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Open Mic Night: Raising Money, JVs, And Buying Note Pools

GDNI 74 | JVs And Note Pools

 

We all have our origin stories, and in this open mic night episode, Gail Anthony Greenberg and Chris Seveney reminisce how they both started in their real estate investment adventures. As they talk about the lessons they learned along the way, they give some key tips on raising money, buying pools, and doing JVs. They also share brief stories about their first note investments and the pitfalls they experienced during those stages. Achieving one level after another in notes investing takes time and experience, but with experts like Gail and Chris, you can surely gain the insights you need in starting your investments.

Listen to the podcast here:

Open Mic Night: Raising Money, JVs, And Buying Note Pools

Chris, what happened?

I’ll touch base upon what just happened. I have officially closed on the Fort Wayne project that I was going to renovate. That is now closed. That one’s gone. The, “I’m going to renovate my first property from afar,” turned into, “I’m not going to renovate my first property from afar.” I’m also closing on a property in Gary, Indiana that was a forfeiture that I sold as a cash sale. I got the paperwork for a borrower who was refinancing me out of a deal. I got that paperwork sent to me and who was in the mailbox. That is awesome. Let’s see. I’m hoping that the hurricane doesn’t impact the two condos that I have under agreement in Florida that are supposed to close.

Fingers crossed, I think it will be okay.

It’s been all about liquidation.

Rapacious acquisition, that’s your big word.

I have no clue what that means and I would have to Google it.

Think of a hungry, slathering dog, it’s an aggressive, mammoth acquisition. We acquired two pools, a total of 130-ish assets. It’s a number too big for my mind to wrap around. How relaxed I’m feeling at the moment.

I want to ask the readers. Can you leave a comment to me whether or not you knew what rapacious meant or didn’t mean, please? I want to do a little poll to see if I’m the only person that didn’t know that.

In the circles I travel with, people use the word, rapacious. That’s why you’re the numbers guy and I’m the word person. Let’s face it, in the note world, it’s better to be the numbers guy than the word person. What am I doing over here? Just confusing people. You didn’t ask, but I’ll tell you what happened to me. I started renovating my historical house down south. They did the roof first. They peeled off the existing roof and guess what they found?

Nothing was there.

They found a meteor appears to have crashed through the roof at some point. There were two layers of shingles. The bottom one, because it’s so hot there, had fused onto the plywood, where there was plywood I should say because I’m not an expert in the anatomy of roofs. The tall pieces that go up to the point on the roof, those are rafters, the wood. The cross ones are rafters. What is the wood that lays on top of the cross pieces?

The plywood would be called sheeting.

GDNI 74 | JVs And Note Pools
JVs And Note Pools: Move quickly when you find a deal that appeals to you and have the funds ready to go.

 

Is it usually like planks underneath it on older houses? That’s what my house had.

The older houses didn’t use four by sheets of plywood. They just use like one by strips, similar to wall framing in the old houses that are horsehair and plaster. That’s what your walls are made up as well.

My Philadelphia house is from 1926 and we had the same thing. There was no plywood. It was boards with shingles on top. It was tricky.

It looks great now though.

I had this insane-looking roof. I showed those pictures around. I got so much sympathy. It was gratifying, but I barely slept until they sent me the after pictures, which are incredible. I’m so excited. There’s a house across the street that’s for sale. I feel like they owe me part of their commission when it sells because just seeing that my house is getting renovated and is not going to be an eyesore, it’s going to be like a major selling feature for the buyers from that house.

We’ve got a lot going on, but we still are one of giving this to all our readers because we’d love to share our story and share lessons learned with people and share the story. Because we hope that you’re following in our footsteps and continuing on the path of we’ll leave the breadcrumbs for you and you can follow us along. Hopefully, it leads to success, which is rolls into our topic, which we are going to talk about the different stages of a note investor. From a neophyte to somebody who’s got some advanced skills.

I have to say on the topic of we love to share our stories. I would go in farther to say, it gives meaning to our suffering to know that we might help someone else not make the same mistakes. I tell my children that like, “Knowing that you didn’t fall into the same hole makes me feel like it’s okay that I went through something.” We noticed that we have reached a new level. I don’t think we knew we were there, but then we woke up and yes, we are there.

I think I dragged you out of bed into this new level a little bit. You didn’t wake up. I dragged you into it.

You made me what I am now.

I didn’t make you what you are, but we’re happy and where we’re at and so forth. I’m the guy at the campfire that pokes people with a little stick and stuff. It’s like, “Let’s get you uncomfortable a little bit.”

