Denis O’Brien [0:37]
Welcome to Episode 214. Bob from Aspen. Hey money clan, a very warm welcome to the Chain of Wealth podcast. I’m your host, Denis O’Brien.
Katie Welsh [0:50]
And I’m Katie Welsh.
Denis O’Brien [0:51]
So Kate riveting conversation we had with Bob Fraser today, all about residential mortgage notes.
Katie Welsh [1:0]
All I can say is my eyes were so big, there’s entire conversation. And I admit I was pretty quiet because I was just taking it all in. It was a big learning conversation for me.
Denis O’Brien [1:15]
Yeah, so for anyone that doesn’t know a residential mortgage note, it’s kind of just like a mortgage. Right. So it’s looking at it from the perspective of the bank and whoever owns the debt and you’re able to buy and sell these notes, which is quite an interesting thing. If you think about it, you can buy and sell someone else’s mortgage while they still have it and they’ll just keep paying whoever owns the note.
Katie Welsh [1:39]
It is definitely a different kind of scenario, but very worthwhile to know.
Denis O’Brien [1:46]
Yeah. And in today’s episode, we’d really do a deep dive with Bob and he explains all about that, and a lot more. So just before we jump into today’s show, we’d love to know how your week is currently going. Hit us up on Instagram. It’s @chainofwealth on Instagram. Let us know. And Kate,
Katie Welsh [2:4]
I’m ready to dive in.
Denis O’Brien [2:5]
Fantastic. Lets do it!
Voice Over [2:7]
Welcome to Chain of Wealth. Here’s your host, Denis inspiring you to begin your journey of financial freedom.
Denis O’Brien [2:21]
Bob Fraser is on a mission to help investors take advantage of one of the most effective and overlooked avenues of real estate investing, residential mortgage notes. As a founder and principal of Aspen funds. Bob has purchased more than 1000 mortgage notes. Earning double digit annual returns with out the risk and volatility of traditional investing options. Welcome Bob.
Katie Welsh [2:44]
Welcome Bob.
Bob Fraser [2:46]
Hey, great to be here, guys.
Katie Welsh [2:48]
Yeah, so Bob, we talked a little bit about you before the show. But I wanted to ask you a quick little brief introduction for all of our listeners.
Bob Fraser [2:58]
Yeah. Well, I started as a computer scientist, worked as a programmer for many years and then in the late 90s, started a tech business and we caught the wave, raised $44 million in venture capital and grew up, you know, to about 300 employees had a crazy growth rate, you know, we were we were doubling every three to four months in revenues.
Denis O’Brien [3:22]
Wow.
Bob Fraser [3:23]
And I end up winning the Ernst and Young Entrepreneur of the Year award in 2000. was kind of a big deal, and then then got caught in the crash the .com crash, we didn’t get our IPO out fast enough, and learned a ton of lessons in that whole scene and really got a, got a financial education. And then became a professional trader for a while stock stock trading, trading portfolios, very successful doing that, and started a hedge fund in 2008, which turns out to be just the wrong time. lost everything again. So the stock market is kind of been my bane. And in 2012, I met my current partner and we started in real estate notes. And he also lost everything into real estate crashes. So we’re both, you know, kind of coming off that experience and wanting to do something that is really, you know, didn’t have the same risk profile as the stock market, which really, you just don’t control any of it. And, you know, so wanting to we thought there was an opportunity to do something much more much better and much, much safer.
Denis O’Brien [4:34]
Right, residential mortgage notes, what exactly is that for anyone that doesn’t know?
Katie Welsh [4:39]
I just thought, can I just jump in there? Because I’m really glad that you asked that because I was thinking, I’m not 100% sure I know what a residential mortgage note is.
