#216 How to Passively Invest in Real Estate Through Notes

Welcome to the Passive Income MD podcast where we talk about creating your ideal life through multiple streams of income. If you enjoy hearing about this stuff, make sure to hit subscribe. Now. Let's get on with the show, everyone. I'm excited to talk to somebody who's probably known to this community. You've seen him at pimdcon, you've seen him at different events. We've talked before but thought we'd have a great conversation today. Around, around the real estate world, around different options to invest, ways to create passive income in real estate. I know everyone here is excited to hear about that. I'm going to be talk to Nate Anini. He is the head of business development for Aloha Capital. He specializes in investor relations. He talks to people like you and me all day about their goals and outcomes and how Aloha Capital might be a great fit for them. He lives personally in Santa Barbara and Vail. He's got a couple young sons. He's both an active and passive real estate investor as well. And that's what I appreciate about him. He understands this world from both standpoints. I'm excited to talk to him about the lending world, about notes and everything in that space in the market today. So, Nate, how you doing?

Awesome. Thanks, Peter. I appreciate it. I'm doing really well. Thanks for having me.

Yeah, excited to talk to you because every time I talk to you, I learned something new and I'm excited for people to learn some new things as well today. Hopefully I did you justice. But do you mind just telling people really quickly like what is and who is Aloha Capital?

Yeah, no, that's a good question. So Aloha Capital, you know, the nuts and bolts of what we do is primarily we are lenders. We are private money lenders to residential investment, real estate nationwide. So basically, you know, typically 1 to 10 unit, if you're trying to purchase a property, finance it either as a rehab or a buy and hold or a multifamily value add ground up. We lend to those assets nationwide on the other side of that because we're on the, the debt, you know, the, the debt side of this business. We are originating all these loans, but those loans are coming from a pool of capital that we've raised from investors over the years, over the last 10 years. So you can also invest in either those funds or those individual notes as a passive investor on the other side thing. So whether you're trying to finance a property or you have some money you want to put to work, that's what we tried to do.

Got it. Okay. So if I have this right, your business model essentially is like, you know, there's all these people that need access to capital. They need the short term, the, the lending, they need the capital and so they come to you. You also have a pool of investors who are happy to lend their capital out, get those kind of fixed returns or that they're happy with and then you kind of ultimately make that transaction happen. Is that right?

That's right.

Okay, awesome. So let's talk a little bit about this because I think a lot of people have a question like who's actually borrowing? You mentioned a little bit about who's borrowing, but who's actually borrowing from you. And why wouldn't they borrow from like a traditional bank?

Yeah. I mean we can focus let's say on the rehab element of, of real estate. Right. So there's a, an asset that has some value add component. An investor can come to us, they are typically going to get higher leverage than the bank would, would finance. If you figure, you know, a traditional bank is maybe going to give you 65, 70% loan to value and probably not very much of the rehab capital, we're going to be closer to 85% loan to value on the purchase and 100% of the rehab capital. So basically you have to bring less of your money to the deal, which means you can use it for other things, you can scale more quickly. It's just always better to use somebody else's money.

Right, got it. Okay. So they can't go to the bank. So they come to you. Unless they want to put their own cash in, they come to you get some lending on that. So when people are coming to do that, like you said, rehabs, how long are they typically they want the capital for how long are these terms?

Yeah, typical rehab loan for us is, is 12 months, 6 to 12 months depending on the usage. So these are interest only loans and there's no prepayment penalty. So you can exit the loan anytime you want. You're obviously incentivized to get the project done and exit that loan as quickly as possible. And then you can refinance into permanent debt through Aloha Capital as well. Where 30 year debt service coverage ratio loans.

Yeah. And then why, why are some of the people in lending, I'm just curious, like why are they coming to you versus some of the other lenders that might be out there? Like what differentiates you guys? So that makes people comfortable and makes the transaction better?

Yeah, they get to talk to Me. Right, so that's all the difference. No, but we, you know, that I kind of kid about that. But we're a small shop, right? So there's, there's big lenders, there's small lenders, there's, there's private lenders, there's your uncle, there's everything in between. Right. So we're a small shop, we're, we're high touch you, you know who you're talking to. It's very consistent. And you know, whether you have a relationship with a big lender or somebody like Aloha, I think it's important to have an actual relationship with them. Know that you can call them up and they're going to pick up the phone and help you get that deal done or address a concern. And, and using generally smaller companies like us is, is going to make that easier.

So when you're figuring out whether they're a good person or, sorry, good company or whatever it is to lend to, like, what are you using as, like, these are, these are all things I'm love to learn about. Like, what are you using as your basic criteria to figure out whether you know they're good to lend to and whether it's, it's a good option for.

