Active Income, Higher Returns – Why Private Lending Beats Note Investing

Conference Recap

I just got back from the Paper Trail Note Investing Conference, and the timing could not have been better. Conveniently, it was held in Chandler, Arizona—right in our backyard—while we’re based out of Phoenix. I was invited to speak on a couple of panels, and I also took time to absorb everything I could about note purchasing, NPLs, and the broader note ecosystem. Although the subject matter wasn’t my daily diet, it widened my perspective and, paradoxically, made me even more grateful for private lending and the way we operate.

Beth Johnson, a good friend and a familiar face from the Lend2Live community on Facebook, played a meaningful role in this trip. She’s been a huge contributor to the community—coaching, consulting, and helping aspiring private lenders take the first steps. Lately, she’s been pivoting away from that side of the business, and this conference felt like her last hurrah in that chapter. She invited me to join those panels, and I’m glad she did. It was a full-circle moment that blended community, education, and practical takeaways.

Much of the conference focused on notes-related investing—buying existing notes and holding them for 10, 15, 20, or even 30 years. The pitch is straightforward: it’s a stream of income with a relatively passive profile. That premise is compelling, and I learned a lot from the sessions. However, it also highlighted how different this world is from our private money world. For instance, I expected to hear LTV emphasized. Instead, I ran into ITV. Initially, I thought the acronym was wrong. But it’s investment-to-value rather than loan-to-value. They’re talking about what was originally invested into the note, not a fresh loan today.

… it’s a stream of income with a relatively passive profile. That premise is compelling…

The acronyms didn’t stop there. When I heard NPL, my private lending brain went straight to private money lender. That was off by a mile in this context. NPL meant non-performing loan. That mix-up underscored a simple reality: this is a different ecosystem. Moreover, it reminded me not to assume that my vocabulary automatically transfers to every adjacent niche. I know the private lending side deeply; nevertheless, note investing has its own rules, norms, and metrics.

Although my focus is private lending, I left with a mix of reaffirmations and new ideas. On the one hand, several sessions confirmed why our approach works so well. On the other, there were broad macro discussions about current market dynamics that apply to both notes and private loans. Because market conditions affect every capital stack, the cross-pollination actually helped. I walked away with practical insights, a few one-off quotes I loved, and some action items I plan to implement. The result is a slightly scattered set of takeaways, yet still cohesive enough to share in a single recap.

To set expectations, this recap stays true to the main ideas. It keeps the voice conversational, trims duplicate words, and tightens the structure. However, I’ve kept the heart of the story intact: what I learned, why I prefer private lending, how the market looks right now, and what to watch for when evaluating fund managers. If you enjoy notes, you’ll find value here. If you love private lending, you’ll find even more.

Why I Prefer Private Lending

The first and strongest realization from the conference is simple: I prefer private lending. The reason boils down to control. When you buy a note, someone else originated the loan. You inherit their underwriting, their assumptions, and their historical files. That data may be accurate; it may also be stale. If the note has been performing for 10 or 12 years, you’ll often receive a solid due diligence package—collateral details, borrower background, and legacy underwriting notes. Yet the snapshot can be dated.

I prefer private lending. The reason boils down to control.

In private lending, I write the story myself. I control the underwriting, verify the property, evaluate the borrower, and review the exit. Therefore, I know how seasoned a borrower truly is, how many payments were made, and where the soft spots might be. That immediacy helps me avoid deals that only look good on paper. Additionally, it gives me a holistic view of risk that’s harder to reconstruct from someone else’s archive.

Returns also stand out. Many attendees quoted acquired-note yields in the 7–9% range, occasionally a touch higher. Meanwhile, our short-term private loans typically price at 12–14%, plus fees. Origination, documents, legal, commitment, extensions—those line items exist for good reasons and compensate for the work required to manage active capital. Consequently, what might begin as a 10–12% annualized return can lift into 15–18% and sometimes north of 20% when structured and executed well.

Many attendees quoted acquired-note yields in the 7–9% range … our short-term private loans typically price at 12–14%, plus fees.

However, high returns alone don’t make a model better. The real edge shows up because I originated the loan. I’m not buying a black box. Instead, I know the collateral, the timeline, the budget, and the exit strategy because I built them with the borrower. Therefore, I avoid loans that never should have been written, and I skip properties where numbers depend on wishful thinking. Control reduces guesswork.

Another advantage is relational. When I originate, I communicate directly with the borrower. We talk on the phone; we message; we work through issues. That cadence builds trust and clarity. By contrast, if you buy a long-seasoned note and call the borrower, they might respond with confusion: Who are you? Why are you calling me after 12 years of payments? The distance is understandable, yet it’s not how I like to operate. I want proximity, not layers.