Bob Fraser [4:51]
You probably you probably pay one every month. But so when you buy a house, you take a loan, that is a residential mortgage note. And what happens is the banks sell these, you probably got a notice in the mail from time to time says, Well, don’t send your money here, send it there. And that’s because that note was purchased by someone else. And all the fine print goes with the new buyer. And that’s exactly what we do. We buy mortgage notes. So it’s very similar to owning real estate. I was actually a landlord for a while and you know, I’m allergic to rental real estate just had such a bad experience. And I love being a leanlord. So I’m I buy these notes from banks and hedge funds and other financial parties and I collect mortgage payments every month, just like some people collect rent, and I send those to my investors. So it’s, it’s far it’s far more scalable it’s far more, you know, like in wins last time you called your banker because you had a plumbing issue or a roof leak, you know. So it’s just, it’s just much less work and much higher yields if you if you do what we’re doing.
Denis O’Brien [6:14]
Right, so it sounds a little bit similar to what happened in 2008 with a whole bunch of you know, the big investment firms buying and selling these mortgage backed securities and they would collateralized them and do a whole bunch make a big pull and stuff. So is what you’re doing. A little bit similar to that in some respects, or are you more on a only certain types of notes you want to invest in? Like, how does it sort of work from your end?
Bob Fraser [6:37]
Yeah, we buy all of our notes individually. So what they were doing was, you know, the people who were originating those notes, were not holding them. So there was a huge amount of risk there. And then they managed to manage to get them rated very highly, which was, which was basically through, you know, little, little financial wizardry, that was not true. And so that was it’s really very different. What we do is we buy mortgages, for example, trouble debt restructure. So this is where this is where, for instance, a person may they get a loan, they have trouble paying that loan. They work with their bank, and they modify that loan, changing the terms, this kind of thing. Then what happens it sits on the bank’s balance sheet for a while they collect those payments, but it is always a bad loan from then, even if they’re paying, even if it’s a good property, it’s still a bad loan. And they’ll sell those at deep discounts where we buy average about 50% discounts. So, you know, you know, I’ll give you an example of a note we buy. It’s a better hundred thousand dollar property in upstate New York. So it’s a little tiny house, upstate New York worth about 100,000. He owes about 100,000 on it, as it as a loan for about 100,000 he pays it’s a 7% loan, so he pays, you know, 400 and something dollars a month to us, but we only paid 50,000 for that note. So how do I how am I going to lose money on that? It’s going to be very, very difficult, even if you stopped paying me, you know, and I have to foreclose, you know, I’m going to end up clearing 75,000 So the bottom line is I’m getting $400 a month, every month, but because I only paid $50,000 note, it’s not 7% yield, it’s actually a 14% yield to me. And because if he refinances or sells the house, I actually get paid 100,000, not 50,000. So actually make I double my money. In that case, it’s kind of a perfect little investment is what it is.
Denis O’Brien [8:49]
So in your scenario what happens to the other 50,000? Like surely someone bore the brunt of that loss?
Bob Fraser [8:57]
Absolutely. So the bank sells it when they’re, you know, the bank is the bank that’s that originated it took the loss. So generally, all these loans are written down by the banks. All these loans. That’s exactly right. So they wrote it down. Banks are actually penalized for having too many of these kind of loans on their books. So they just get rid of them after a while, and they sell them off to to folks like me.
Katie Welsh [9:23]
So how risky are these kind of investments?
