KSS 41 | Note Mutual Fund

 

Did you know there is now a note mutual fund that you can invest in? TJ Osterman and Rick Allen from Paperstac have been investing in real estate notes, and together they’ve created a special fund that enables people to invest in the note business in a completely different way. TJ and Rick have changed industries for Paperstac, and they’re going to change it once again through this fund that looks at the other side of the business and helps people stay in their homes. In this episode, find out more about the Money with Meaning Fund and how it’s a perfect fit for any investor out there.

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Profit With A Purpose Through A Note Mutual Fund with TJ Osterman and Rick Allen

I’m coming to you from Paperstac. If you are looking for inventory, they’ve got it at Paperstac.com. I’m here for a different reason. The guys at Paperstac that have been investing in real estate notes for a couple of years have put together a new fund. I wanted to put special attention towards this new fund because I think it’s something very special. It’s going to enable people to invest in the note business in a completely different way. It also has a very good feel good about it because the whole purpose between these funds is to help people stay in their homes. That’s our focus now and we’re going to jump right into it. I’m joined by Rick and by TJ.

Kevin, how’s it going?

Kevin, thanks for having us.

I’m psyched to be here because I think this fund you put together is going to be something special. You’ve shown that you’ve changed the industry for Paperstac and I think you’re going to change it once again through this fund. Before we get into the actual fund, which is called Money with Meaning Fund, go into your history a little bit about the experience that you have in funds leading up to this.

To start with, we got into the industry as a way to buy houses cheaper. When we started doing this, our first deal was $90,000 in debt and we paid $8,400 for it. We loved it. Along the way we, we had a little education and we started learning about the performing side of the business. We discovered the actual feel-good side of it. When we went ahead modified someone’s loan and allowed them to keep their property and to have them crying on the phone with us was pretty amazing and we said, “This is great,” we started to look at the other side of the business.

If your investment is just for profit and not underpinned by any social responsibility, it's not going to attract as much investment. Click To Tweet

It was us as we started in the mortgage note business. As Rick said, we were real estate investors and we got into the mortgage note business by just looking for inventory. What we did is we started getting education. That’s where we met Kevin. Every time we would go to a case study or we heard case studies, nobody was emphasizing the ability to have profit and purpose on both sides. There’s a great ability to make a lot of money in the mortgage note space, but because you’re able to make a good amount of money in the mortgage note space, you’re able to also do something good for a little bit of purpose. We decided to actually take that strategy and implement it. We changed that strategy and we decided, “Is this going to scale?” After doing about $6 million under management, we decided yes. That’s why we chose this more structured fund.

A few years ago, you had a type of fund that accredited investors could invest into. That means you have to meet a certain criteria and such. You are able to raise capital, go out, buy notes and work out most of the notes or do you got some performing notes as well and then start to pay the investors back on an annual basis? Is it the typical type of fund that you did back then?

That was typically it. It was all accredited investors. They would come in and they would reinvest their distributions and kept rolling it and building. We were doing well. They liked the returns so they said, “Let’s just keep it going.” When we decided to pivot and open up this structured fund, we wanted to offer the ability for people to invest in these notes, not just to accredited but to non-accredited too. More directly we thought it would be great if the same people were helping to save their house, had an opportunity to invest in something that typically never would happen. They can go ahead and help themselves, but they can also help their neighbor by investing in these funds. For us, that was one of the real driving factors. It’s like, “What a cool story that is.” Just to open something up to just the non-accredited investor in general.

That type of fund wasn’t even available. Was it to non-accredited investors? It wasn’t even there. If it was, it was very limited. It only has 50 or 75 people.

It was actually The JOBS Act that came out and restructured the Regulation A+ Tier 2 offering is what the SEC calls it. It’s a type of fund to where we can generally solicit non-accredited and accredited investors without having to register and selling these securities in each state, which is a huge ability for people like ourselves who don’t have hundreds of millions of dollars to be able to go out there, promote this mission, promote this asset class and be able to take investment from everybody.

KSS 41 | Note Mutual Fund

Note Mutual Fund: The Money with Meaning fund offers the ability for people to invest in notes, not just to accredited but to non-accredited, too.

 

The A+ fund, anybody can just create one of those right away.