You guys as a borrower? I mean, there's obviously just the, the general credit worthiness. What's your fico? Which, you know, just gives you a very broad spectrum. People pay their debts, but more specifically, particularly in the rehab space, we're looking at experience, right? So there are experience buckets. Whether you've done zero, you're, you're starting out and it can be your first rehab and that's totally fine. But typically you're not going to get very high leverage. You're going to pay a little bit more both in points and rate, because a lender, any lender, is hedging their bets against, you know, maybe your first one's not going to go so well. Whereas if you've done 10 of these and you can show that you execute over and over and over, you meet your budgets, you are profitable in the end, you pay on time, you're obviously a great borrower. For us, we're like, let's, let's give this guy as much money as he needs to scale his business and continue executing and doing really well, that's awesome.

Okay, so I'm assuming that most people listening to this, they're not necessarily on that side of the table. They might be, might be some people that are really interested in finding out more about that on that side to they want to borrow more capital because you know, they have a property of their own multifamily or whatever it is, or you know, a fix and flip or something they want to do. But I would venture to say probably most people listening to this are on the other side of the table where we see this as an opportunity to get into real estate in a passive way. And I've invested in notes before and so I want to maybe expand on this a little bit. So do you mind just sharing for people like, just for the concept of, like they might hear this concept of a note or note investing. Like what does it actually mean for somebody like an investor?

Yeah, it's a great question. A note to mortgage, right? It is, it is a promissory note paper against whatever you have borrowed. So basically we are originating a mortgage. We, we look at that, we underwrite it, we say this is a good deal, this is a, a credit worthy bor. We originate that loan, that mortgage, and then that has a note against it. So as an investor, a passive investor, you can either buy that whole mortgage from us and take the entire revenue stream where we would still service it, or more frequently for what we're doing is you can do a partial investment where you are participating in that revenue stream. Let's say it's a hundred thousand dollar loan, for example, you can buy $25,000 worth of that and then we're servicing it and then distributing to you.

Do you mind if we kind of just walk through it like just to break it down in steps. So, just so that I can understand from like an investor standpoint how you guys operate. So let's say I'm investor, I'm, I'm interested in, in the debt side of these real estate deals. We talked about equity and debt a lot on our platform and our community. And I think people understand when, when you're on the equity side, you kind of own a piece of, of the, the business or the property or the action and you've got the, you know, the upside, the downside that goes along with it. And then when you're on the debt side, you act more like the bank where you're lending out money and you expect those, those returns. So for an investor, let's say I decide, okay, I, I don't know, let's say I'm, I'm somebody and I say I want to get more into the debt side of this. Like how does that happen? Like you said, there are, are notes out there that I just decide to invest in, in whole or partial. Can you explain that a little bit?

Yeah. I mean, so you're looking at, you know, I can obviously only speak to Aloha, but looking at a company like Aloha, you're saying, okay, this company has, has been in business for coming up on 10 years, have originated, you know, 4,000 plus loans over those years. So I know that they have the experience to do the underwriting. So they are the lender, the bank. I can then as an investor come in and you know, basically leverage our experience and the fact that we've been doing this for as long as we can and say, okay, I'm now the bank without having to do all the heavy lifting of the underwriting and the work behind it, knowing that we're servicing it, finding these deals. Because we are primarily lenders, we're lots and lots of deals coming across our desk all the time. So we can very be very selective about the deals that we do and only do good deals because this is our money out the door. Right? We're not, you're not taking your capital and investing it directly in a deal. You are basically recapitalizing us. We've already invested Aloha capitals money. So we are fully incentivized to only do good deals in the first place because we're fully exposed to that, that mortgage or that note as well. So yeah, as an investor you can come in and say, great. In this, in this time where, you know, if you're used to an equity play, you've been in syndications or, or just in bought something yourself, you know, you have to go to a lender and say, I, I want some money. What's, what's the rate going to be? How much am I going to pay for this? And in a higher interest rate environment, that's not the most enviable position to be in. Whereas if you are the lender and you still have good deal flow, you're still seeing deals out there, it's a much more enviable position to be in. You could say, okay, rates are higher, I'm going to get a better return on this capital. So now as an investor, you can come in and rather than being sort of subject to high interest rates and being like, oh, how am I going to make this work? You can say, great, I'm getting a great return on my capital. Certainly better than I was, you know, when money was basically free four or five years ago.