Bob Fraser [9:30]
Well, it’s real estate. So what’s the risk? You know that that house could go down in value? I mean, there’s a there’s a couple risks. One is that housing prices go down again. And the other is that, you know, the borrower stopped paying. But as I just pointed out, if the borrower stops paying, I actually make more money than if he did pay me because as long as that house holds its value or, or even a little bit, the other risk is if that house goes down in value, and let’s say it drops 35% of its value, like, like, what happened in 2008? Well, I mean, the house was now where $65,000 why I’m still only paid 50 for my note. So the bottom line is, you know, that’s why we love this. It’s kind of bulletproof. I mean, there’s no guarantees, nothing is risk free, but it’s a pretty good risk reward scenario. And it’s it’s a very inefficient market. These Kind of notes and we were able to buy them at just really very good deals. We do have an expertise and working with borrowers that are having having trouble. So it is a core expertise of ours. We’re actually very busy. A lot of our loans are a lot of work, but we don’t mind doing the work, whereas the banks are literally don’t really want to do that kind of work. So we earn the you know, we earn it, but it’s not super risky. Here’s the other reality. Okay, so this guy is paying $400 a month p&i payment principal and interest on this and insurance taxes and insurance, think it’s about $550. With the rent on that property is about 800. So where’s he going? I mean, if he says, Hey, take this property, you know, the end of the day, he’s gonna end up paying more in rent, so it’s actually a better deal for him and one of the key metrics we use when underwriting is paying attention to the loan payment versus equivalent rent. So again, we’re store buying stuff that is very, you know, very sticky, generally.
Katie Welsh [11:35]
So from what I’m understanding, I just want to recap quickly, because all of this is new to me. So it’s a relatively safe investment class because there’s not as much of a fluctuation as there are other types of investing for real estate, correct?
Bob Fraser [12:26]
That’s right. It’s, it’s a real estate is a piece of property. It’s a single family home. And, you know, that can fluctuate but
Katie Welsh [12:5]
Right.
Bob Fraser [12:6]
You know, again, I’m I’m the bank. So, I mean, you realize during the financial crisis, do you know what percentage of mortgages, what the delinquency rate was and mortgages at the peak?
Katie Welsh [12:18]
I don’t know the exact number but I do remember driving around town and seeing a lot of foreclosures, foreclosure signs.
Bob Fraser [12:26]
About 5%. So even if I wrote off 5% I’m still I’m still actually, you know, I’m still making good money, but I’m not writing off 5% my default rate is actually around two or 3%. But my recovery rate is actually positive, meaning that if they default, I actually make more money. It’s actually, you know, actually I’m able to fully recover my losses.
Denis O’Brien [12:51]
Is that because of like PMI that kicks in and then they settle the loan or how do you do that?
Bob Fraser [12:57]
Well, for example, 100,000 dollar house I paid 50,000 for it my end up having to foreclose, which I hope I never do, but we end up having to do it once in a while. I sell the house for you know, 85,000 and, you know, my net, maybe my net takeaway $80,000 Well, again, I only paid 50 for the note. So actually make a $30,000 profit.
Denis O’Brien [13:22]
Right. Cool. So like, How much money do you typically need to invest in this kind of an investment class?
Bob Fraser [13:30]
Well, you probably want to buy more than one note so you probably need a few hundred thousand dollars minimum to buy these notes and you know, of course depends on the on the property and depends on you know whether you’re going first law first liens or second liens.
Denis O’Brien [13:46]
Cool and your fund exactly Aspen Funds, how do you help investors sort of invest in real estate and stuff?
Bob Fraser [13:55]
Yeah, well, we have a we have an Income Fund that’s been open ended fund, it’s been operating for eight years. And we buy we pool the money, we buy these mortgages and we pass pass the earnings back to investors paying 8.5% per year and we send a check monthly, cash. And in addition, a portion of the profits above the preferred return is also returning ends up being another half percent or 2%. So it’s very high, very high, high return. You know, I said, we started this eight years ago and I had a, I had a friend who knew my experience in the stock market and he came into a settlement and just trying to earn income and raise money for to pay for his family. And he said, Bob, you’re, you know a lot about the stock market, what can I buy, you know, to earn income, I want to make a living off that. And I looked at him and I said, Good luck, buddy. You know, I mean, you know, if you’re out there shopping for income investments in the public markets, it’s just, there’s nothing good. And, and I thought, you know, I mean, for, for example, popular investment is EQR, which is a real estate rate 3.5% return, but do you know in since 2000, it’s has seven drops of 20% or more, and two of those were 50% or more, can you imagine you lose half your money in order to get a three and a half percent return. That’s the kind of stuff that just give People heart attacks.