I will say the opportunity knocked. I was a little slow to answer the door and I was getting on an airplane and that was part of it. You raced to the front door and threw it open and now we’re both living with the consequences, which are very nice. Thank you for being wildly impulsive and encouraging me to do the same. We’re at this new level. I don’t know about you, but it caused me to look back to the beginning. It wasn’t that long ago that we were scratching our heads over our first notes and wondering where in the world we might go with this. We were saying now, looking back, there is a progression that you do as a note investor. The overview is you start as somebody who doesn’t know what you’re doing and it’s a big head scratcher and you’re very nervous and taking baby steps for me and for you too. We bought notes ourselves with our own money at first, wanting to make sure that we knew what we were doing before we had any investors to work with. Phase two is I think you are now a more experienced note investor and you start having JVs work with you. You start doing JV deals, then you do bigger maybe JV deals. The next step is that you might buy a small pool and work on it. The next step after that works out great is you might do what we did and buy a much bigger pool or maybe two.

With that, we can talk about the different steps to spend five minutes on each one and so forth. I think some of the things we’ll share are the brief stories on each step where we were, what we learned and some of the pitfalls that we had during those stages. I don’t want to talk about timing because it’s very different for different people and stuff. It’s more of, the timing isn’t about days, months, years. It’s about comfort level and understanding certain things and having your business because it’s about making sure your business is set up to get each level. For me, at the beginning stage, being an engineer, you’re trying to absorb as much training as possible and you have the analysis paralysis. I know I had that. It took me about six months before I pulled the trigger on a note. I was of the sense I was not taking anybody’s money and I don’t recommend people take other people’s money before doing your first deal. I always think you shouldn’t use your own funds to invest in that way because it is a lot of learning curve when you’re doing it the first time. That’s my two cents on that. I’m curious about your thoughts.

Wherever you are in your business, there are going to be days where you feel miserable and days where you feel excited. Click To Tweet

It’s the same for me. I also used my own money. I was fortunate to have a good-sized IRA. I was fortunate to have had enough bad experiences with a traditional brokerage to feel like I didn’t have that much to lose. I wasn’t that nervous. I also had an inherited IRA. Because I had done private lending and I had flipped houses, I had already set up my IRAs to invest in real estate. I was talking to a brand spanking new person. They just formed the thought that they want to invest in notes. It was funny talking about while you’re learning, there are certain things that you have to pay attention to. One is knowing where your money is going to come from. What you and I both very quickly learned, it was true back at the beginning and it seems even truer now, is you have to be very able to move quickly when you find a deal that appeals to you and you’ve got to have the funds ready to go. My big thing was I was listening to all the advice. Some of the advice, “Get yourself JV partners right away, do a lot of marketing over here.”

The advice that I felt some of which was coming from inside of me was, “Don’t pay any attention that. You’re not going to take other people’s money. Learn the business. Learn what you have to learn, even the individual steps. If you think back to when you first signed up with a servicer who knew all the steps that were going to be involved. The first time you boarded a note with a servicer, did the intake document they would want, the documents that you’d have to give them to prove that you owned it? All the different things, the coordination that you’re going to have to do. You’d have to decide whether you wanted them to put insurance on it or you’ve got to have to find your own insurance. There are so much. You literally have ten balls in the air when you’re first doing it.

It’s a lot. It’s not something you can read the books on to get an understanding for note investing. I always like to use the term when people talk about golf. You can read about how to golf but until you step up on the tee and swing that club and hit the ball and figure out that it slices to the right or whatever, you need to learn and understand and go through the steps to physically get a good grasp on it. That’s where it comes down to patience and not trying to go 1,000 miles an hour in this. I can sometimes get caught up in that, but I want it to be methodical and thoughtful when I did my first few deals and stuff. Making sure I understood before I started to jump in the next level. One of the things I also got hung up besides analysis paralysis was I was all over the place. I was trying to build a calculator.

I was trying to bid, I was trying to market, I was trying to get a name for myself. You should focus on taking certain steps and get your systems in place first, get your calculator or whatever you want to use and how are you going to manage your business and your systems if you have the time to do some of the marketing and things. I caution people with some of the marketing things. If you overmarket sometimes and you’re posting certain deals and stuff, experienced investors can see through that. Sometimes, I tell people to be careful. I never say there’s a stupid question. There are always great questions you can ask and answers, but if you’re trying to market certain deals on things and you’re not familiar with it, before you do it, definitely have someone take a look at some of the stuff you put out there.

