred percent. That’s the mindset. Nick,

Charles:
As we’re wrapping up here, a couple things I always like to, I mean, so many years, you’re almost two decades in real estate from acquiring work with family offices to what you’re doing now with the income fund. What would you say are the main factors that have contributed to your success over these decades?

Nic:
I would say that my hand is always on the wheel of growth and improvement of the business a hundred percent. That always falls on me as the chief growth and improvement officer, really, truly. So what that means is I’m laser focusing on the biggest needs of the business and the biggest opportunities, and I’m hands-on on the hiring process. And then when we’re hiring, we are hiring someone that levels up the entire team. So it’s a big leap up, and then I move on to the next thing in the business with the biggest opportunity and the biggest growth need, and I move on to that and bring in the best possible talent for that. So that consistent commitment to each hire, leveling up the entire team, and me being very integral in that process and being able to work through the hiring process to find the perfect fit for that, has absolutely helped us jump up the ladder each stage. So that commitment is, is core, core to how I view business today.

Charles:
Fantastic. So Nick, how can our listeners learn more about you and say investments? Sure.

Nic:
The best way that they can get some value for from us for free, we give away tons of economic deep dives, tons of research, whether it’s portfolio strategies that we’re seeing, w whether it’s economic trends, investment trends, et cetera. They can get all those for free at saint investment.com/resources. Tons of value there and they can learn a lot more.

Charles:
Okay. Well, thank you so much for coming on the show and looking forward to connecting with you here in the near future.

Nic:
Charles, great to connect with you today and talk to you soon.

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About Nic DeAngelo

Nic DeAngelo is the CEO and Founder of Saint Investment Group. A firm that acquires institutional-grade real estate assets nationwide with 600 mortgages across 29 states. Additionally, Nic’s company operates the Saint Income Fund, which makes debt and equity investments across various property types. Saint currently has over $200 million in assets under management and has consistently distributed over $14 million to investors over the past 10 years.

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