All of that said, I recognize an honest tradeoff. Buying notes can be passive. You purchase the paper and collect payments. Private lending is active, and that workload is real. I used to preach passive income as the pinnacle. Now I’m more skeptical. In fact, I heard a line at the conference that hit me between the eyes: “there’s not a passive way to build passive income.” That quote captured what experience has been teaching me. You need active effort somewhere—either up front to build capital or along the way to manage the vehicle.

there’s not a passive way to build passive income.

As a result, I’ve leaned into active income and consistent execution. I’m comfortable originating, monitoring, and recycling capital. The cycle creates velocity, and the control tempers risk. While note investing absolutely fits some investors’ goals, the active craftsmanship of private lending suits mine. It aligns with how I think, how I work, and how I measure outcomes.

Market Conditions and Practical Strategy

The macro backdrop touched both note buyers and private lenders. Rates, liquidity, and caution were recurring themes. Many borrowers and operators are equity-rich yet cash-poor. That mismatch becomes painful when rates rise, because cash flow shrinks even as balance sheets look impressive. Therefore, plenty of people feel the squeeze.

Because of that squeeze, I’m seeing more portfolios selling assets at breakeven or even taking small haircuts. The objective is defensive: reduce exposure and raise liquidity. Previously, some investors could wait three to five years to see if a thesis played out. Now, many would rather lighten the load than gamble on uncertain timing. Consequently, caution is higher, and patience is thinner.

The objective is defensive: reduce exposure and raise liquidity.

Rates have pulled back from their peaks, but they remain relatively elevated. Although that is not news in itself, the sustained level matters for underwriting. Banks have tightened credit boxes, which pushes more demand toward non-traditional channels—seller financing, private money, and hard money. That’s helpful for us on the origination side. Nevertheless, it also signals that conservative structures should be the default. If banks are careful, we should be disciplined as well.

Our strategy reflects that discipline. We avoid luxury price points and focus on median or below-median segments. The days when a rising market could paper over bad buys are gone. Previously, a mediocre acquisition might still exit profitably thanks to six months of price appreciation. Now, with list-price reductions appearing in more neighborhoods, that tailwind is unreliable. Therefore, we concentrate where demand is deepest and affordability is strongest.

On the commercial front, we’re selective. Pure office or retail gives me pause, despite periodic return-to-office mandates. Mixed-use can be acceptable if the residential component is durable. Smaller multifamily still makes sense when the fundamentals support it. Self-storage sits in a middle zone: it can work, but it’s one of the first discretionary expenses households cut when budgets tighten. Consequently, I want strong sponsorship, simple business plans, and conservative leverage.

I want strong sponsorship, simple business plans, and conservative leverage.

Speaking of leverage, bank LTVs on many commercial assets have pulled back from 60–65% to roughly 50–55% in some cases. That single change cascades through the plan. If a borrower counted on refinancing into a higher LTV, the math may no longer pencil. Therefore, as a private lender, you cannot assume a clean refi takeout. You need alternate exits, longer timelines, or more cash in the deal. Otherwise, you risk owning the asset at the worst possible moment.

Meanwhile, I still underwrite with an eye toward liquidity stress. I don’t want the borrower’s entire plan to depend on the cheapest capital being available right on schedule. Additionally, I challenge budgets for contingency because costs rarely move in a straight line. In choppy environments, the surprises do not arrive politely. They stack. Consequently, conservative assumptions are not pessimism; they are prudence.

When in doubt, I prefer simple deals with clear scopes, reasonable timelines, and comps that don’t require gymnastics to justify. For that reason, I’ve passed on multiple opportunities that looked glossy but needed everything to go perfectly. Some of the best outcomes come from projects that are ordinary in a good way: common product, abundant buyers, modest finishes, and exits that don’t require magic.

I prefer simple deals with clear scopes, reasonable timelines, and comps that don’t require gymnastics to justify.

Finally, I keep returning to velocity of capital. The ability to deploy, execute, and recycle funds quickly is a competitive advantage during uncertain cycles. It lowers exposure time, shortens feedback loops, and compounds returns. While glamorous projects draw attention, the steady ones build portfolios. Therefore, we double down where our process shines and our downside is bounded.

Red Flags, Fund Vetting, and Next Steps

During the conference, I captured a handful of quotes and heuristics. They are simple, yet they stick because they bring clarity at the right moment. The first one deserves a poster: “Some of the best deals are the ones that you don’t buy.” It sounds obvious. Nevertheless, when capital sits idle, the temptation to force a mediocre opportunity can be strong. Discipline feels like inertia until it looks like wisdom in hindsight.

Another quote tackled pricing risk with false precision: “If the deal’s not good at 13%, it’s not a better deal at 18%.” If you’re not going to get paid at 13%, you’re not going to get paid at 15% either. Effectively, they’re both 0%. People often hike rates to “compensate” for risk. However, default risk does not care about the coupon. If performance fails, the price of money is irrelevant. Therefore, structure and execution beat cosmetic tweaks.

