The Alphabet of Real Estate Investing

by Rob Godar 01/12/2020

Image by Ulrike Mai from Pixabay

If you're considering getting into the world of real estate investing, there are some basic terms that are important to understand. Buying and selling property is, of course, one way to invest, but there are other investments that offer favorable returns. However, it can sometimes be difficult to master the confusing alphabet soup of investment opportunity.

Packaged investment products include the Asset-Backed Security (ABS) and a Collateral Debt Obligation (CDO). In some ways, they are similar; each is typically bundled as a group investment for marketing purposes. Financial return is realized as payments are made by the pool of consumers included in the group. 

The ABS evolved historically, beginning in the 1980s, with the lender practice of bundling mortgage-backed securities for resale, primarily to other institutions. Today the practice continues, but mortgage debt is classified as a CDO, with specific real estate as the collateral. It is a specialty designation under the umbrella of asset-backed securities. The breakdown can be complex, and terms are sometimes confusing.

Financing that comprises CDO debt includes all the underlying characteristics of the ABS, in addition to the specialized assets of both commercial and residential Mortgage-Backed Security (MBS) or REIT (Real Estate Investment Trust) debt. A unique type of CDO that only includes mortgages is known as a CMO, referring to Collateralized Mortgage Obligation. 

Most investors really don't need to know more, but there are other designations that are commonly used:

  • A CLO is the term for Collateralized (Bank) Loan Obligation;
  • A CBO designates a Bond Obligation;
  • Credit-backed debt is sometimes referred to as synthetic CDO to distinguish it from cash-backed debt.

Various types of CDO debt are batched into three (or more) classes, known as tranches, with varying degrees of risk and return. Although the maturity level may be the same, an Equity Tranch investment offers the highest potential return but bears the lowest credit rating. A less-risky Senior Tranch boasts a higher credit rating, and the Mezzanine Tranch is in the middle.

Typically, an ABS investment package comprises credit card debt, student loan debt, home equity loans, auto loans, and large sum debt-repayment contracts for other goods, with no mortgages in the package. 

An investor in either an ABS or CDO earns a return, in part or in full, as the pool of debt is repaid by the individuals whose loans have been pooled. The risk of default is spread over the spectrum of loans, and investor risk is assessed, largely in proportion to the number and type of loans included in the package. 

These various types of investment packages are usually marketed only to institutions, rather than to individual investors, however there are ways for individual investors to purchase shares through the investment firm.

About the Author
Author

Rob Godar

Greetings everyone; those of you I know and those of you I’ve yet to meet!

My name is Rob Godar and I thank you for joining me on my journey as I share my long-time passion for Silicon Valley Real Estate.

My path to being in business for myself started at a young age. I am a proud Third Generation California native, growing-up in Sunnyvale. It was here that I began my entrepreneurial journey. I was a paperboy for both the Sunnyvale Daily Standard and the San Jose Mercury News. Up before the crack of dawn, and out collecting subscriptions long after the sun went down. I have fond memories of playing in the Metro Little League at Raynor Park. After graduating from Archbishop Mitty High School and attending both DeAnza and SJSU, I ran my own consumer electronics business for twenty years, learning much about business ownership and about the world of “sales”.

It was during this time of my life that I developed my passion for real estate. Initially, I became a homeowner, back when double digit interest rates were the norm. Talk about scary! I then began looking at real estate everywhere I went….on vacation, on my days off and even when out on dates with my now wife, Linda. We have been real estate investors for over 30 years and I’ve been an agent for over 12 years.