I think that’s true because you can look amateurish inadvertently because you are an amateur at this point. I would say at this point, one of the greatest dangers too is falling victim to all the talk on Facebook about other people, particularly people who started when you did and always measuring yourself against what they’re bragging about on Facebook. How they’ve done this and they’ve replaced their salaries. I felt like I needed to be buying a lot of deals. I think in some respects, my eagerness to have some made me not as picky as I should have been. This is ironic. I now got the deed to a property of a note I bought at the very beginning of my note investing career. Admittedly, it was a complicated note and probably not something I should have bought as an amateur. Indeed, now that I have ownership of the property, I’m probably going to have to renovate it as a rental and hold it as a rental and collect rent for a while in order to break even on it. That’s not something I want to do because at this point, I want to deploy my funds differently, but I’m stuck. You know that expression about picking a spouse, “Marry in haste, repent at leisure.” It can be the same with notes. Buy in haste, repent at leisure.

Gail, let’s talk about the next step.

I was going to say it to you, how did you know you were ready to take on JVs?

I had done probably a dozen deals and I had done performing, nonperforming bankruptcy. I’ve foreclosed on an asset. I thought I was comfortable and a few things. One is when I started taking them on, I was staying in states that I was comfortable with that I understood or had great counsel. Because I have a good grasp of the numbers and calculating things, I was comfortable bidding and where I was on assets and what their value was. You can’t compare yourself to other people because everyone’s very different. They have different lifestyles. They have different funding sources and different goals. I say this to every person I talk to. If I never buy another note in my life, it doesn’t kill me. It doesn’t hurt me. Notes aren’t my full-time job that’s providing my source of income.

GDNI 74 | JVs And Note Pools
JVs And Note Pools: When people entrust you with their money, they have the right to transparency and to know exactly what’s going on.

 

I was very conservative and I’d look at deals and take on deals that I think were conservative in nature and had reached out to people and having a lot of discussions over phone and just explaining to them what I’ve done. I was always honest with them. I’ve done ten to twelve deals. What’s my JV agreement and my background and everything like that. I started to do smaller deals with people where I’d have people find $10,000, $20,000, $30,000 deals. The way I structured it, I thought it was beneficial to them. I thought at that point in time I was comfortable. I was more uncomfortable at the time with trying to raise money than I was in confidence in bidding and acquiring notes, to be honest with you.

I think that’s pretty common. A lot of us are not salespeople professionally and probably have a pretty negative view of selling. Selling being twisting people’s arm to do things they don’t want to do. It always feels a little aggressive and manipulative. We’d all love to have everyone come to our door and not go fishing. Let the fish jump into the boat. I’m using fishing language because you just had a very successful fishing weekend with your son for the first time. I think one of the things that made me realize it was that I used to go into BiggerPockets to first read people talking about notes. At a certain point, I realized that I was the one talking about notes and people were thanking me for my input and valuing what I had to say. I started to get this feeling like I do know a little bit of this point and it made me appreciate that.

It’s the same thing with me on the BiggerPockets thing. For the people who are reading who aren’t on BiggerPockets and you want to get into notes, there are two things. One is there is a ton of information under the real estate strategies forum. It’s tax liens, notes, paper and cashflow discussions. There is a ton of note questions, information and everything in there and participate. That’s the one thing I’ll tell everyone to do is participate in that. Ask questions, provide feedback if you know the answer. As you continue to grow, it’s a great place to potentially raise some money. For me, I’ve used it extensively and it’s been very productive. If you ever go on into that section and look under top contributors, I bet you you’re going to probably see my name along with probably Jay Hinrichs, Chad Urbshott, Marco Bario and Bob Malecki. You’ll typically see a lot of the same characters on there that are having a lot of discussions. Martin Saenz on a lot on there as well.

It’s very valuable because even if you’re not raising money, but I had a conversation with somebody who’s on BiggerPockets and said, “I have a quick question. If you can help me out on a certain servicer.” We had a discussion and this person gave me information that I wasn’t aware of from somebody I used that is probably going to save me probably about $10,000. In by him reaching out, having a conversation. It wasn’t a conversation about trying to raise money or anything, it’s having a conversation about note investing with somebody that was under BiggerPockets as well.

You’re saying it helped you raise money. My whole first wave of JVs came from BiggerPockets and largely people who were geographically fairly close. I had a number of people who asked to sit down with me. One was from Long Island. We met like halfway in the Princeton, New Jersey area and stuff and it was nice. It gave me a lot of confidence that people were finding what I was talking about. That was good. For everyone I know who’s sending out emails and everything, that is a great idea. The point is I wasn’t even trying to raise money but I was being myself. I was sharing what I know. It was super comfortable for me because I had no agenda. That’s always that authenticity piece for me where I have a very hard time getting up and trying to make people do something like give me money. If I can just be myself and share what I have to give, then I find people respond. Particularly the JVs that I like to have or people. All my JVs are very good friends at this point. That’s the way I like it to be.