If the deal’s not good at 13%, it’s not a better deal at 18%

There was also a regulatory nugget that sparked research on my end. I heard that note investing, including some seller-financing contexts, can have an exemption under the Dodd-Frank Act that applies differently than it does in private lending, especially for owner-occupied scenarios. I’m not an attorney, so confirm specifics with legal counsel. However, it’s a reminder that seemingly similar strategies can sit under very different rules. Consequently, compliance should be a deliberate part of your model, not an afterthought.

A practical lending rule that resonated with me is to be cautious when someone asks you to refinance out another private lender. It’s not a blanket prohibition, but it’s a yellow flag. Why is the current lender unwilling to extend? Did the project drift? Did budgets explode? Often, the borrower will present a tidy explanation, yet the deeper story tells you more. Therefore, ask questions until the mosaic is clear.

… be cautious when someone asks you to refinance out another private lender.

One lighter moment came from a seasoned private lender discussing rate negotiations. When a borrower asked, “Are your rates negotiable?”, his response was perfect: “Of course I can go higher if you want to.” The humor works because it reframes the conversation around value, terms, and certainty rather than just price. Moreover, it highlights that service, speed, and competence sit inside the rate, not outside it.

A standout panel asked the classic question: do you bet on the jockey or the horse? In lending terms, the jockey is the operator; the horse is the collateral. Both matter. Yet one panelist emphasized a trait that keeps paying dividends—personal responsibility. When a project goes wrong, what does the borrower say? Do they blame the realtor, the contractor, the market, and the moon? Or do they say, we missed, and here’s exactly how we’ll fix it? The words matter because they point to behavior under pressure.

Reading people is a skill worth sharpening. You will never be perfect. Nevertheless, pattern recognition improves with reps. As a landlord, I saw this repeatedly. Prospective tenants with elaborate sob stories were often the riskiest. Similarly, in lending, if every past setback was somebody else’s fault, the next one will be, too. Therefore, I prioritize operators who own outcomes without theatrical excuses.

The fund-focused sessions packed in details. If you’re investing in or operating a fund, governance and infrastructure deserve as much attention as returns. Third-party fund administration matters because it separates bookkeeping from the sponsor’s operational biases. An investor relations team that actually communicates is not a luxury; it is part of the promise. Access to the principal for a meeting signals accountability. Timely K‑1s or 1099s are not optional; they are table stakes.

An investor relations team that actually communicates is not a luxury; it is part of the promise.

Audited financials came up, and the consensus was nuanced. They are excellent to have, but for smaller 506(b) or 506(c) funds, the cost may not justify the value every time. If a fund is only a few million dollars, paying for a full audit can drag on returns. Therefore, lack of audits at a small scale is not an automatic disqualifier. It is a factor you weigh alongside transparency, controls, and reporting cadence.

One document you should always request is the loan tape. It reveals concentration by borrower, asset type, geography, and duration. If 90% of the portfolio sits in new construction in a single metro—say, Austin, Texas—ask why. If half the balance is with one sponsor, probe that relationship. Concentration is not evil by itself. However, without offsetting diversification or risk controls, it magnifies volatility. Consequently, the loan tape helps you move from story to statistics.

The topic of fund-of-funds investing also surfaced. In that scenario, your fund places capital into other funds instead of—or in addition to—direct loans. It’s not inherently bad, yet it adds layers. You must underwrite the manager you invested with and the managers they invest with. The two-tier structure complicates fees, reporting, and visibility. Therefore, unless you specifically want that exposure, direct lending funds offer cleaner lines of sight.

A memorable comment addressed the psychology behind blowups: most people don’t start out intending fraud. The line was blunt and insightful: “Most people don’t wake up and say, I’m going to run a Ponzi scheme today.” It usually starts with ego, then a bad project, then borrowing from Peter to pay Paul. Lifestyle inflation can be a tell. When a sponsor’s spending surges far beyond historical norms, it’s not proof of malfeasance, but it’s a reason to look harder. Consequently, I watch patterns, not episodes.

It usually starts with ego, then a bad project, then borrowing from Peter to pay Paul.

Another pragmatic topic was succession planning. What happens if the sponsor gets hit by a bus? Does the fund suspend, dissolve, or continue operating under delegated authority? Who has signing power? What is the communication protocol? Investors deserve a clear plan, and so do team members. I’m taking this seriously in our own PPM. The goal is straightforward: protect investors and create orderly pathways for capital if something unexpected occurs.

Zooming back to first principles, this conference affirmed that lending is part math and part judgment. The math helps you say “no” to mirages, and the judgment helps you say “yes” to real opportunities. My model favors active engagement, careful underwriting, and manageable scopes. It is not glamorous. However, it’s repeatable, and it stores up resilience for the days when markets swivel.