Katie Welsh [15:30]
Yeah.
Bob Fraser [15:30]
And, you know, I thought, you know, I could put together knowing what I know, in the mortgage industry, I could put together a fund that would solve his problems. And we that’s exactly what we did. And he became our first ambassador.
Denis O’Brien [15:43]
Yeah, so really interesting, you know, space out there. And like you said, the nice thing is with real estate is that it is a physical property. And you know, like, at the end of the day, people always need some way to live. So
Bob Fraser [15:55]
That’s exactly right.
Denis O’Brien [15:57]
Long term. It’s definitely not a bad asset class to hold.
Bob Fraser [16:0]
That’s right.
Denis O’Brien [16:1]
So I got another question for you and one of the podcasts booker, I like just chatted to us a little bit, and they gave us some information about you and I believe you’re, you believe that, you know, there’s a huge like anti dollar crowd right now. I’d like to get your thoughts on that and like why you think they’re crazy as such?
Bob Fraser [16:22]
Well. You know, it’s seems to be there’s just a lot of money being made and dollar crash protection kits, I think you know, and you know, the gold crowd and other other crowd, but people are are just really, you know, thinking that the dollar is going to crash. And so I’ve done several I’ve published economic newsletters for several years. But you know, the dollar I actually said in 2013, the dollar is going to be one of the strongest currencies in the world for the next 20 years. And, you know, so I think you don’t you don’t really want to bet against America, you don’t really want to bet against against the economy. And, you know, the dollar is still the world’s strongest economy. You look in in the in the Euro land, they’re offering negative interest rates, a lot of money is going from Europe to America. You look at the Euro, they’re very, they’re very easy money policies, they’re printing more currencies, same with the Chinese one. So so the dollar is going to be very strong currency and I don’t think people should be worrying about that. And you know, generally, I think fear is a bad idea. For your Yeah, for your pocketbook.
Denis O’Brien [17:34]
Yeah, definitely. So what are your thoughts then about, you know, the whole concept right now that everyone seems to be on that the next recession’s coming the next recession’s coming the next recession’s coming everyone is sort of like Heebie Jeebies on the stock market’s almost back to an all time high. And, you know, like a lot of people are naysayers at the moment, so I know,
Bob Fraser [17:56]
I know, and I just, I just published my latest economic roundup and, you know, which we can give to your to your listeners in the show notes, if they’re interested. But there is not going to be recession in the next two, three years. And I based that opinion on, you know, research I’ve done on in a few areas. But if you look at for example, the unemployment rate is hitting record lows. What’s not being published is the fact that the unemployment rate is hitting record lows both in Africa amongst African Americans literally all time, low 50 year lows and Hispanics. Well, this means people are going back to work well, people that are going back to work, are generally going to start spending money, they’re going to buy a car, they’re going to buy a new coat, they’re going to go out to eat. And 70% of the economy is consumer spending. So if the consumers have money, and number two, they’re optimistic, which they are. That’s a record optimism right now. They’re going to be spending money. And I look at not just the headline unemployment, but broader unemployment measures, because they’re really the ones that tell whether people are having money and they’re spending money and they’re all very, very strong. Bottom line is when you have consumer optimism like this and you have you know, unemployment rate hitting new lows, it’s it’s happening, you know, your economy is going to be strong. Now, the economy and the stock market are two different things. Right. You know, I think the stock market is limited upside from here. But I also think it has limited downside. I think it’s gonna be very volatile.
Denis O’Brien [19:35]
Yeah, definitely an interesting space. And, you know, I couldn’t vacuum all consumer confidence right now. Like, I’ve been watching the latest earnings on this last week and I saw that chase reported, and they had a really, really good quarter. And they were just saying that, you know, people are spending money, they’re making money and they’re spending money and they feel good. So, it’s definitely a testament to, you know, how confident people are right now. And, you know, now with the holidays coming up as well, like, you know, there goes some more spending.