No, I wish it were that easy. It’s been 24 months of working on it, constantly refining and making sure. We do have to go and submit everything to the SEC. They have to look at it. You’re not going on to Legal.com and just spinning out the paperwork and you’re like, “I’ll do it Friday, have it by Monday and I’m good to go.”

That’s why I wanted to point that out, but when you’re in investing in a fund like this, this is something in two years bringing you to this point. Along the way, there’s disclosure after disclosure and attorney after attorney to make sure this is all done the right way. I think people need to know that this is not a quick crowd-funding type of platform that’s done a little differently. This is a full fund. You mentioned The JOBS Act that enabled this where people can do it. You’re not even limited on how many accredited and non-accredited.

We’re not limited at all.

The only limitation on a non-accredited investor is 10% of their annual network or 10% of what they’re annually making is what they’re limited to invest on an accredited side.

The technology and the support is out there, and there are people who are actually working for the small investor. Click To Tweet

I know your minimums are almost ridiculously low at $200, but it enables them to do it, but they could do that every month. Could somebody get on an automated investment plan? Is that a part of that thought process as well?

That’s one of the beauties of this. We wanted to make something for these investors that might not have an investment plan and they don’t have $100,000 to do it for a retirement plan. Especially with the gig economy, all these people that are working odd jobs here and there. They don’t have a 401(k) or IRA. Something like this, we wanted to make sure that technology was able to handle people coming onto the platform and saying, “I want to invest $200 to start, but every month to take out $1,000 and we’ll see how things go from there.” They’ll up from there possibly.

Start with $200 and do $200 a month. I think that’s the key to start saving. You do a little bit at a time to where after the initial paying of that $200 going every month, you stopped thinking about it. It’s nice because it can be set up to automatically happen.

I like to break things down and simple. I’m going to say this, but I’m not saying this legally what this is. You can always envision this. It’s allocating a mutual fund. You’re buying a mutual fund that invest in these assets and the assets can be anything from performing, nonperforming and even REO properties that you’ll own a small part of, depending upon how many shares in this case or membership units that you own within the entity.

One of the things to look at is so many times I hear people say, “I’d love to start investing in real estate. I just have to wait until I build up my capital. I’d love to start investing in mortgage loans. I just need to build up my capital.” Now, you don’t have to worry about building up your capital. You can take $200 and throw it in there and you can be in the ballgame. You can start learning, investing, participating and not have to watch the good deals go by and know that you’re leveraging our expertise and the past several years of experience and jump right in.

KSS 41 | Note Mutual Fund

Note Mutual Fund: The first part of fixing the problem is to stop putting people out there who are in a situation where they need more affordable housing.

 

Once you get in with MWM Fund, what’s great is let’s just say you invested only $200. You’re going to be getting the newsletter from us and you’re going to be getting updates on new assets that the fund is buying. What direction we’re going in with these, why we chose that strategy. It can get you involved in this asset class and see the different strategies that we take. It is good to be diversified. You do want to hit those homeruns by buying a mortgage note yourself and run it through that way and look for those 30%, 40%, 50%, 60% returns. You also have something a little safe where you can earn up to 10% annually on your money this way. Our history of what we’ve done, we believe we should be able to hit that hurdle with no problem.

As you’re reading this, you can also go to MWMFund.com to read more about it and that’s a direction I want to head. We’ve established anybody can participate in this, they can do it on a monthly basis, regular basis or depending upon your expertise and your expertise is going to be very transparent. They’ll be able to look and see what funds that have been purchased in, why they were purchased. I love that part of it. The Money with Meaning, the whole name of the fund, when you guys created this one, you created something different than the initial funds that you had. This one went in with a whole purpose. Tell us more about that and why you wanted to do that. I know you touched on it a little bit, but bring it home as to what you want to accomplish with this?

We set out once we got a taste, “We’re making some money and we’re helping out. How can we take this and scale it? What should our mission be?” We sat around and came up with 10,000 family homes. That was it. Because at the end of the day, there are families attached to these mortgages. “Roof, Pillow, Blanket,” has been our motto. We want everybody to have a roof, a pillow and a blanket. There’s an epidemic going on with an affordable housing crisis. We look at it and say, “We would love to be able to go out and build more affordable housing, but the first part of fixing the problem is to stop putting people out there who are in a situation where they need more affordable housing.” If you can buy their loan and buy it at a huge discount like we do, you can work with them. You can give them that opportunity. Our first qualifying question is, “Do you want to keep your house?” Just about everybody wants to keep their house. You don’t ever run into it.

