Investing in Performing Notes with Martin Saenz

Martin Saenz brings social good into smart investing. Martin is a Managing Partner of Bequest Funds. Renowned as a thought leader in the mortgage note investment industry, Martin is generous with his firsthand expertise, to the benefit of his many clients and followers. Genuine, loyal, and passionate about creating a better world through profitable business, he works hard to share and spread success. Martin also wrote the books Note Investing Made Easier and Note Investing Fundamentals.

Together with business partner Shawn Muneio, Martin cofounded Bequest Funds with the dual purpose of helping investors grow their wealth and helping mortgage borrowers stay in their homes. Martin owned and operated multiple successful companies prior to launching Bequest. A successful entrepreneur and real estate investor for over 15 years, he brings a high level of strategy and experience to the Bequest model. He has directly helped over a thousand families stay in their homes and countless more through the influence of his mentorship.

Martin holds a BA degree in Philosophy from U.T. — San Antonio, an MBA from Drexel University, and an M.S. in Project Management from George Washington University. Martin, his wife Ruth, and their four children live in Sarasota, FL. Together, they enjoy exploring the natural beauty of the state and being a part of their church community.

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Investing in Performing Notes with Martin Saenz

Brett:

I’m excited about our next guest. He brings social good into smart investing. He’s a Managing Partner of Bequest Funds. Renowned as a thought leader in the mortgage note investment industry. He’s generous with his firsthand experience to the benefit of many of his clients and followers. He’s genuine, loyal, and passionate about creating a better world through profitable business. He works hard to share and spread success. We’re gonna be talking all things about investing in performing notes as a way to create and preserve more wealth. So I want you to please welcome to the show with me, Mr. Martin Saenz. Hey, Martin, how are you doing?

Martin:

Good, Brett. Thanks for having me on.

Brett:

Absolutely. For listeners get to know you for the first time when you give them a little bit more about your story and your current focus.

Martin:

Sure, in 2004, after leaving my corporate job, my wife and I decided that we wanted to be entrepreneurs and venture out and, and start building financial freedom for ourselves and work towards retiring early by creating passive income in our lives. So we did what a lot of folks did, we figured out what type of business we wanted to launch. It so happened to be a federal government contracting company that my wife and I launched, selling museum exhibit displays to the federal government on a nationwide level. So we did that out of the gate.

Brett:

Fantastic. Amazing. By the way, you can learn more about Martin Saenz by going to bqfunds.com. Martin, for our listeners who get to know you for the first time, would you also give a little bit more about maybe a gift you believe you’ve been given, go back to your earlier days? What would you say that’s a unique gift that you’ve been given? How does it help how you help them bless people today?

Martin:

I would say compassion is probably my superpower, if you will, as well as having financial acumen. So just being good with numbers, making good financial decisions, being disciplined with my finances, and so I’d say those two together.

Brett:

Fantastic. Let’s keep that in mind. Those are great combinations, have compassion and financial acumen as we go into the topic at hand, which is investing in performing notes. So Martin, what’s the number one secret to investing in performing notes?

Martin:

Treat investing in notes, not as a novice would but treated as a business where you have total immersion, and you’re building systems around each phase of mortgage note investing, which I would consider these four phases. Acquisition, which is a sourcing phase, due diligence, asset management, and portfolio management. So really just having to have your having capabilities in each one of those phases to go out and buy notes with.

Brett:

Makes sense. I’ve heard a saying that we don’t rise to the level of our goals, we actually fall to the level of our systems. So we don’t have these big aspirations for something. But if we’re not treating it like a business, and running in like in a system, there’s a certain laws of business, if you will, that it’s not going to go to our aspiration. So just talk about how you have been able to build your systems in a way that makes them efficient, makes it effective for the note holder, and for the groups that you’re working with.

Martin:

Sure. Especially kind of working towards scalability, which everyone’s always longing for it takes systems especially in the sourcing phase of things. What I find is a lot of folks in the industry, they’re good technicians and they’re great at running acquisition teams, through note pools. They’re really good at Asset Management with doing homeowner workouts and other phases of the industry. But they fall short from the sourcing perspective because they don’t have proper systems in place by which they are on a daily basis sourcing new deal flow from note sellers that are in the industry,

Brett:

What’s the number one way you found to source new deal flow?

Martin:

First, start with focusing on one’s identity. So you really know how you need to operate in the space, what your buying parameters are, what your limitations are financially, what’s your resources are at your disposal, what you need to outsource, that kind of thing. Then move that into marketing and branding. So that your marketing represents who you are in the industry and what you’re looking to accomplish. From there, you can go into your CRM system, building an outreach matrix by which you’re going to be forming daily rituals of outreach to note sellers.

