Latest / Real Estate Note Investing / Episode 60: Raising Capital for Your Note Business

Transcript

Episode 60: Raising Capital for Your Note Business · Real Estate Note Investing

• 0:00
  SPEAKER_00: Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar.
• 0:12
  SPEAKER_00: My name is Robert Haitha, founder of Pick Notes, and my mission is to make note investing ethical, profitable, and accessible for you.
• 0:20
  SPEAKER_00: In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of mainstream investors like you.
• 0:29
  SPEAKER_00: So without further ado, let's get into this show where you're in good hands with my AI clone.
• 0:34
  SPEAKER_00: Let's go.
• 0:37
  SPEAKER_00: This program is for informational purposes only and should be independently verified before taking action.
• 0:45
  SPEAKER_00: At some point in the growth of a note investing business, your own capital becomes the constraint.
• 0:50
  SPEAKER_00: You are seeing more deals than you can fund, or the deal sizes are growing beyond what a single investor's balance sheet can support.
• 0:59
  SPEAKER_00: That is a good problem to have.
• 1:01
  SPEAKER_00: And it is also the moment when understanding how to bring outside capital into your business becomes essential.
• 1:06
  SPEAKER_00: Before getting into the mechanics, it is worth being direct about something.
• 1:10
  SPEAKER_00: Raising money from investors is a regulated activity.
• 1:14
  SPEAKER_00: The Securities and Exchange Commission and state level regulators have specific rules about how capital can be raised from investors and under what conditions.
• 1:22
  SPEAKER_00: This is not an area to navigate by instinct or by copying what you have seen other people do.
• 1:28
  SPEAKER_00: You need to work with a securities attorney who understands private placement law before you raise a single dollar from anyone other than yourself.
• 1:36
  SPEAKER_00: What follows is a general orientation to the capital structures that note investors commonly use, not legal or securities advice.
• 1:44
  SPEAKER_00: The most accessible capital structure for a smaller note investor is a deal-by-deal joint venture.
• 1:50
  SPEAKER_00: In a joint venture, you partner with one or more capital investors on a specific loan or a specific pool of loans.
• 1:56
  SPEAKER_00: You bring the deal, the expertise, and the operational management.
• 1:59
  SPEAKER_00: Your partner brings the capital.
• 2:00
  SPEAKER_00: You agree on a split of the profits up front.
• 2:03
  SPEAKER_00: This structure is relatively simple, does not require a formal fund structure, and can be arranged with a straightforward joint venture agreement prepared by an attorney.
• 2:11
  SPEAKER_00: Because you are going deal by deal rather than pooling capital broadly, the regulatory requirements are generally less complex, though you should still understand the applicable rules before proceeding.
• 2:21
  SPEAKER_00: As your business grows and you develop a consistent track record, you may want to move toward a pooled vehicle.
• 2:28
  SPEAKER_00: The most common structure in the note investing space is a fund organized as a limited liability company or a limited partnership.
• 2:36
  SPEAKER_00: The fund raises capital from multiple investors who become limited partners or members.
• 2:42
  SPEAKER_00: You manage the fund as the general partner or managing member, and you deploy that pooled capital across a portfolio of loans.
• 2:49
  SPEAKER_00: The legal document that governs the structure and describes the opportunity to investors is called a private placement memorandum, or PPM.
• 2:56
  SPEAKER_00: This is a detailed disclosure document that explains the investment strategy, the risks, the fees, the management team's background, and the terms under which capital is invested and returned.
• 3:07
  SPEAKER_00: A securities attorney drafts the PPM, and it is not a document you should approach casually or produce yourself.
• 3:14
  SPEAKER_00: One practical point on fund design: keep the investment mandate as broad as reasonably possible within your strategy.
• 3:20
  SPEAKER_00: Some fund managers make the mistake of writing a very narrow PPM that limits them to a specific loan type or lien position.
• 3:27
  SPEAKER_00: Then they see a compelling opportunity outside that mandate and cannot deploy their dry powder without going back to amend the documents.
• 3:34
  SPEAKER_00: Build an optionality so that if you are primarily focused on non-performing second liens, the PPM also allows you to invest in first liens when the opportunity is compelling.
• 3:44
  SPEAKER_00: For investors who want to participate in note returns without the complexity of a formal fund, self-directed individual retirement accounts are one of the most powerful vehicles available.
• 3:54
  SPEAKER_00: A self-directed IRA allows the account holder to invest retirement funds into alternative assets, including mortgage notes, inside a tax-advantaged wrapper.
• 4:04
  SPEAKER_00: These investors are often motivated buyers of reperforming loans because they want passive cash flow that grows tax deferred or tax-free inside their retirement account.
• 4:13
  SPEAKER_00: When you sell a reperforming loan to a self-directed IRA investor, the transaction has a few extra steps.
• 4:20
  SPEAKER_00: The custodian has to sign the purchase agreement, the investor signs a purchase directive, and the assignment gets recorded in the custodian's name.
• 4:27
  SPEAKER_00: But the pricing you can achieve is often better than selling to an institutional buyer because the self-directed IRA investor is willing to accept a lower yield in exchange for the tax advantages.
• 4:37
  SPEAKER_00: On the institutional capital side, once a fund has achieved meaningful scale, debt facilities become available that allow you to leverage your equity capital.
• 4:45
  SPEAKER_00: A credit line or term debt facility from a family office lender or specialty finance company might advance 60 to 70% of the value of your performing loans, allowing you to deploy more capital without raising more equity.
• 4:57
  SPEAKER_00: The trade-off is that institutional lenders require minimum portfolio sizes, specific documentation standards, and regular reporting.
• 5:04
  SPEAKER_00: This level of capital structure is typically several years and several million dollars into a business's development, but understanding it early helps you build toward it from the start.
• 5:13
  SPEAKER_00: Wherever you are in the capital raising journey, investor relations is a permanent responsibility.
• 5:19
  SPEAKER_00: Setting clear expectations about timelines, returns, and risks before capital is deployed, and communicating proactively and honestly throughout the investment period is what turns a single investor relationship into a long-term partnership.
• 5:34
  SPEAKER_00: Investors who trust you and have been treated well are the most reliable source of capital for your next deal.
• 5:40
  SPEAKER_00: Next time, we are going to look at building a lifestyle first note investing business, how to design your operation around the life you want to live, and why scale is not always the right goal.
• 5:51
  SPEAKER_00: Thanks for sticking around to the end, and thank you to my trusty Robot and the FixNotes team for putting together another episode.
• 5:59
  SPEAKER_00: If you want to learn more and hang out with the real not AI version of me, join our free school community at school.com slash fixed notes.
• 6:08
  SPEAKER_00: That's s k-o-l.com slash f I X N O T E S.
• 6:14
  SPEAKER_00: In the meantime, we'll see you in the next episode.