The kids have friend there, they go to school there and they’ve worked there. There’s a reason they chose that home. You guys can work on it and get this thing resolved a lot quicker than a bank would because you’re focused on them.

The problem with the banks and they’re not the enemy or anything, it’s just not their business model. It’s a very entrepreneurial type of business. When you’re talking about a smaller balance loan, it’s very hands-on. These big institutions, they’re not going to allocate resources or money to do so. It’s a very regimented process. At the expense of that are these people to where they have a house that’s $150,000 and the bank keeps selling that back and forth and they’re not able to get a resolution. The flip side, somebody that has a $500,000 house, that bank looks at that and says, “Allocate more funds and resources to that because our return on that is going to be a little bit better.” They are focusing on a single bottom line of financial returns, which is fine, we do that as well. We also pivoted a little bit and said, “Because we’re getting this spread, we can also manage this with a little bit different of a style for purpose as well.”

Invest more where your money works for you. Click To Tweet

The problem’s not gone. That’s where some people, depending upon where you live in the country, you might think, “We’re past the crisis.” For example, the three of us were talking about the industry and we all read a flag night’s report that came out. We were looking at Fannie Mae sales and looking at the states where there are states that have still 10% of 30 to 90-day late loans that are still in trouble. We saw the foreclosures click up by 11%. The crisis is not over in a lot of places and there are still a lot of people that need help. I think these opportunities zones are starting to help that as well. Is that part of the play of what you’re looking at in this fund?

The opportunity zones are huge. For instance, we were talking about Puerto Rico, the entire island is an opportunity zone. I don’t want to go into the rabbit hole too far on the specifics of an opportunity zone, what you’re talking about is huge tax savings. What that’s going to do is attract a lot more capital into these lower-value areas of the country. Because in the past, it was a low-income housing tax credit that you would be able to sell to be able to fund these affordable housing in general. Those are going away. Different vehicles are coming into play like this opportunity zone, which obviously points out the idea that there is an issue in these certain areas of our country. The values are not going up in these areas.

The rents are going up but the values are not.

What’s amazing is when you can go to somebody and their rent is $1,500 in their area. We can give them a $350 a month mortgage payment and still be showing a double-digit return to our investors and save their home. Right there is a little bit of a gap. That’s the niche that we fill in. One thing I did want to say about the Regulation A+ is we saw a change in the investment landscape coming. We’re in it to raise money because the money is what fuels this. Without raising money, we’re not going to be able to complete our mission. What we saw was a lot of people are starting to look into if your investment is just for profit and it’s not underpinned by any socially type of responsible investment. It’s not going to attract as much investment going forward into the future because a lot of changing of the guards is happening within family offices where the fathers are moving away and then their sons are taking over where their sons are Millennials. Their investment criteria is different. The landscape is completely changing and we’re in it for the long run. We’re looking at building something that’s going to continue on into the future. If this is our first fund, we’re going to continue to roll these out to.

You speak about those family offices or the endowments, there definitely have carved out a portion of their portfolio and said, “This portion of our portfolio is being directed towards the socially responsible, the purpose and profit, if you will.” We’re definitely coming into it at the right time.

KSS 41 | Note Mutual Fund

Note Mutual Fund: What attracts a lot of investors to the note space is because you can have multiple exit strategies.

 

Kevin, I want you to comment on this. If you were going to go into the ‘80s, ‘90s and somebody was talking about socially responsible to a businessman, they’re like, “That’s two different things here.” The funny thing is that nowadays, it’s not so tree hugger hippie-type of thing. You’re actually able to get returns and these ESG filter, Environmental, Social and Governance. It actually shows us a great risk indicator as well. There’s some different stuff for sustainability.

As you guys were talking about that, in my brain when Rick was talking about the social response, I’m like, “You didn’t even have those words before.” The whole thing wasn’t there. I agree with you. There are more people that are taking that into consideration with their hard-earned money. Let’s face it. People are out there are working hard. There are more people working, but where do you put it if you don’t have $10,000, $20,000, $30,000? That’s the other thing that they’re running into. This is a perfect type of investor for Millennials all the way up to people who are retired who don’t want to spend the amount of time. Maybe they want to buy a note or two themselves per year, but be able to own a portion of many notes under professional management with a very small investment. It’s a perfect fit for any investor out there.

