For real estate investors, the idea of using notes as a primary investment vehicle is often overlooked because the physical structure gets all of the attention; however, this strategy carries plenty of potential.
Done properly, one can invest in a debt instrument - a mortgage or deed of trust, depending on the state- gaining the benefit of a cash flow stream without the need to get into property management details. But finding notes worthwhile can be difficult and risky. One way to minimize risk and ensure a profitable and stable outcome is to work with a qualified investment manager or investment company with a track record of proven result.
Using Capital Partners to Buy Notes
Entering into a joint venture is a great way to fund your real estate investment opportunities. A joint venture arrangement is basically a simplified alliance between two parties that share a mutual interest in a business, particular assets, or more. Since a joint venture doesn’t actually involve a merger or any sort of power transfer, they are considered pretty much ideal for someone who needs financial backing to buy notes.
If you need investors to help you fund your real estate business, private capital partners can be a good solution. Step one is finding an investor who likes your proposed strategy for turning notes into income. The next step is to decide how each party will be paid or how the income will be split. There are two ways to structure the investment with the capital partner, either through debt or equity. Debt states there would be a monthly or quarterly or annual distribution, for example 8%. If the real estate investor borrowed $10,000 at 8% interest only, for example, the monthly payment would be $66.67 per month. The problem with debt financing is the investor is obligating himself or herself to that debt payment. This proposed capital structure poses a risk for the real estate investor who must make that payment each period. It’s an obligation that possibility could be avoided through an equity capital structure.
As an equity partner, the capital investor is getting a percentage of the total profits, and total income received. It might be a 20% equity stake, and in that way, could possibility be a safer investment for the real estate investor, because if the investment stops performing there is not the obligation to make a payment to the capital investor. For a small $10,000 investment, the $67 might not seem like a lot, but what if it was a $1M investment? That’s $6700 per month which could be much more challenging to keeping making those payments while the income stream is corrected.
In addition, from the capital partner’s side, an equity partnership may be more beneficial from an overall yield perspective. The return is often higher with an equity structure because they participate in the profits.
You Have a Note – But What Now?
Having a plan of action is paramount for success in both attracting capital partner investors and having a successful conclusion to your investment. The Legacy Group uses an internal Project Gameplan™ for every asset we acquire which outlines the strategy for success including the company’s exit plan.
One business strategy could be to broker a note, find a seller, and find a prospective buyer and make a small profit for putting those two parties together. If you know where to get sellable notes and where to find groups that will want to buy them, this process might a great way to get started. Be sure to check local regulations regarding these transactions as law and rules vary by state.
An easier way to get started is just invest with someone who is already doing the business. They will have the systems, the contacts, and the experience to keep your money safe along with returning a great yield. This is exactly how The Legacy Group has built their business, one investor at a time. We have the knowledge, background and experience to succeed in the note business. Our history has proven that we can return a consistently yield for our investors. In fact, over the past 10 years, we’ve created hundreds of JV partnerships with investors who have invested in either our fund or on a deal-by-deal basis. Our success is due to our unique process called The Legacy Advantage™, in where we identify all of the risks associated with a particular investment, attempt to mitigate or minimize the risk using a proprietary set of best practices, and then create a contingency plan. You cannot eliminate all risk, but our goal with The Legacy Advantage™ is to minimize the risks, as much as possible, to make them almost non-existent.
The Benefits of Giving Up Control
In an ideal world there would be plenty of time for every pursuit and every desire and an ability to research the best notes and learn how to underwrite them properly and thoroughly. The reality is there is a limit on how much available time there is to not only find suitable notes but also tend to them if they go sideways or need attention. In addition, there are regulations and laws to follow for servicing and collection. All of these concepts are not impossible to learn, but a choice needs to be made for spending time doing other things you love vs. working on this strategy.
The main benefits of investing as a passive investor in the world of real estate notes is the magic of passive income. So many people complain of being “too busy” in life. You ask them how they are, and they say “busy”. It’s almost like a badge of honor, that if you’re not busy, you’re slacking. However, I see it as a booby prize. Being too busy to miss out on the happy moments of life is not what life is about. That is the beauty of passive income; in that you don’t have to work any harder but yet get to realize the cash flow. It's the lazy-persons path to true wealth.
Some may seem that giving up control is a disadvantage; however, I see it as an advantage. It’s an advantage to be able to focus on your family or career and let the upside take care of itself while the experts work the model to generate an above average return.
Benefits of Joint Venture Funds & Investors
Lastly, it is important to touch upon the overall advantages of joint venture funding and using professional investment companies through a private equity fund for your real estate portfolio. After all, the note business is part of the real estate investment business.
Here are some of the advantages you as an accredited investor can find by working with The Legacy Group Opportunity Fund include:
- Ability to diversify your investment capital across multiple markets, deals, projects, sectors and assets classes – all reducing your risk.
- Stock market-like returns with bond level-type security.
- As much as 80% of all profits are distributed to A-class shareholders.
- Projected returns 9-14% backed by historical data, and preferred returns of 7%.
- Availability to invest using IRA dollars through your custodian.
- No ceiling on upside returns – there is no cap on how much you can make.
- Our managers continue with cutting-edge training for horizon view direction and models.
- Third-party accounting and bookkeeping audits, reports and updates, and custodianship of investment funds with real-time transaction level reporting for investment dollars for transparency.
- The Legacy Advantage and our 140+ years of total real estate investment experience.
Finding real success with joint ventures and note acquisition will require a plan, an understanding of the related markets, and confidence and agreements among all parties. While that might seem like a lot to need, especially if you are new to the real estate investment business, know that you can make it happen. Time and time again, our team at The Legacy Group is reminded by our own clients that success starts as a state of mind.Want to know more about real estate investment opportunities, joint ventures, and notes acquisition? We love discussing a business we find so fascinating with new people. Feel free to call us at (719) 578-8387 or contact us online at any time.