Bob Fraser [20:7]
Yeah, it really is time to be to be optimistic. It’s time to be in the be in the game. You know, again, the stock market. You know, one of the things I did is I I tracked, you know, the stock market looking at key ratios, and what was the future earnings add for every month of history. If you bought it month what was the 10 year earnings? And by PE ratio? Well, as you might imagine, the higher the PE ratio, you know, the more expensive and more expensive the stock market is. In other words, the less likely you’re going to make money on it today’s PE ratio, you can be expected earn about 2% per year for the next 10 years in the stock market. If history is any indication, which I believe it is, but, you know, So bottom line is I don’t believe it has it has a lot of upside. But also I don’t believe it has a lot of downside. If you look at you know, why is the stock market going up? Well, the one of the biggest purchasers in the stock market right now, in fact the biggest purchaser in the stock market is stock buybacks. And so it’s companies buying their own shares and they’re buying billions and billions of dollars worth of shares. Well, the last thing you want to be do is betting on the market going down when you’ve got the 800 pound gorilla buying shares, so on and you know, so it’s just not something you want to be you want to be betting against the market. But I’m also a lot not going to be, you know, putting a lot of money in the stock market.
Denis O’Brien [21:37]
Yeah, definitely makes sense. So going back to mortgage notes, I wanted to ask like, how liquid are they. So say, for example, someone listened to this podcast has got 50 k laying around and they want to buy some mortgage notes. They put the money down, like how easy is it to sort of get the money back? Do you sort of have to wait until something happens or how can you quite easily sell to someone else.
Bob Fraser [22:2]
There are a number of exchanges that are out there that allow you some liquidity. So you could use to probably think of it like a home, like a house. You know, it’s it’s some work to sell it and you know, you may be sitting on it for a while. What we do because we have hundreds of notes in our fund, we end up having about about 8 to 10% of those notes pay off every year. So literally someone sells their house or refinances. So there’s kind of a natural a natural liquidity they self liquidate, you follow me, but you never know when
Denis O’Brien [22:37]
Right.
Bob Fraser [22:38]
So it’s like your house suddenly sells itself one day, but you never know when it’s going to sell itself. You know, it is. But it’s good for us. Because we have because we have so many notes. We allow our investors to get their money back on a quarterly basis. So it affords us an internal liquidity that we can pass on to our investors. So yeah, I think it’s, it’s a really great deal. You know, then you go shopping again, we go shopping every quarter. For more notes, you know, take that cash and redeploy It.
Denis O’Brien [23:12]
Makes sense. So someone that doesn’t invest with you. It’s obviously like your fund that purchases all of these notes. Correct?
Bob Fraser [23:18]
Right.
Denis O’Brien [23:19]
So they’re effectively buying a pool of notes.
Bob Fraser [23:22]
That’s right.
Denis O’Brien [23:23]
Right. So yeah, even if like one or two are liquidating, it’s not the end of the world as such enough to go refinance it or go get new note immediately because you got a whole pool of stuff that’s still in the game.
Bob Fraser [23:32]
Correct. And generally see I look forward to those liquidations because each has a profit. You know, because I bought it a discount. When I get paid off, I recover all the discount. So if I bought a note for a, you know, $100,000 for $50,000 and he he refinances I get paid $100,000. So it’s a it’s a profit, it’s a it’s high five time and then we you know, go shopping with 100,000 instead of 50.
Denis O’Brien [24:0]
Makes sense. Bob, just before we dive into the value link round, do you want to give a 30 second elevator pitch for Aspen funds?
Bob Fraser [24:9]
Well, sure we have a growth fund and an Income Fund. The growth fund is using a different strategy of distressed residential mortgage debt and creates outsized returns and the Income Fund is an evergreen fund. Is it been operating for seven years pays pays eight and a half percent returns Cash on monthly basis and and offers investors liquidity and all of this without volatility and without the the you know the Heart Attack of the stock market.