Brett:

Got it. That’s really qualifying who you are and what you stand for, and also what your company is providing as a service. But as well as qualifying, what is it you’re looking for? Would you talk about a little bit of the difference of how you guys are? What kind of loans that you’re looking for, and how maybe an investor could get can get connected with you and kind of the framework of what you guys are going through to make sure these deals are good performing notes.

Martin:

Absolutely. Staying in our lane, I’d say, first and foremost is what’s critical. You look at so many funds in the industry, especially the Alternative Investment Industry. They have 10 pillars, they do it all, and multifamily self-storage, raw land, I mean, in the list, just it’s a laundry list of things that they do. So you really can’t serve all those masters, you really should just, in my opinion, kind of do one thing or do two things and do it to the best of your ability. For us, it is buying mortgage notes, we have one side of our company. It’s a hedge fund that buys distressed mortgage notes, where we connect with the homeowners and create loan modifications to help keep these homeowners in their homes with payments they can afford. Then we have another entity called Bequest Funds, which operates as a 506 C reg D Income Fund, and we buy performing mortgages into that income fund at yields of 11% to 13%. We payout our investors at annual preferred returns of eight to 9%. We make our payments on a monthly basis.

Brett:

That’s fantastic. That’s really great, these are the 506 C reg D deals eight to nine. Talk about the the underlining assets right homeowners been through Fannie Freddie on the underwriting may be gotten to a tough spot. then now you’re getting a back at a discount. Talk to us about that, because that eight to nine is a really attractive barn.

Martin:

We think so especially in, in these inflationary time periods that we’re in and everyone’s seeking yield. Really the heart of the asset class is that like you mentioned, these are bank-originated mortgages. Something occurred in the homeowner’s life. These are originally they’re a paper they’re they have high credit scores, these individuals, but they had a health issue or they ran into a love crisis, and they got divorced, some occurrence happened. So they stopped paying on their mortgages, and the banks or lending institutions bundled them in these distressed mortgages into tranches and sold them to a hedge fund in the secondary mortgage market for 20 3040 cents on the dollar. These hedge funds, take these mortgages and make connections with the homeowner, and work out payment plans and loan modifications. What happens as a result is these people, these homeowners are back on their feet. Now. They got their job back, they got their health back, they got remarried. So now they’re making their payments according to the new payment schedule, and they go through what’s called a re-seasoning, or re-performing time period. So after 12 months of on-time payment or 24 months of on-time payment, Bequest Funds, our income fund buys those assets into our income fund at 70-80 cents on the dollar, or 60 to 80 cents on the dollar rather.

Brett:

That sounds great. So a minimum amount for investors, accredited investors time in the fund. Give us a little bit about that if I put $100,000 in it’s eight to 9%. That’s cool. Is that the minimum with the minimum and how long does that have to stay in there for?

Martin:

Yes, so it’s $50,000 is the minimum buy-in you have to be an accredited investor as it is a 506 C reg D Income Fund. So you do have to meet those those requirements. As far as the time commitment period for the nine year annual preferred return. There’s a four year time commitment for the eight percent annual preferred return, there’s a one year time commitment. We also have a 6% option with a six month lock in, as well as for people that need more liquidity.

Brett:

Okay, and then talk to us a little bit about the foreclosure rate. So how many of the actual average LTV and the average credit score of the borrower? So what are those stats look like?

Martin:

So in terms of collectability, with our fund, I mean that the LTV, which we term investment value are two metrics that we look at on a daily basis. Our controllers, monitors those, that performance and we actually have a big monitor in our office that has all those metrics that everyone can see on a daily basis. So what we look for with investment value, and we call this out in our ppm for bequest income funds, is we look for a 65% investment value percentage or below. So what that means is, if there’s an asset, if there’s a home that’s worth $200,000, we will be into that investment, no more than $130,000. So that, if we did if the homeowner did stop paying for whatever reason, and refuse to enter into discussions, we will have to be forced to foreclose on that property. We’ll have equity coverage to recoup our investment in that in that asset.

Brett:

Okay, perfect. Got it. So 60%, 65%, LTV investment value. Then 9% is a four-year commitment. 8% It’s a one-year commitment. 6% is a six-month commitment. What if someone says Martin, I put the money in and three months goes by? I’m like, oh, no, I need the money. Like, what’s the surrender charge? What happens there if that happens or is it just not an option?