The friendships and partnerships I think are very important in this business because it is a very small business. There are a lot of people who are buying and there’s a lot of people who are attempting to get in it and it’s a challenging business. This is the phase that I would say, “Are you going to do notes or is it too much?” Because a lot of people try and sell you on it being a passive investment strategy. This is the point I think when it’s the decision, because once you start taking on JVs and stuff, you have to have systems in place, you’ve got to make sure your books are done to the tee. Between your books marketing, CRM, software, managing software, your notes, expect to pay. I tell people to budget $500 a month. I know why people don’t spend that. I think as a light in the grand scheme of things if you want to get to operating it in another level, which is when you get to that next level, you’re going to have expenses. You can’t do it without expenses.

I would even say when you feel like you’ve achieved your apprenticeship and you know enough that you can take other people’s money. That’s like a real decision point because when people trust you with their money and lots of times it’s IRA money and lots of times, it’s people who might be close to retirement and cannot lose their retirement money. That’s when you look within and ask yourself like, “Can I do this? Am I prepared? Do I know enough? Am I strong enough in this that I can be that person in someone’s life where they’re looking to you to help them achieve a financial goal in their IRA?” The other thing to ask yourself when you’re taking on JVs is that exact thing, “Am I prepared to do the hard work of putting together particularly a financial reporting system?”

Don't rush towards a big goal just because you feel like other people might get there ahead of you. It's all about what feels right to you. Click To Tweet

That is the absolute keystone to having a great JV relationship is, “Can I set up a great bookkeeping system to begin with that will allow me to generate reports on a regular basis? That will give JVs the detail that they’re entitled to about what’s going on with their money. It will allow me to give them the cashflow that they’ve earned.” Not just set it up the first time but maintain it because someone’s got to enter all that data. Either you or a bookkeeper, someone’s got to take every transaction and put it in there and keep all that up-to-date. It’s a commitment and some people who love the idea of this business don’t love all the technical and detail aspects of it, which can be a killer. I believe many note careers have wrecked on these shoals of these kinds of problems.

The biggest thing I would say in this component or this stage is you need to determine as part of your business plan now, and I think it depends on doing work full-time or is this your full-time thing? What are you doing with collateral? Are you storing it? Are you doing all your recordings? Are you doing all that work? Is that you or is that somebody else? The second component is your bookkeeping. Are you doing all your books? Are you having someone else do all your books? Once you make that decision, then you’ve got things going smoothly and so forth. That puts you in then into that next phase, which is you’ve got a bunch of JV deals under your belt or a bunch of deals under your belt. If you’ve got funds, you don’t need to think JV money. Most people don’t have a $500,000 laying around to invest. People will use some of their IRA and stuff and then look to bring on some investor cash.

Once you get through those first two levels, that’s when you start looking at when you’ve got that experience and you’ve done a lot of deals. You might have done 30, 40, 50 deals, whatever the number is, where you start looking at, “Now I’m going to start buying ten, fifteen assets at a time,” which may be a small pool or maybe ten or twenty out of 200 asset pool. That can lead you the next notch of investing. It’s talking about getting your businesses set up and a component to that, it’s major besides the bookkeeping and the recording side of things is reporting. Reporting to your JV partners. Between the bookkeeping and the reporting, that should be a major focus besides acquisition management and then reporting because part of managing that business is that reporting process.

I think if I look at any situation that anyone has described to me where their relationship with the JV went south, it’s almost always a failure of communication. Communicating regularly, doing what you promise to do, what the JV agreement says you’ll do, failing to hold up your end. When people entrust you with their money, they absolutely have the right to a lot of transparency and to know exactly what’s going on, to receive those disbursements promptly, to have a lot of detail in the reporting. We’ve never said this before. We’ve talked about doing due diligence on people that you might fund the deals with. I would ask someone for samples of the reports that they generate. Take out the names and the identifying information. Let me see what you give out. That would have been something that saved a lot of people a lot of grief, don’t you think?

Yeah, I never thought of that. That’s part of what’s your package, what is it that you do and so forth. That’s interesting and so forth component because you can see. I know people who have done that and also ask like to see people’s books and so forth. For me, I’ll show everybody any reporting. I’ll show in sample reports, whether they’re financial reports or management reports or whatever they are. Where I usually will cut the line is I’m not going to show people young profit and loss statements, balance sheets and stuff. I can tell you, yes, I’ve made money. You don’t need to see how much I’m making on individual deals and stuff like that. For me, I keep that confidential. I will give people references. Because of one of the things that I tell people, I’ll say, “I can put together a resume of deals I’ve done. I think you’re better off talking to people.” I sent you that thing that I dazzled Gail with something that I sent her.

