Episode 35: Equity Plays vs. Cash Flow Plays

Most note investors know they want a deal — but not every deal resolves the same way, and buying the wrong type without knowing it is how returns disappear. In this episode, we break down the two fundamental resolution paths in note investing and why knowing which one you are in before you bid changes everything.

🔍 What you'll learn:

✅ What separates a cash flow play from an equity play — and why the distinction drives every underwriting decision

✅ How to evaluate a cash flow play around the borrower's ability to pay and what a reperforming loan is actually worth

✅ Why an equity play resolves through the property — and how strong collateral can protect you even when the borrower never pays a dollar

✅ What the best deals have in common — and how to recognize when you have both plays working in your favor

✅ The mistake that kills returns — buying for cash flow when you are actually in an equity situation, or worse, having neither

This program is for informational purposes only and should be independently verified before taking action.

Transcript

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Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar. My name is Robert Haitha, founder of Fix Notes, and my mission is to make note investing ethical, profitable, and accessible for you. In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of mainstream investors like you. So without further ado, let's get into this show where you're in good hands with my AI clone. Let's go. This program is for informational purposes only and should be independently verified before taking action. When you buy a non-performing mortgage note, you are not just buying a debt. You are buying a specific situation, a borrower, a property, and a set of circumstances that will ultimately determine how that loan resolves. So understanding whether you are buying an equity play or a cash flow play changes everything about how you underwrite the deal, how you manage it, and what a good outcome actually looks like for you. A cash flow play is what most people picture when they think about note investing. You buy a non-performing loan at a discount, work with the borrower to get them back on track, and either hold that reperforming loan for monthly income or sell it to a cash flow investor at a premium. The value you create is in the consistent monthly payment stream. So you are pricing the loan based on what a reasonable modification payment might look like and what yield that payment represents on your purchase price. If you bought the loan for $3,000 and you get the borrower paying $200 a month, that is a strong cash-on cash return. If the borrower eventually refinances and pays off the loan early, your internal rate of return shoots up significantly because you collected those monthly payments and then received the full payoff ahead of schedule. An equity play is a different animal. Here the resolution path runs through the property, not the payment plan. The borrower may not be in a position to make modified payments. They may want to sell the home, do a short sale, or eventually lose it through foreclosure. What protects you in this scenario is the equity in the deal. If the property is worth $200,000, the first lien balance is $80,000, and your second lien balance is $40,000, there is $80,000 of equity above the first lien. Even in a worst case outcome where the property is sold, there is more than enough to cover your position. Your return in this case comes from a lump sum, a discounted payoff, a short sale settlement, or a payoff at foreclosure, rather than a stream of monthly income. The distinction matters because it changes how you evaluate risk. In a cash flow play, the borrower's ability to pay is the central question. You want to see stable income, owner occupancy, and a borrower who is motivated to stay in the home. The numbers on the property matter less as long as the equity is not a problem. In an equity play, the borrower's financial situation is almost secondary. So what you care about is the value of the collateral and the amount of equity sitting above your lien. The borrower may not pay you a single dollar in monthly income, but if the property has strong equity and the deal resolves through a sale or payoff, you can still earn an excellent return. Some deals are both. A loan with strong equity and a motivated borrower is the best of all worlds. You can pursue a modification, get cash flow going, hold the reperforming loan, and still have the equity backstop if anything goes sideways. Those are the deals you want to lean into and price accordingly. But when you are evaluating a tape with many loans, you need to quickly sort each asset into its most likely resolution category so that your bid reflects what you are actually buying. Or worse, when they buy something with no equity at all, assuming the borrower will work with them and the borrower does not. Understanding which play you are in before you submit your offer is how you protect yourself from surprises that affect your return. Next time, we are going to walk through the chain of title and assignments, what they are, why they matter, and what it means for your investment if the paperwork is not in order. Thanks for sticking around to the end, and thank you to my trusty Robot and the Fix Notes team for putting together another episode. If you want to learn more and hang out with the real, not AI version of me, join our free school community at school.com slash fixed notes. That's s k o l dot com slash f i x no t e s. In the meantime, we'll see you in the next episode.