Martin:

It’s the best effort. I mean, we did have one person that put in the minimum and they had a family emergency and need the money out. We cashed him out. I mean, if we have the money on hand, and we usually keep them at least a million in the bank, with the income funds. So if someone hadn’t dire emergency, I mean, we’re, we’re investors, we’re, we’re people with families, I have four children, and, and so I get it, and things do happen, and we’ll do the best that we can to redeem, we, we very seldom have that occurrence. Most of the people that come in the fund just stay in the fund and go how they need to go. But I did want to address you, you mentioned collectability and the performance of the mortgage fund. So I did want to address that as well. Because you have that one side, which is capital preservation and LTV, ITV, then what are we doing to ensure that we can recoup the investment in case it goes south, we have not had to foreclose on any loans, and request funds to date. As far as our collectability percentage for our portfolio, we’re at 97% collectability, which is extremely high for the industry that we’re in. We’re very proud of that. I attribute that to the compassion that our asset managers have in their ability to build deep-rooted relationships with the homeowners.

Brett:

Excellent. We’re streaming live on YouTube, by the way, the Capital Gains Tax Solutions channel and also the Expert CRE Secrets channel. You can subscribe, rate, review. If you’re enjoying the show, share this with somebody. we’re talking about investing in performing notes with Martin Saenz and you can learn more about Martin at bqfunds.com. The last question on the investing payouts, is it monthly or quarterly? What are these payouts happening?

Martin:

Yes, so payouts on a monthly basis. That’s just kind of our philosophy. Our mindset here is that investors and we’re I’m the largest investor in Bequest Funds myself. So this is about creating a legacy for myself and my family, my partner’s family as well. So we have expenses on it coming into us on a monthly basis. So we need to pay out our investors on a monthly basis, especially given that we’re collecting these mortgage payments on a monthly basis. So it just all makes sense to do it that way.

Brett:

Perfect. So before the show, Martin, we’re talking about you sold a business, you’ve built a business then you sold it. Part of what we do here at Capital Gains Tax Solutions is we encourage and coach people on how to defer capital gains taxes and provide the trustee services something called a Deferred Sales Trust. I’m curious, when you sold your business, what was your biggest frustration with the capital gains tax? Anything there that you want to share about how that all went down?

Martin:

Yes. So we sold, we got 25% down. We took back a business note for 75%. So I guess in a way, we deferred some capital gains that way and doing a note kind of stretching out the income. And so I think that’s it. I mean, I remember, you’re asking me to kind of dig back a deep, but this was nine years ago, we structured it with goodwill, I guess goodwill is the portion you’re assigned to that is going to be ordinary income in the portion you’re assigned to what the FF and E and things like that are capital gains.

Brett:

There’s some stuff there. The biggest thing, though, and you mentioned it people do a traditional seller carryback, and they take they’ll finance the buyer. Your scenario sounds like they put a 25% down payment, and then you carry the 75. It’s neat because you get some short-term deferral and the taxes, you haven’t received that 75 yet, but eventually, they pay you back and you pay the tax. The difference between what we do, which is the deferred Sales Trust is it’s still an installment sale. But the difference is, you can have that note go for as long as you want. You also have access to the capital the next day to go put it into a new business, such as a request or a real estate deal, or startup or ground-up development or stocks, bonds, mutual funds, you can diversify, so you’re not tied to that single person. You’re also not going to get paid off in a short period of time, and the tax anyways. So we call it the Netflix way of doing things. For those who want to learn about all of this, you can go to capitalgainstaxsolutions.com. We also have our free Mastermind every Friday, on the Deferred Sales Trust, totally free at 10 am Pacific Standard Time, 1 pm Eastern, and my book is coming out, Building a Tax-deferred Exit Strategy, the proven playbook for unlocking your ideal wealth plan, when selling any asset of any kind for yourself or your clients. By the way, I know you’re in Sarasota, Florida. One of the gentlemen that’s actually the first chapter of the book, you may have heard of them, and may have seen him in some of the driving down the streets, I think that’s where he resides is, a gentleman named Kevin Harrington from Shark Tank. Anyways, he’s in Sarasota. He’s an opening chapter. So any thoughts on anything I just said, Martin, might be brand new to you?

Martin:

I think that’s more on the brand new side. With capital gains, we experienced capital gains on the note side, when we receive payoffs, for the most part, all the interest income from the monthly payments that come in our interest income. So it’s basically ordinary income. But one thing that we did do when we set up the fund is we rolled down the proportion of capital gains that the fund receives his total income to the investors individually. So what that means is about 25% of the income earned in Bequest as a company is capital gains. So on the investors, K-1 statements 25% will reflect capital gains and 75% will reflect interest income, so it’s a little bit of a tax benefit.