I can barely think straight. It was so dazzling. My head is spinning.

As part of this phase here, another thing I want to talk about is understanding the difference between bidding on a single asset and a portfolio and how you’re going to manage it. Typically, you’re still doing one-off deals, “This person has got these three deals. This person has got these five deals.”

I wanted to make sure people understand that point. When you’re buying pools, that doesn’t mean you get a bunch of investors together, put up all the money together and go buy fifteen assets. You have to assign each asset to an investor. That is a very critical thing.

The other thing that happens typically around this stage is you also learn to get more creative. What I mean by that is you might do some partials, another alternative for some cashflow on certain things. You may take a property back and keep it as an REO. You may tweak your JV agreements a little bit to change some language or some terms or something in that.

You’ve got to do more flexibility to do more stuff.

GDNI 74 | JVs And Note Pools
JVs And Note Pools: Companies typically don’t go under because of profitability; it’s because of cashflow.

 

You’re starting to understand the big picture. I look at it from, “You learned to drive a car or buying your first few notes.” All of a sudden it’s like, “I didn’t realize all these buttons, what they did on the car.” Once you get to this level and you can do some pretty interesting things.

I feel like it happens organically because once you’ve done a bunch of notes, things have happened. Things that you didn’t anticipate have happened. If you solved it and it worked out okay, then the next time you’re like, “Why don’t I just do that?” For example, you buy a nonperforming CFD thinking you’re going to get performing and resell it down the road, but then a person signs it over to you or you have to do a forfeiture. You end up with the house or whatever the reason is. Now you have this whole situation where you have to dispose of a house and maybe the way you do was fun. It worked out. You made money. The next time you’re looking at the tape, maybe there are some REOs on there and you’re thinking, “Maybe I could buy a house. Why don’t I talk to my investor?”

I did that with an investor. We bought a house and our plan was to create a note on it. The whole idea was still to be in notes but have a different entry point instead of a nonperforming note or performing note, to sell a house. It turned out once we spruced up the house, it was pretty valuable. We’re like, “Do we want to create a note and then wait a long time to season it in order to sell it down the road for money?” I’m like, “Why don’t we sell the house if it’s worth something?” That house I have, we have probably $30,000-something into it. I’m going to say $34,000-ish and it’s under contract for $76,000.

Also, one of the things that probably is going to happen by this time is you had a clunker. You may have lost money, you may have been sued by a borrower. Who knows? It’s going to happen to you. That’s where you’re going to get knocked down. You’ve got to get up. One of the things I’ll mention too is as you start getting to this phase, we’ve buying fifteen, twenty at a time, I would strongly recommend that you have a decent reserve of cash that you’ve made from your first few deals are closed out some deals before hitting this phase. Once we have deals close out but also have some money aside because when that clunker does come by, it’s a decision that you need to make of, “What if I had an investor on this deal? What am I doing with the investor? Am I just giving him whatever we get back? Am I going to give him his full money back? What is it that we’re going to do?” That is a business decision that’s completely up to you. Your contract may stipulate certain things, but if you’ve made some money and you’ve got to let some money put aside, it’s much easier to swallow the pill on some of these issues that you have.

You need it also because there will be times when people want to get out of deals, even deals that things take longer than they were expecting or something comes up for them where they need their cash out of it. It’s great to be able to let somebody out. Our contracts require notice and give us I think 90 days to cash somebody out. I had a CFD that I took back and it needed about $11,000 of renovation. I asked my JV for it and he didn’t have it. He had problems at home where he had all sorts of repairs that he had to make and that was expensive. He was like, “I’m so sorry.” I said to him, “Considering what’s going on, would it be better for you if I find someone who can replace you in this deal?” He was like, “Yes, thank you so much.” I felt bad ultimately because that guy stepped in, put in a total of $26,000 to cash him out, plus pay for the renovation and walked away after two months with like a $5,000 profit on his money in two months. I felt bad that my original investor didn’t get it. The important thing is that you can meet the needs of your JV. It’s about being flexible and experienced enough and having those reserves that you can do what’s right for your JV.

As you said, the reserves, I forgot to mention that. Who knows what happens? You may all of a sudden get a $7,000 water bill that all of a sudden, your partner doesn’t have it that you may have to fund. There are things like, “You’ve got a performer. I’ll send you to foreclose,” and you may not have had $5,000 in reserves from the JV partner and I’ll send you to go to foreclose. You take that and multiply it by ten notes and that’s $50,000 that you have.