The great thing is if I’m going in to buy one loan. If that loan has a negative outcome, it directly damaged my portfolio.

I’ve seen one deal stop somebody from not even investing anymore.

If you can take your money and put it into a fund that it’s spreading the risk among multiple loans, the chances for success, you’re basically hedging your bet. Because if one loan goes down and you’re like, “I know I’m not tied into one loan, I’m tied into 500 loans.” If you look at the aggregate of past success, you can say, “I’ve got a pretty good idea which way they’re going to trend.”

Kevin, we have some good timing on our side too because it’s all about timing and luck in the same sense and conversation. With the potential of a downturn coming in the market for our business, that’s huge because there is going to be, as they would call a lot of blood in the streets. There’s a lot of opportunity. There are a lot of people who need help at that point. We don’t want to kick more people out of their homes into an unaffordable rental market. They’re a bunch of homeless people because they couldn’t afford their mortgage at the time. There’s a huge opportunity there that we’re sitting on with the timing. We think that the up and coming possible correction, if we’re positioned in a good position and we have institutional style capital, maybe $50 million, $80 million, $100 million and we’re able to apply that towards the smaller balance loans and help these people out, we think we can start to make a good mark.

You talk about trends and timing and such, when you go back to the last crash, as you guys know I do a lot of research on all this and have all the stats and numbers. A big part of this equation was the banks finally figured out they can’t solve this problem. The government couldn’t solve the problem. It came down to the entrepreneurs. A lot of the bigger companies focused on the bigger deals. Smaller entrepreneurs were the ones who helped fix this whole housing crisis. The government puts in some new laws here and there, but for all intents and purposes, the hard work was done by the individuals. In fact, you mentioned Puerto Rico. It could be a microcosm I think in this scenario of what happened in the US. They’re realizing down in Puerto Rico that the government’s not solving the problem, the banks aren’t solving the problems and it’s going to require investors to solve that problem. The incentive might be opportunity zone, but it’s going to take people to go down there and get it done. I could see a great play for this to happen with that fund because you go down there with capital.

Another thing that you have to remember when you’re talking, people are probably thinking, “If it’s such a great opportunity, why don’t these huge institutions just do it?” Besides not being entrepreneurial, one, they’re publicly owned. Meaning that shareholders don’t want to hear that their bank is investing a bunch of money into nonperforming distressed assets. They don’t want the headlines. It’s bad headlines coming from that end. There are a lot of places to where this play does not fit within those big institutions. Therein lies the niche and therein lies the gap that we can take advantage of.

The hardest-hit states still. There are a lot of southern states that need a lot of help. There are pockets up in the northeast and of course the Midwest. This will be a target based upon your experience, your knowledge base. Let’s face it, through the Paperstac platform, you see a lot of assets throughout the United States. You track that, you look at the numbers. You know what’s going on in the industry. I’d say you’ve got a pretty good feel on the pulse of what’s going on deal wise and running numbers and where you can find deals. I’m sure that it’s something you guys look at all the time.

Always looking at what stuff is trading. We were doing it before we started this looking at the Fannie Mae stuff. On the Paperstac side, we see a lot of inventory come through there. We have a pretty good idea what assets trade for and we have the opportunity to purchase assets as they come on the platform just like anybody else. We’ve also partnered up with non-for-profits. We’re able to take a look at the non-for-profit first look HUD initiative and the HUD assets, which stuff and all the states you’ve mentioned, stuff in Puerto Rico. We’re excited about the opportunity of the inventory that’s out there.

KSS 41 | Note Mutual FundI didn’t know that you were doing that. I’m glad you brought that up again because that’s a sweet spot for me. I’ve found that niche myself. If you’ve been to my three-day trainings and such, I don’t tell it all the time, but I did a lot of businesses in the HUD. When you do the business with a nonprofit once again, it enables you to get things cheaper. Just like buying the notes to the property, which means you have more flexibility and can work with people better. In that case, in the HUD property, the play would be to acquire that property and put a family in that property and I’m guessing to seller finance.

