3 Ways To Recession-Proof Your Note Portfolio

On a recent note mastermind the question came up about stress-testing a note portfolio.

This is a great idea from time to time. But what does that mean? How do you stress test a note portfolio?

In short, look at your note portfolio and determine how it might perform in the event of a shift in the economy. How strong is your portfolio if the general public starts missing payments due to an economic strain?

I have said many times that one reason the note industry is so strong is that we do well in any economy. That said, you do want to pay attention to any vulnerabilities.

Minding Your Note Portfolio

As I write this article (April 2026), inflation and employment numbers are still not great.

Various global conflicts are in play. Oil/Gas prices are as high as they have been in five years and still climbing. The cost of goods is still high. We are at an important crossroads.

So, what should you focus on as note investors?

LTV and ITV can make the difference between making a great return and potentially losing some money on a deal. The good news is that we, as investors, can control the deals we invest in — and how much.

It comes down to the big three…

*Now, I will say that nothing is 100%. You can do everything right, and still have some deals go bad. But HOW you are in the deal makes a huge difference in how it plays out.

3 Ways To Recession-Proof Your Note Portfolio

Buy Equity, Not Just Yield

High yield does not protect you. Equity does.

In a downturn, what matters most is a low LTV (loan-to-value) with realistic property values. If a homeowner is in a financial crunch, they are less likely to walk away from a property with equity. They will sell the house to pay off the debt and walk away with the difference.

When you have a deal with a low down payment, it is easy for the payer to walk away —they don’t really have any skin in the game, especially if the property value has gone down.

Here are two deals:

• Deal A: 18% return at 90% LTV.
• Deal B: 11% return at 55% LTV.

Which deal do you think, as an investor, you want to be in during a recession or economic downturn? [Spoiler alert: The answer is B].

Focus on Payment Behavior, Not Property Type

Some research suggests that borrower behavior predicts performance better than asset class. I can’t say I have found that true across the board, but it certainly is not a bad place to look in this ‘stress test’ scenario.

Things that matter? Payment history for the last 24-48 months. Job stability. Credit score (shows how they pay everyone else).

A borrower with a lower-end property and five years of pay history is a better bet than a new borrower with an expensive property (all other things being equal).

Diversify By Product, Not Just Geography

Many people in notes think diversify means different states. That is true, but it can also mean different products.

Full notes, partial notes, smaller balance notes, different collateral—all things that can help diversify your note holdings. What you hold can make a difference. Some products have a higher default rate in tough times (looking at you, ‘land notes’).

Also, remember this…

LTV is a big factor in the payments continuing.

ITV is a big factory that, if things go wrong, the investor gets all of their money back. [When in doubt, think ‘partials.’]

Know your exit possibilities before you buy a note.

Creating Note Portfolios that Perform in Every Economy

Recession-resistant note investors usually share three habits:

• They buy conservatively
• They underwrite behavior
• They protect liquidity

You don’t need to be afraid to invest in notes, in any economy — you need to stick to smart investing from the beginning.