It is super fun to pay for yourself, but leave some money in the kitty because there’s always a rainy day.

I come from the corporate world and I’ve worked for a company that’s acquired multiple companies and I’ve been on the teams that have acquired these companies. Especially back in 2008, ‘09 and ‘10, I worked on one big acquisition and I was involved in another one. It didn’t go through. Companies typically don’t go under because of profitability. It’s because of cashflow. That’s where you got to be careful is making sure you’ve got those reserves set aside. That’s part of growing. This is some of the lessons you’re going to learn when you’re buying some of your notes is all of a sudden, you’re going to look and say, “This person funded $20,000 deal and I have $4,000 reserves.” All of a sudden something’s going to pop up where tax wasn’t paid, you’re going to advance $2,000. It goes non-performing at $90 a month. All of a sudden, you filed for foreclosure and the attorney wants a $2,500 retainer.

That $4,000 is already gone and now you’re out of your own pocket. You can go back to that individual, but what’s your agreement say? Do you say you’re going to cover those or go back? Sometimes you can go back to them, but their well might be dry. You’ve just got to have those conversations upfront a lot of times, which is what I’ll have what people, which is, “I’m only going to take down $25,000, but if we do after foreclose, do you have $5,000? Because I don’t want to have the $5,000 sitting in my account, but do you have it on standby?” Make sure you have money, a line of credit or something that if you need to pull it, it’s there.

Friendships and partnerships are crucial in the JV world. Click To Tweet

That’s super important is setting the expectations with the JV so they don’t feel like, “Did you not figure this out correctly at the beginning to ask for the right amount?” It’s great to express to the JV that you don’t want to hold a lot of extra money in the case that you’re going to have to renovate a house or something or do a legal process. I’m paying you the respect of letting you use those funds as needed in the interim. You need to know that this could happen and I may be coming to you if it does. I find when people know what to expect, they’re very able and they don’t get upset. We should go back to our phases at the point where you feel like you’re ready to take down a little pool and everything. Before you’re at the point where you would start a fund where you’re allowed to mix everybody’s money together to buy a big deal, when you’re buying a pool with multiple investors, you have to buy each asset with a particular investor. You might have three with one investor, one with another investor. The point is they know which ones are their properties, you know which ones and the amount of money that you’re asking from them is tied to the actual purchase price of those specific investments.

You don’t want to intermix. Once you’re comfortable with that and so forth and so on and you’ve been working, what you’ll find if you do have investors and they may have invested with you and the deal goes well and stuff. Sometimes they have some little extra cash to invest in the next one. All of a sudden, if you’ve got ten, fifteen people and close out some deals at $20,000, $30,000 and then all of a sudden, they got $50,000, all of a sudden you’ve got $500,000, three quarters of $1 million of funds potentially available if you can find the deals. When you’re moving from that stage to buying a larger pool, it’s that next step you take. At this time, you should start trying to find some other sources to acquire notes. Some of the sources you have, you may have told them, “I’m looking to take down something and I’ve got about this much. I’m looking to spend.” They’re able to also possibly find something for you and say, “What about this? Take a look at that.” This step is interesting because, Gail, I think the question or issue is once you get to that, when do you bring on help? People always say, “Chris, you haven’t hired somebody,” and so forth. Part of this is that you and I partner on these.

I look at us now as a partnership and whether it’s if you were taking it on hiring and bringing somebody on board or I was taking on and bring some on board, the experience that you have or I have is probably tenfold of bringing in somebody at $15 an hour or $20 an hour. We also work very well with each other on our strengths and weaknesses. That’s a component though of how are you going to do it? Are you going to do what yourself? Are you going to try and team up with somebody? What’s your plan? Is it your spouse? Who is it? What is it? Is it something that you need to delineate if you’re looking at taking down a larger pile of notes? The question is, how are you going to fund them? Are you going to do individuals? Are you going to do people in bulks of ten or are you going to put together a fund? If you do a fund, is it a 506(b), is it a 506(c). There’s good and bad. 506(c) is accredited, but you can advertise. 506(b) is sophisticated, but you can’t advertise. Those are a lot of things you’ll look at because to put those documents together too, it doesn’t happen overnight. You’re going to have to probably take three to four months to get something like that in the pipeline. If it’s something you’re looking to do, is it something that you start when you’re in the prior phase? You’re spending $10,000, $15,000, $20,000.

