Investing sweat before money in notes

[David Faulkner]

I would like to get started with getting “hands on experience” in or around note investing, but do not yet feel comfortable enough with the asset class to lay down the type of capital it would take to get started directly investing (~$100k or more to start, I’m told). So, what is the best way to invest my sweat to get hands on experience before I invest my money?

Background & details:

I am an engineer by trade & education and I also have an MBA in finance, which by no means makes me an expert, but it is a start … I'm good with numbers, pay heed to the details, and conservative in nature (defense first, then returns). I also have a wicked independence streak, don't mind being contrarian, and like to be hands on & in control, which could be a good or a bad thing depending on the context and who you ask. I already have been successful investing and managing a small SFR rental portfolio. I work a fulltime job and am not quite yet financially independent from my passive rental income (but almost). I have money to invest in the form of cash in SD Roth IRA LLC + excess equity that may be tapped via either sale or cash out refi. I worked hard for this money, by investing carefully and with a lot of sweat equity, and don't want to be cavalier in investing it into something I know little about (like notes). However, I'm finding that the SFR rental numbers in the markets I operate in are no longer working, so I'm looking to diversify my investments into notes. For my SFRs, I purchased distressed REO "cosmetic fixers", was active in repairing them, then hold them for passive long term income … I would like to adopt a similar type of strategy with notes. I would like to stay in my own backyard (SoCal), be hands on and independent as possible, without pooling my $ into a fund or JV (MyM, not OPM). I'm not looking to get rid of all my SFR rentals, just augment them by diversifying into notes. This is where I'm envisioning ending up.

My ideas so far:

I would like to work part time (10-20 hrs/week, nights + weekends) to get some hands on experience. Part time is likely my best bet because unless I could start at or near 6-figures (not bloody likely), then the opportunity cost of quitting my current day job would be too high. I don’t necessarily need to make any money on my initial sweat, but must get valuable knowledge & experience out of it. I would then invest money once I:

1. 1) Understand due diligence to assess risks, rewards, and values as well as develop skills to find good deals, remedy issues that may arise, and execute a variety of exit strategies successful.
2. 2) Find notes that meet my investment criteria. I'd be happy with 12-14% annualized returns when notes are performing, plus a "kicker" derived from a discount from UPB if the note prepays. All this while having equity sufficient to cover my downside and avoid principal loss. I see item 1 above as a prerequisite to 2.

So, is this a reasonable plan, and what is the best way to execute it? Should I get my license and work as a mortgage broker/originator? Work at a mom & pop title or escrow company? Volunteer to work for/with a seasoned investor in a mentoring arrangement? A seasoned investor like the one I’d like to work with by definition wouldn’t really need my help or money, so what would my value proposition to them be? I'm not paying $10k for a guru mentoring program; I know what business they are in (hint: it is NOT the business of finance). On the other hand, I don’t want to ask for a free ride as a charity case. Or should I stay on the RE side for now, work as a RE agent, then RE broker, then commercial RE broker, etc. until I “rise to the level” of dealing in notes?

What do you think?