That’s the beauty of what attracted us to the note space is the multiple exit strategies. You’re not just put into one single exit strategy, but you can actually do a bunch of different exit strategies. I just want to touch again, Kevin, on the technology side and why the opportunity actually exists now and why it didn’t a few years ago. It’s because the technology wasn’t there for us to be able to do this with the smaller type of fund. People say, “$200 an investor, that’s going to be insane.” The overhead is too crazy. What this technology has caught up and given us the opportunity, that’s why we find that we’re lucky that we’re able to do this. We’re able to leverage the technology that only the big guys were able to utilize because they had all the money to do it, but it’s available to smaller investors out there. Anybody out there that’s looking to follow the path that we have done, the technology is there, the support is there and there are people that are actually working for the smaller investor.

For example, for somebody reading, they’re going, “What do you mean your admin cost is how much lower?” They can go to the website, MWMFund.com and invest right there. That is your cost. There is no person that has to process that. It’s all processed electronically. They go online, they invest, you’re invested and then they get reports and everything else.

The most important thing that we did when we first started was building the infrastructure to be able to handle this, to be able to navigate it safely, to be able to be efficient at the same time. We partnered up with some smart people and some great companies like our fund admin, Sudrania Fund out of Chicago. They deal with huge hedge funds and they’re looking more of the retail side in the market. They are helping us navigate the backend in compliance, regulations and all the stuff that goes on with this. What we did was build that infrastructure around us with smart accountants and attorneys so that when we hit the ground running, we have everything in place to be able to do this because we can’t do it on our own. It’s not just us. It’s a huge team of people that are doing it, but because of the technology, we don’t have to hire all those people.

Are you guys doing an official launch of some type or is there going to be a notice that goes out or are you open for investors?

We are open for investment. We’re doing constant things with the website and technology side. We’d love to share with anybody about what that looks like, but you can go to MWMFund.com, read all about it and you can invest right there. Like Kevin said, you don’t have to go through a broker-dealer. Actually, it shows about more that money works for you. In the past you’d invest $100, $90 of that would be invested towards what you’re investing in and $10 would go towards the broker-dealers fees. Nowadays, that 10% savings goes directly to work in the investment world.

It sounds great what you’re doing and to everybody reading, go check it out. I think you’ll find something that you want to participate in, whether you’re a beginner or you’re advanced. With the cost of entry, the management, the strength of what they’ve done in the past, the way they’ve managed the other funds, I think it’s a great deal for everybody. Get invested and let them know that you’ve known about it here on the show. Thank you so much. Is there any final point that we didn’t touch on?

I think we covered it all. Thanks for having us and thanks for doing what you’re doing for the note space and in investing in general.

Thank you, gentlemen and thank you, everybody, for reading. Please don’t forget to keep up to date, go to the website, KevinShortle.com and subscribe to our mailing lists. That way I can keep you in touch with everything, whether you’re here local in Central Florida and Paperstac is too because we are doing deal review classes. We do one-day trainings. If you’re somewhere else in the country, check those dates to see where I might be as well and check out our online training. If you haven’t purchased the book yet, Real Estate Without Renters, go check that out on Amazon.com. Thank you, everybody. I look forward to talking to you on another episode.

Important Links: 

About TJ Osterman

KSS 41 | Note Mutual Fund-TJ Osterman is a Husband, Father, Entrepreneur, and is interested in positively impacting society anyway he can.

His current project consists of helping the underserved, the low to middle-income families in this country with affordable housing situations.

Tj and his company MWM currently do this by investing in Troubled Mortgages. They have currently deployed over 6 million dollars into this effort and are managing 100+ mortgages right now.

2018-Launching a New Fund with hopes of driving 200+ million in dollars over the next 5 years into affordable housing situations and saving 10,000 families homes. MWMfund.com

2018-Launching Paperstac, this is the first fully digital online place to invest in mortgages. Paperstac.com

About Rick Allen

KSS 41 | Note Mutual FundRick is a Husband and a Father and he has always been an entrepreneur.  He loves to positively impact peoples lives and disrupt markets.

Rick’s current projects both revolve around the distressed debt market and disrupting how mortgage notes are traded.

His company Paperstac, is the first fully digital online process for buying and selling mortgage notes. Paperstac.com

As a co-founder at MWM fund, Rick and his team focus on deploying capital in the distressed debt space with the goal of managing for economic returns and social impact.  In short, we are saving peoples homes and giving back the American dream of homeownership.
www.MWMfund.com

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