I would like to take a moment to say that I think people feel like they have to be master strategists, but when you look at how you and I got here, we were doing one thing at a time. At the very beginning, we were trying to learn how to be node investors. When we started taking on JVs, we were trying to understand how to be good note investors for a JV to fund deals with. We were problem-solving along the way and always asking ourselves, “How do we make the process better? How do we meet their needs better? What’s missing? How do we ramp this up?” We were not on day one being like, “How quickly can I start a fund?” This has been the theme of this whole thing.

Give yourself the time to grow. Grow into these things and don’t be rushing towards a big goal because you feel like other people might be getting there ahead of you. It’s all about what you’re ready for and what feels right to you. You and I have a lot of dedicated investors now because we’ve treated every deal like it’s the most important one. Do you know? When you have a JV, they want to feel like their deal with you is the most important one and they are. We just did a conscientious job with the details that we had. Now we have a pool of people who look to us.

We are friends because things have gone well and sometimes things have not even gone well, but we’ve held up our end and we’ve met our obligations to them. It’s like being through any a difficult situation with someone. You find out what people are made of. Now we’re able to reach out to people when we have something good and say, “We have this. Are you interested?” We got a big rush of yeses with these pools that we’re buying. It’s not because we’re famous podcasters. Some people we met because we’re famous podcasters, but most of these people have been originals with me or people I go pretty far back with. I don’t know if it’s the same for you.

GDNI 74 | JVs And Note Pools
JVs And Note Pools: Having a fund requires a level of sobriety and commitment.

 

All of the people that I typically do with are before the show and I don’t consider us famous. We like to talk. You’re right. The big component to this too is you set the tone in phase one and the neophyte phase. It starts at that and you’re going to have bumps, you’re going to have issues. You’ll sometimes off course. It’s all natural and normal, but when you’re starting out, stick to some corporate goals. What are the goals of your company and what are your motto and stuff? What’s your mission statement essentially? A lot of people just put cheesy ones and so forth, but put something down and then look back at that. Sometimes when you’re having some of those bad days, because when you get to the stage or talk about now, you’re a full-fledged business and you need to run it like a business. There are no more cutting corners on things or sitting here thinking, “I’m going to do my books by myself,” and so forth because you’re not going to have time. If you’ve got 50 active assets rolling full steam and trying to do the books and distributions and everything, you’re much better off paying a bookkeeper $150 a month or whatever it is. It’s not a ton of money.

It’s a few hours, an hour to two hours a month. You’re better off paying them to get it done. It’s right. That way if JV or somebody says, “This is wrong or what’s going on with this,” it’s a third party that’s doing it for you. I think it also gives people more credibility that says, “I’m not doing my own books.” Because in real estate, there’s a lot of lack of trust sometimes when it comes to money and numbers and so forth. When you’re using a third party that can do the reports for that and you say, “I’m completely transparent, look at everything.” Sometimes yes, the bookkeeper, I make mistakes and I code something to the wrong property and stuff and clean it up and so forth and get it corrected. At this point, you are a business and you need to operate as a business. It’s scary because a lot of us have never run a business and it’s also exciting and fun.

That’s a good point about the bookkeeper, particularly one who is able to access the bank accounts. Because then all that money is coming in and the money is going out to the places, you’re saying it’s going out. I could see that giving a lot of confidence.

I’ll drop Debbie Moan’s name who I use and same thing with like getting a CPA to do your taxes for you, but it goes more to that. I have all my collateral stored at MetaSource. People, that’s up to you and stuff and that’s something that can be done either way. It also goes to you should have at this point in time an attorney who is your go-to attorney. I know people have attorneys in every state and so forth, but you should have an attorney who your go-to attorney who does your JVs or tweaks them. It’s somebody who can pick up the phone and call and say, “This is a new situation for me. What should I do?”

A perfect example is just looking to convert CFDs to notes. I pick up the phone. I call the attorney who I use all the time, Brian Gallagher. I highly recommend them. He’s awesome. It’s like, “Brian, I’m looking to do this. What are your thoughts?” and so forth. He’s like, “Here’s what my recommendation is.” Sometimes it’s not legal advice, but sometimes it’s some advice because he might not be licensed in that state, but he’s like, “If you’re doing it in my state, this is what I recommend,” or things along those lines. It’s very good to get somebody, because a lot of people sometimes you don’t know if they’re fly by night, meaning they shoot from the hip and do things that I would question. Sometimes it’s good to talk to an attorney or two attorneys and stuff. Granted, yes, you’ve got to spend $100, but $100 is a drop in the bucket compared to if something goes wrong from that standpoint.