Brett:

That’s cool. That’s smart, It’s all about the structure and the planning of all of these things. If you have a million-dollar net proceeds million dollar gain on a deal, you qualify for the Deferred Sales Trust, but if you’re structuring your deals you always want to get with professionals who can help you structure your fund in a way that can be the most tax-efficient. Because it’s not just about what you make, it’s what you keep at the end of the day. So your taxes are a big part of that 30% to 50% Capital Gains depreciation recapture depending on the asset, depending on what state you live in. So keep that in mind, go to capitalgainstaxsolutions.com to get started on all that. That being said, Martin, are you ready for the lightning round?

Martin:

I am.

Brett:

Here we go. Knowing what you know now if you can go back to your 25-year-old self, what is that one golden nugget you make sure to tell yourself to do?

Martin:

Don’t invest for appreciation, invest for cash flow.

Brett:

Second question, what’s the number one book you’ve recommended or gifted the most in the past year?

Martin:

It would be The 10X Rule by Grant Cardone.

Brett:

Amazing. Next question: What are you most curious about right now?

Martin:

Tax avoidance. Every year it’s getting harder. So we’re looking at acquiring some office space now and some other real estate acquisitions to get with cost segregation to take advantage of.

Brett:

Grant Cardone has the number one video on that by the way. If you guys look up Grant Cardone Commercial Real Estate Taxes on YouTube, it’s a video that I literally watch. I try to watch it like once a week because he does such a good job of breaking it down and looking up Grant Cardone Buy CRE to save taxes. It’s a 30-minute video and I’m telling you to watch that and it reminds me about Robert. It’s a good reminder from everybody. Robert Kiyosaki said the purpose of owning a business is to buy real estate. Once you change your mindset to the purpose of a business cash flow, or this or that, that’s fine. But it’s actually to buy real estate. Here’s why? Because once you be successful, and you scale up, you’re gonna get hammered with taxes unless you have tax depreciation to offset your taxes. There’s a thing called real estate professional thing called Cost Segregation, Accelerated Depreciation. You’re gonna get hammered. Even though Martin’s in Florida, I mean, California, he’s got one of the more friendly tax states, but you got to be aware of that. You got to know how to play the game. Grant Cardone does a great job of breaking that down. Any last thoughts on that, Martin?

Martin:

I want to check it out as soon as we get off here. I’m a student. I’m always learning. In fact, the more money you make, the more you need to learn.

Brett:

Exactly. So check that out. The next question is this, number one leadership quote or theme that you strive to live by?

Martin:

I think it’s the golden rule, Do unto others as you would have them do unto you. Just treating people with respect, treating people with courtesy, I think so much of that, like is lacking in our world where we’re just kind of like everyone straight to the punch, everyone’s can be kind of short with each other, especially on social media. Like I’ve gotten off Facebook, and it’s just, I’ve kind of like, just trying to keep other people’s perspectives in mind when I’m working with people.

Brett:

Actually, the last question, and we’ll let you go. By the way, make sure you plug your book as well. How do you stay centered in your values after all of your success helping a lot of people build a lot of well, how do you stay centered? What are the habits that you tried to do to stay centered in your values, and then encourage a charge forward to reach for new heights?

Martin:

Yes, I wake up, I pray and I meditate, and then come in, I read a few pages out of the Bible every morning and so I just try to keep certain daily rituals in place. I look at all my accounts on a daily basis. So I keep in touch with my finance on a daily basis. But really the the biggest lesson in humility was my earlier years in self-employment and just getting hammered financially every which way and that’s kind of grounded me during the good times.

Brett:

Yes. So the 2008 crash, really rethink a lot of things and don’t forget because things are highly appreciated right now be very cautious. Well, Martin, I want to thank you for being on the show. Thank you for sharing so much wisdom with us about the opportunity that Bequest Funds provides. I want to encourage you to keep using the gift of compassion and your financial acumen to help people create and preserve my wealth and get some freedom through investments that aren’t traditional stock market stuff right and that are consistent performing notes that are that seem to be the very low risk. You can go to bqfunds.com and any last words I mean also plug your book, Martin?

Martin:

Note Investing Made Easier. Also, Note Investing Fundamentals. I’m also proud of that book as well. But reach out to me at martin@bqfunds.com with any general questions. You can reach out to me if you’re going to be a potential investor. If you have questions in general about entrepreneurship, if you think that I can help you with anything you need, reach out to me.

Brett:

Awesome. Thanks, Martin for being on the show.