Well, I know that people have a lot of different options today to, for investing and trying to get like this, you know, safe returns I'd say. So you've got, you know, people have the option of being just in a savings account and some Treasuries and things like that. And I think people know that the numbers that are associated with that, like what are some of the numbers associated with some of this node investing? Like when you're like people are coming to you or when people are thinking about investing in notes like what kind of returns should they be looking for out there in the market today?

Yeah. So the notes that you would invest in through Aloha, these are primarily rehab bridge loans. Right. So it's going to be a higher interest rate than, than say a permanent debt loan is. And those rates are typically 10 to 15% annualized return. So double digit for sure. And that would first position loan typically 6 to 12 month terms. There are higher rates. You can do second positions, we don't offer very many of them. But there are higher returns on development deals and second position loans that can really get you up into the high teens. But you know, pretty typically 10 to 15% is, is very sort of average. And that's not a variable turn, that's a fixed return. If you invest in a 12% loan, you, you get 12% annualized and that's it. You get 1% on your money every month. So it's not, it's not a guessing game. You're gonn exact same amount every month that that loan is in performance.

Cool. I mean those type of returns I think are really attractive for people in, in today's environment. But you said something about first position and second position of like, you know, of these loans. So can you explain to people a little bit about, more about what that means and what the difference is?

Yeah. So a first position basically you, nobody has senior debt over you. You are in the first position in the loan in the lien against that property. So all of our loans are collateralized by the actual asset behind it. So typically that's a, a structure. Right. Let's say it's a single family house, that borrower is personally guaranteeing the loan and we have basically rights to that property in the case of default. So if that borrower were to come and say hey I can't pay anymore, or more frequently just take off, we're taking over, over that, that asset, whether it's a house or anything like that. And, and nobody gets paid off before we do. So as an investor in Aloha you also are in a first position. You are participating with us, but nobody has SEN over you. So basically nobody gets paid back before you do. As an investor. Aloha. We don't recap, recoup any of our capital before you recoup any of your capital.

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We can't wait to see you inside. Let me ask you real quick then. Okay. What in the case of somebody like you said, first position is really safe position because obviously if something happens to it, then you guys take over the property. But I, I wouldn't expect anybody want to do that. If you happen to do that and had to take over a property, then what would you do on the backside to recover some of the capital Would you just go out there and market and sell it or what would that be?

Yeah, it depends on, on what state the property is in. Right. So if it not in a, not state, like in the, you know what I mean, what, what condition the property is in. So if it's, it's already been rehabbed, if they finished up the rehab or it's something we can finish pretty quickly and then just sell on the market, that is often what we're going to do. And in that case, there's often, not only are we, you know, recouping all of our capital, but there's upside on the back end which an investor would participate in. So if you're selling it for a profit, that profit is distributed between all the investors. Well, so that would be the most typical workout. But before that, to your point, we don't want to take over properties. Right. Going into default is, it's a pain in the butt. It's, it's just not the, the outcome that anyone is looking for. So we, we try to mitigate that by A, only underwriting really strong deals to really, really qualified borrowers on the front end. But then B, if a note has fallen out of performance, if they're late for some reason, maybe they're, they need a little more time to fix a roof or they're, they've got it on the market but it hasn't sold as quickly as they thought it was going to, we would much rather work that out with the borrower and get that note back in performance. So if that's an extension on the loan at the same rate, whatever they need, if they need a bit more capital, and there's a compelling reason that's the route that we're going to take before we go into full default and then take over.

How, if you don't mind me asking, like, how often does that kind of case scenario happen? Like, especially like in, in your experience.

Yeah. So we can talk about our historic experience of 4,000, you know, plus loans. I think we've only taken over a dozen properties in almost 10 years of doing this over those thousands and thousands of loans. So it's very, very rare. Historic default rate is 0.4%, so, you know, way less than 1%, whereas the industry average is 3 to 5% also.

Okay, so what are some of the other kind of benefits of investing in a note versus like either just buying your own properties or another things in real estate as well. Like what is of the reasons why. I'm just curious again, you mentioned some of the Big ones, obviously, the high returns, the fact that it's, you know, the security and it's collateralized against the property. But what are some other reasons why people might be interested kind of investing in this type of product?