To close the loop, I sat on two panels that will become podcast episodes. One focused squarely on private lending—nuts, bolts, and nuances. The other, with Kevin Kim and Gerard Figarelli, dove into fund mechanics and securities considerations. Their insights were exceptional. Frankly, I had moments where I wondered what I could add because their experience runs deep. Nevertheless, the conversation was energizing, and the takeaways were practical.

More importantly, the sessions reinforced a common theme across strategies: control what you can, price what you can’t, and communicate the rest. If you are buying notes, that means buying intelligently and verifying assumptions inside older files. If you are originating private loans, that means designing structure, building relationships, and reviewing exits like your capital depends on it—because it does.

… control what you can, price what you can’t, and communicate the rest.

Practical Checklist:

• Favor control. In private lending you underwrite the property, do due diligence, and verify seasoning and payments yourself. When you buy a note, you inherit someone else’s files that may be stale after 10–12 years. Moreover, you didn’t originate the loan, so context is limited and borrower contact can feel distant. Therefore, prefer fresh underwriting and direct communication over inherited assumptions.
• Price for work. Our short‑term loans typically carry 12–14% interest plus fees—origination, doc prep, legal, commitment, and extension. Consequently, a 10–12% annualized base can rise to 15–18% and sometimes 20%+. By contrast, many acquired notes trade around 7–9%. Because the model is active, those fees compensate for actual work and risk, not fluff.
• Stay median. We avoid luxury price points and high‑end flips. Instead, we fund median or below‑median projects. During 2022–2023 a rising market could absorb mediocre buys; now we’re seeing price drops. Therefore, we prioritize common product with deeper demand and less volatility, not waterfront historic remodels at $1M+.
• Be commercial‑cautious. We’re not doing strip malls, retail, or office right now. However, mixed‑use is acceptable (e.g., a storefront with apartments), and smaller multifamily is a yes. Larger multifamily can work with the right numbers. Self‑storage is okay too, though it’s an expense people cut when budgets tighten. Consequently, plain‑vanilla business plans and conservative leverage matter.
• Watch LTV drift. Bank LTVs on commercial have fallen from ~60–65% to about 50–55% in many cases. If a borrower’s plan depends on a higher‑LTV refinance, the math may not pencil. Otherwise, you risk forced extensions, payment plans, or foreclosure. Therefore, be very careful with exit numbers and timelines.
• Interrogate stories. Bet on the jockey as much as the horse and listen for personal responsibility. If every issue is the realtor’s or the contractor’s fault, that’s a red flag. Additionally, avoid sob‑story theatrics; reading people is a genuine superpower. Be cautious refinancing out another private lender and ask why the current lender won’t extend. Consequently, keep asking questions until the full picture is clear.
• Vet funds like a pro. Don’t be too hands off. You want reporting, third‑party fund administration, an investor relations team, and access to the principal for a meeting. Timely K‑1s/1099s are table stakes; don’t let returns overshadow the infrastructure. Audited financials are excellent, though for smaller 506(b)/(c) funds they’re a nice‑to‑have, not a mandate. Moreover, have an attorney review the PPM, and watch for lifestyle inflation—the “borrow from Peter to pay Paul” spiral is real.
• Study the loan tape. Always ask for the loan tape. Examine concentration by geography, asset type, borrower, and duration. For example, if 90% is new construction in Austin, Texas, ask why. Likewise, if 10 of 20 loans are with the same borrower, probe that exposure. Consequently, use diversification to offset inevitable clusters.
• Beware layers. A fund‑of‑funds adds two sets of due diligence, more fees, and limited visibility. It is not automatically disqualifying; however, complexity increases room for error. Therefore, choose it only if you explicitly want that exposure and understand the tradeoffs.
• Plan succession. Have a clear succession plan. What happens if the sponsor gets “hit by a bus”? Does the fund continue, pause, or dissolve? In our PPM we intend to add language: allow terms to mature, let projects pay off, have a designated person manage wind‑down, and then return capital. Consequently, investors get clarity before a crisis.

I’ll keep integrating these principles into our workflow. Additionally, I’ll share more detail from the panels soon, especially around fund structure and investor communication. In the meantime, I remain bullish on private lending done carefully. It rewards rigor, it compounds through velocity, and it thrives on clear, honest dialogue between lender and borrower. When we keep those pieces tight, the results follow.

The conference expanded my toolbox without changing my compass. I like active models that let me steer. I like simple scopes that exit cleanly. And I like relationships where the phone gets answered before the email lands. If that sounds old-fashioned, so be it. It keeps capital safe, keeps projects moving, and keeps everyone honest enough to do the next smart deal.