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THE POTENTIAL BENEFITS AND DRAWBACKS OF SECURED NOTES

Today, it seems as if individuals have more options than ever before when it comes to investing, but regardless of their goals, many investors have valid concerns including the return that their investment will earn for them.

Secured notes may address both of these issues, as they offer investors potential protection against the volatility of the stock market, along with greater returns than many other comparable investment options. It’s important to note that the ability of the borrower to make the note payments, and the ability to make distributions to investors, will be dependent on the repayment strategy, which may not be successful. Thus, there is a risk of loss of the investment. Further, most secured notes are illiquid and no trading market exists or will ever develop, therefore, investors would not be able to make withdrawals of capital contributions.

COLLATERAL MAKES A SECURED NOTE SECURED

A secured note is a type of loan that is backed by collateral. This generally makes a secured note to be considered less risky because investors have a way to recoup their funds should the borrower default, but there is always a certain level of risk with every investment.  If the borrower stops making payments, the lender may put a lien on, or in some cases repossess, the collateral. However, there is a potentially lengthy process to collect on the collateral and it could involve litigation which will tie up an investor’s money for a substantial time period and involve legal fees. Collateral is something of value that a borrower can pledge to a lender. Common forms of collateral include real estate, automobiles, equipment and investments. Personal items, such as jewelry or artwork, may also sometimes be considered as collateral.

An unsecured note is a loan that is not backed by collateral. This is a much riskier investment for lenders because if the borrower defaults, there may be no way for the lenders to recoup their investment. The collateral of the secured loan is something that is worth at least as much as the loan, offering investors peace of mind and making the secured note much more attractive to many investors.

SECURED NOTES MAY OFFER PROTECTION AGAINST MARKET VOLATILITY

While the security offered by the collateral may make secured notes an attractive investment option, there are other potential benefits as well. One such advantage is that secured notes offer an opportunity to diversify with limited exposure to the volatility of the stock market, especially for those who want to invest for a relatively short amount of time. Although diversification using secured notes is one technique to hedge against market volatility there is no guarantee that diversification will protect against loss.

2022 has gotten off to “the worst start to a year for stocks in more than half a century.”[1] So far this year the markets have not performed well:[1]

  • The Nasdaq has fallen 30%.
  • The S&P 500 is down over 20%.
  • The Dow Jones Industrial Average is down over 15%.

Secured notes, conversely, are not linked to the markets and offer investors a regular payment at a fixed interest rate. Plus, unlike the markets, “commercial real estate has seen success in 2022” and “the overall industry outlook remains positive heading into the second half of the year.”[2] However, there is no guarantee that past performance of commercial real estate assets is indicative of future results.

Please email us at info@integrisinv.com or call at 84-INTEGRIS to learn more about our Integris Secured Credit Fund now.

 

This article is for informational purposes only. The effectiveness of any of the strategies described will depend on your individual situation and on a number of other factors. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor.

For accredited investors only. This information is neither an offer to sell nor a solicitation of an offer to buy any security by any person in any jurisdiction. Offers and sales shall be made only to persons who qualify as accredited investors under applicable U.S. federal law and only pursuant to a confidential offering memorandum (the “Memorandum”) and subscription documents setting forth definitive terms of each investment opportunity. An investment in a limited partnership involves a high degree of risk and is speculative as described in detail the Memorandum for each investment opportunity, including the possible loss of your investment, and is illiquid with an uncertain liquidity date. Past performance is not indicative of future results. Securities offered through Shopoff Securities, Inc., member FINRA / SIPC.

[1] Gura, David. “It’s Been a Vicious 6 Months for Stocks. Here’s What the Grim Markets are Signaling.” NPR. June 30, 2022. https://www.npr.org/2022/06/30/1108787657/6-months-stocks-2022-economy-first-half-nasdaq-dow#:~:text=Both%20indexes%20are%20in%20bear,it%20is%20down%20over%2015%25.
[2] Brooks, Al. “2022 Midyear Commercial Real Estate Outlook.” June 27, 2022. https://www.jpmorgan.com/commercial-banking/insights/2022-midyear-commercial-real-estate-outlook#:~:text=Despite%20rising%20interest%20rates%E2%80%94with,second%20half%20of%20the%20year.

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