Yeah, people typically are investing in notes a. Because of the passivity. Right. You're looking at, you're not having to install toilets or hire somebody to install the toilet. You are, you're just getting paid on the work that somebody else is doing. So it's harder and harder to find deals that pencil right now because of interest rates. And if you're in a very localized region, maybe you're only familiar with the area around you. And if that area is not somewhere it's easy to make a deal happen, you're a little bit stuck, potentially. You're sitting on some capital and there's nothing for you to go buy that's going to work. Whereas because we lend nationwide and we have really qualified borrowers all over the place, there are tons of markets that are still working and you can basically, you know, go find a professional flipper that we're working with and ride their coattails. They're finding great deals, off market deals. And you say, all right, awesome. You do the hard work. I'm gonna finance this for all intents and purposes and take all the upside of, of the return. But you're not having to be very active in it. Secondly, it's just a lot more liquid. Whereas if you're actually locking up capital, whether it's into a equity play or just buying an asset, that's where it is. It's locked up. Whereas these notes are typically, again, six to 12 months. But you can invest in a note that's been in performance for some period of time. So you could put your money into a note that' exit in three months, so it can be a very, very quick hit. So you're sitting on some capital, you don't want it locked up for two or three or five years. You can put money to work at a very predictable pace for a year and then take your capital and either reallocate it if you choose to, or go put it into some other asset if something else comes up.

I always tell the story, Nate, of like my. My very first investment in real estate. And I talk about it. People have been. My conference have talked about it. It was actually in a note like this. And so it was. It was really cool to see the returns come in and feel like, hey, this thing is actually working from a real estate perspective. And there's Steady returns and that kind of launched everything for me. So I understand the benefit of this type of investing. One of the downsides to it that again I've noticed is, you know, there's some, when we talk about real estate, we talk about some of the tax benefits that's available to real estate investors and things like that. Can you talk a little bit about the tax side and then also what you guys, what maybe some investors do to kind of mitigate that downside, I'd say of investing in notes and the, the tax benefits and things like that?

Yeah, I think that that's fair. I mean the, it is regular interest income. Right. So I would say that your typical viewer is probably a high net worth individual, probably taxed a high, at a high clip. So you're paying that, that, that burden against this income as well. You can mitigate that by investing through a self directed ira, which is what lots and lots of our, our, our customers do. So they're, they're taking, you know, potential retirement savings and investing that, that's obviously deductible against your income on the front end. And then it's not a real product right now. So I guess I'm, I don't really want to talk about it yet, but we are launching a new fund this year that will be a reit. So there'll be, you know, sort of the pass through tax advantage there.

Awesome. Yeah, I mean again, I've invested in debt both, both, you know, inside and outside of kind of these tax protected accounts. And I'd say the fact that they're, it's just completely passive for me has been a benefit either way. I know that there's probably ways to optimize tax treatments. So people should definitely, if they're interested in this, look into the different options, figure out what works for them. But again, the beauty of all this stuff for me especially as like you mentioned, it's like liquidity, the returns and of course the fact that it's completely passive. So definitely in real estate that's a, that's definitely a bonus. Let's talk about the market a little bit. I mean like you've been in this now like I said, Aloha's been in the game for about 10 years doing this and they probably seen some ups and downs in the market and especially what's going on the market today with inflation and interest rates. Like how has that impacted the overall market that you've been in in terms of notes? And then where do you see this going from here?

That's A good question. Yes, we've absolutely seen the ups and downs over, over multiple years. You know, we, we operate from a place that, that we're not looking to lose anybody's money, including our own money. Right. So rule one, right? Don't lose anybody's money. So rather than chase the highest returns and fancy flashy returns throughout the ups and downs of the market, I think we've been very sort of consistent and steady. And frankly, in a low interest rate environment that we had four or five years ago, that means that your return is going to be lower. If you were investing in the same kind of product, maybe you would have been looking at, at an 8 or 9 or 10% return, you know, four years ago, which is still a great return. But you know, it was an effect of the very, very low interest rate environment. Whereas now as, as rates have come up and you know, no matter what the Fed does, we're not getting back to 2 or 3% anytime soon. So I'm sure everyone is pretty aware of that. But you know, rates are going to stay relatively high for the foreseeable future, I think. So that's just going to be reflected in great returns to passive investors. So, you know, that element of, affects the market certainly, whether the, there's as much transaction, you know, transacting going on, there's maybe fewer deals. But at the same time I've learned anything about real estate investors. They're very resilient bunch and they'll find a way to, to make it work. They'll find deals in, in any market, wherever they have to go and find it. Because that's an important thing in that the notes that we originate that investors can invest in, these are not investors to even be on the platform and to originate one of these loans with us, one of these higher leverage notes on the swell investments platform, we call it, you have to demonstrate that you've done 10 plus loans in the last four years. In a similar asset you've executed over and over. You have high fico. So these are primarily professional flippers. They're not going back to their day job as a science teacher or whatever they were doing previously. This is it. So come hell or high water, whatever the interest rate environment is doing, whatever the market is doing, they're finding deals, they're looking for deals to cash flow. And maybe they're less profitable than they were at some point, but they are still finding deals because this is what they do.