I feel like we’re in a situation now where we’d like to say everything about this. I think the takeaway is the final level. At least the final level that we can see is having a fund. Having a fund is a very big deal with very big requirements in terms of legal structure, offering paperwork that is SEC compliant, understanding the rules of a 506(b) or 506(c) so that you’re doing the right kind. It’s going to cost you some pretty serious money to get the offering documents, the private placement memorandum and the operating agreement on all the things created. You need to do that with a real attorney and not on a rocket lawyer. It requires a level of sobriety and commitment because now you’ve taken your individual responsibility to individual investors and you’ve multiplied that by several.

An example is we had the 506(c) documents created, which was 506(c)s for credit investors. Not only is it getting those documents created, but there’s also the component to, now based on what type of software am I going to be using? Make sure I have that up and running. How am I going to do the reporting? How am I doing the distributions? There are different companies that can do that, but those are things that you look into. Some of them, a lot of them, their minimum is $1,500 a month to manage the distributions for you. There’s the software you can buy, but it’s very expensive. You’ve got to spend $10,000, $15,000 versus $1,500 a month. You look at it and say, “From doing a two-year fund, do I spend $15,000 to buy it or do I spend $36,000 to lease it and have the person do it?” That’s some of the decisions. It’s not cheap. That’s where through this whole process, my last thought I’ll say on all of this stuff and I’ll be the first to say yes, I’ve blown money on things I shouldn’t have spent money on and is lessons learned and I wish I didn’t.

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There’s the other side of things is to manage and operate a business. You have to spend some money and I recommend spending it on good things and making sure and running a buy before you make a capital expenditure on things. I ask people, “What about this and that?” You can’t personally get to the point of still using a free CRM service or managing your notes on an Excel or Google Doc that you may have put some automation. I know other people may use Podio and I’ve used Infusionsoft on from mine. It comes to the point where you get to a level that you need to figure out what you’re doing because it’s going to be very difficult to do reporting and everything just off of a Google Sheet with automation in my mind. People have done it. Bill McCafferty has done it and he’s good at it and so forth. I think he’s one of the few that can get away with it.

I think you have to have a particular mind with tremendous detail orientation and you have to only be doing this not to have another big job. You have to focus on it. That’s why I do a lot of things myself that you delegate or automate. I’m excited to be doing these big pools because it’s now forced me to jump in with both feet on the automation and systems. I’m excited to learn them. Once again, it’s a growth experience.

Gail, I think we should end on that and we’re excited to, from our perspective, be entering into this what I consider next phase and I’m sure there’s another phase above that as well that we just haven’t visualized yet.

We don’t know what it is, so we can’t talk about it.

It’s working your way and starts. Wherever you start, wherever you are in your business, there are going to be days where you feel down in the dumps and there are days you’re going to feel excited about things. Just keep plugging. We tell people this isn’t a passive business. If people are telling you it’s passive, then it’s not. If it’s a business you want to get into, it’s a great business, but you got to understand that if you’re only going to buy two, three, five notes a year, then I’ll be honest, you probably shouldn’t be in the business, but you can invest with people who are in the business. Because I think you’re going to end up spending a lot of your profits on systems at that point in time.

I’m laughing at you because I think someone could buy five notes a year and have it be like a nice little thing on the side and they don’t have to automate and stuff.

If they’re buying for their own portfolio, yes. If you’re thinking that you’re going to want to take on investors but only by five to ten assets per year, the reason I say that is people always forget about the lost opportunity costs. “I bid on these ten assets, I got six excepted and I only closed on two.” You just dropped $1,500 probably on due diligence. All of a sudden you look at $1,500 on a $15,000 note, there’s your 10%.

It’s far to be between doing it small and doing it big. That in-between place is tough. Anyway, I would say like my nugget and I can make this my note and bolt. I would say give yourself a chance to grow naturally in this business. Don’t be forcing yourself to try to hit targets, particularly targets that are based on being competitive with other people. You have to feel within yourself that you’re ready for the next level and that you are ready to take on the burdens and responsibilities of the next level. If you do feel like you’re evolving correctly and it feels right to go to the next level, it is very exciting to do.

Gail, we’ve had a great topic. Any final thoughts?

Did you want to give a note and bolt or have you drained yourself of all useful information at this point?

My note and bolt are about making sure your systems are in place and stuff.

Your systems talk is still somewhat falling on deaf ears on my part. You’re about to have your day as you’ve now involved me in a situation where I have no choice but to get very systematized. Let’s do it. Thanks, everyone. Please be sure, if you haven’t already done so, to leave us a review on any of the platforms. Do we have a preferred place for them to leave a review?

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