Denis O’Brien [24:42]
I love it. Money clan we’re just going to take a quick break and then we’ll dive right back into the value link round. Kate art only used to be available to people that were uber uber wealthy rich, you used to think of people with their you know like they made millions of the stock market and then invest in art, but our sponsor today Masterworks allows people to invest in art that aren’t at that point yet.
Katie Welsh [25:4]
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Denis O’Brien [25:25]
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Katie Welsh [25:57]
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Denis O’Brien [26:1]
I’m so glad you asked. So you can head on over to chainofwealth.com/art. If you use that link that’s chainofwealth.com/art. You can bypass the waitlist of over 17,000 people and you can sign up today so definitely check that link out chainofwealth.com/art.
Katie Welsh [26:23]
Okay, Bob, so we’re curious to know what your savings or retirement plan looks like?
Bob Fraser [26:59]
My savings and retirement plan?
Katie Welsh [26:34]
I imagine not in the stock market too much.
Bob Fraser [26:38]
It’s not I’m actually I’m actually a fan of the, the insurance companies, you know, and using whole life policies and the infinite banking concept I actually, if you’re familiar with that at all, but I do that and also heavily investing in my own business is really my retirement plan.
Denis O’Brien [26:59]
Love it. So what is that infinite banking thing that you spoke about?
Bob Fraser [27:4]
The Infinite banking concept is very, very cool. It’s the idea of using a whole life policy with cash value from a mutual Mutual Insurance Company. And what they do not only do you get life insurance with these, but they’re also a savings and investment account. And what you do is you can borrow from this from the cash value of this account. So let’s say you over five years, you pay in you know, $25,000 worth of premiums, well you can borrow back $25,000. And you can do it, in essence, borrow from yourself. And the idea isn’t you go buy a car, you borrow the money from yourself, you pay yourself the monthly payment for your car back into your insurance policy. And so it’s a way to collect insurance interest rather than pay it. So it’s a very good deal. Plus it has the whole life insurance component. So I’m not I don’t sell that stuff. I’m not an insurance agent.
Denis O’Brien [28:2]
Right.
Bob Fraser [28:2]
I’m just a user of it. But they’re they’re just fantastic plans. And with Rook solid investment, you know that a lot of commercial real estate is in these these companies and they generally pay you know, 4 or 5% which is not bad in today’s world.
Denis O’Brien [28:18]
Yeah, definitely. I’ll have to check it out. So do you have a favorite book that your into?
Bob Fraser [28:23]
Favorite book. Oh my gosh, I just just finished Snowball by The Warren Warren Buffett biography that was absolutely fantastic. So definitely everybody should should read about Warren Buffett.
Katie Welsh [28:39]
And that was called snowball?
Bob Fraser [28:41]
The Snowball Snowball. Yes.
Katie Welsh [28:43]
Awesome. So do you have a favorite quote that you try to live by?
Bob Fraser [28:48]
Okay, here it is. You ready?
Katie Welsh [28:50]
I’m ready.
Bob Fraser [28:50]
A good plan violently executed now is better than a perfect plan executed next week – George Patton.
Denis O’Brien [29:28]
Bob we absolutely loved hanging out today. Do you have any last parting piece of advice for our listeners and then we’ll say goodbye.
Bob Fraser [29:6]
Yeah, don’t don’t ever listen to fear move forward in your dreams and and learn from Learn from your mistakes and advance every day. So appreciate being here with you guys. It’s been amazing. Love the podcast love it.
Katie Welsh [29:20]
Thank you so much are so glad that you are able to swing by in a tell us all about Aspen funds.
Bob Fraser [29:28]
My pleasure.
Denis O’Brien [29:30]
Thanks, Bob. Money clan we been hanging out with Bob Fraser you can check out his website, its aspenfunds.us . And definitely check it out and figure out if these residential mortgage notes are for you.