I mean, it's awesome. It's interesting. Yeah. In this market, when things are Changing and things going back and forth again.

You're.

Yeah, it's been, it's been interesting to see what's happened in real estate. And again I think like you mentioned, there are opportunities at every part of the cycle. And so people just have to be open and educate themselves, put themselves in the right community, find these opportunities. And definitely investing in these notes has been something that's been a part of my portfolio personally. And so it's been great to connect with you guys on that. Like so if somebody was just, I mean first of all you probably a ton of education on the topic. I hope that people when they're listening to this, they have a better idea of what node investing is, what the other side is, what they're able to get in in terms of a product, what they should anticipate, maybe even some of the things they need to do for their own due diligence in this own space themselves to understand what's a good option and what's not and you know, what they should expect from a standard from you know, investing in notes. So just curious with you guys in particular with Aloha, like what's an opportunity for them to get in? And I would just love to hear like what are some of the minimums? Like what type of investors are you know, allowed to invest on the platform? And if you don't mind just talking a little bit about that.

Yeah, absolutely. So we really try to offer something to every investor. So we have options for accredited and non accredited investors. So our Aloha Limited Income fund is available to accredited investors. A $50,000 minimum buy in, no lockup period. It's returning roughly 8% annualized return. But that's a, an amalgamation of all the mortgages we hold in our portfolio at any point. So it's diversified over all, you know, any hundreds of notes at any given point. More specifically the, the swell investments. No platform, you're investing in one or as many notes as you would like. But I would say a typical investment from an investor would be be say a hundred thousand dollars spread over two or three different notes. It's a twenty five thousand dollar minimum in any note. But if you come in with let's say you know, a hundred thousand dollars, you can say okay, I like this deal, I like this deal and build yourself your own little mini portfolio. Depending on, you know, what your, your risk tolerance is, what your strategy is, whether you're trying to get the greatest return, you're whether looking for maximum liquidity, whether you just like certain regions, maybe you Live in Ohio and you're like, I want to invest somewhere I could potentially go and drive to this investment. Like, great, we can find you notes in Ohio and you can spread your money and diversify it over multiple borrowers in that market or spread yourself across the entire country. But for the notes platform, you do not have to be an accredited investor. Again, twenty five thousand dollar minimum and it can be as turnkey as you want it to be. You know, again we're high touch companies. So you can call me up and I'm happy to walk you through the platform and show you what's there. And I'm not here to act as a economic advisor or your personal wealth advis advisor. I can show you what we have and I can tell you the pros and cons of it. And of course it's up to people to, you know, in the end make their own decisions. But you know, you can lean on the fact that again, we've done the due diligence on these, on these loans. Our money is already out the door. We've decided they, they're great deals and we've underwritten and originated them so we're fully exposed to that deal right away. So you can, you know, we're not, we're not selling our dogs here. These are all great notes that are in performance and, and you can sort of trust that we've already done that work on the front end spend.

Oh, so what's a great place for people to reach out to you? How do they connect with you?

Yeah, the easiest place is to go to Swell Investments and you can click on Contact us through there and, and find me directly. You can give me a call. We can book a time to do a video call. Really whatever works for you. And then generally from our Aloha Private Lending, which is our lending platform, it's just a aloha private lending.com that's going to show you the entire gamut of notes and, and loans that we offer. And you can also contact us. So we say Swell Investments is powered by Aloha Private Lending.

Ah, okay, got it, got it. I mean, Nate, first of all, thanks for being a part of our community. I know that you guys been part of the PIMD community for a while. We had you speak at pimdcon. People have connected with you people. A lot of members of our community have put their trust in you and you guys have done a fantastic job. So love how you guys always lead with education. And then of course you're, you guys are completely approachable. And actually somebody we can talk to. So I want to thank you for this. Appreciate your time. Time. I think we've learned a lot about node investing and if people are interested in this, they should definitely reach out to you to connect with you to find out more. I think you've already given the information on that, but we'll also have access to that. You know, we'll put links wherever. Again, these podcasts are and around the show notes so people can connect with you. Nate, thanks for your time. Really appreciate it. Let's talk again.

Yeah, I appreciate your time very much. We'll see you at pimdcon this year in Dallas. We're looking forward to it. It's always great to connect with you face to face and the members of the community. And yeah, anytime they want a little more information, please reach out Aloha Capital, Aloha Private lending dot com.

Okay, thanks so much.

Talk soon. Bye.

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