Note Newbie: What is a good JV partnership?

Question

I am new in the note business and looking to learn the note business using money from my SDIRA. I have made a few acquaintances from BP and are hoping to JV with them to help me learn the note business. I am hoping for a win-win situation for both of us. I know (or at least I hope) that most of the people on BP are genuine and are not out there to sc*** the new guy but I am also aware that there are predators out there too. Can anyone guide me on what to look for in a mutually beneficial JV note deal? I want to know how to separate the bad guys from the good.

Thanks!

Bob Malecki · Answer

Hi Mark,

If using my SDIRA, I have a separate trust established which declares my SDIRA as the sole beneficiary and I declare that trust as the co-beneficiary in the JV trust agreement. This is sometimes called "trust stacking" which creates multiple layers of trust arrangements.

If not using my SDIRA I will declare my LLC as the co-beneficiary so that I have inherent asset protection. Hope this helps.

Also, noticing that you are located in Seattle, you may want to consider joining our Meetup group Seattle Distressed Note Investors:Creating Wealth With Debt. We meet monthly and discuss these kinds of entity architectures.

Bob

Originally posted by @Mark Gibbs:

@bobmalecki just curious, is it an LLC that holds your share of ownership in the trust or do you have it directly in your name? Seems like good protection if you can skip the LLC altogether but I am always concerned about reach through with litigation.

Bob Malecki · Answer

Hi Chuck, I have to respectfully disagree with your premise that notes are not complicated. Even in a private lending scenario you outlined above, there are many moving parts and different regulations from one state to another. With factors like shifting vacancy rates, vandalism, tenant integrity and competency/performance from the borrower/landlord, there is much to be considered when loaning on a rental property.

Yes, private lending is simpler than restructuring NPLs, but the return on investment is also generally lower since a private lender is generating a loan at 65-80% of the asset value, vs. buying a NPL at 50% or less of the asset value. A restructured NPL can fetch P&I income closer to 100% of the asset value (possibly more if the home is under water with a loan balance higher than the value).

In addition I'd rather have a borrower who lives in the home and will keep it maintained while sending me consistent monthly payments, vs. a landlord-borrower who may get squeezed if his property goes vacant for many months or the tenants stop paying their rent and new income cannot be realized until the eviction process is completed.

Higher risk and more complicated, yes, but higher reward as well!

Originally posted by @Chuck VanDyne:

Jay, I do not believe investing in real estate notes are complicated for a new investor. Of course, I am not referring to non-performing note investing which I would not advise a new investor to undertake.

Bob Malecki · Answer

Hi Sandy,

I have nearly 100% of my own SDIRA funds deployed into notes, mostly non performing that we've gotten re-performing and we are seeing an average of over 30% annual ROI in that portfolio. Most of the notes purchased are stabilized for ongoing cash flow, and we've foreclosed only on one home this year so far. The borrower had already vacated prior to my buying the NPL, so this was essentially a "foreclose & flip" outcome.

I've been doing JV deals on non performing notes with a many investors who have SDIRA funds and want to learn more about the process. I typically will do all of the research, due diligence and have my team work with the borrower for a desired outcome of reperformance and cash flow, or an exit of Deed In Lieu or foreclosure as the last resort.

By partnering my SDIRA entity with a JV partner, I utilize the platform I've created in my own note business and provide additional income to my and my partner's SDIRA accounts. A win/win for everyone, especially if we can keep the borrower in their home.

My JV partner is the investor who funds the note purchase and expenses while I do the "heavy lifting" and communicate with my investor/partner all along the way. We set up a Personal Property Trust which has both my company and my partner or his/her company as the beneficiaries, and the trust is named as the assignee of the note upon purchase.

The trust document defines the participation of each partner as well as performance criteria, buyout parameters, etc. By using a trust as the ownership entity, our identities are protected from the borrower while we retain ownership via the private trust agreement. Also a trust agreement is less costly to set up than a LLC which requires state registration and is publically searchable.

I have a fairly "virtual" system for project management which includes email, GoogleDocs and a few other cloud apps to allow us and my team to stay in constant communication and make decisions rather quickly if needed.

Connect with me if you want more info, and in fact I just did a webinar to my local Meetup group here in Seattle which outlines the tools I use to run my note business as well as multiple SFR flips and rentals.

Best,

Bob Malecki

Bob Malecki · Answer

Hi Jennifer, feel free to connect with me off-board and I can provide you more info, Bob

Jennifer King · Answer

@Bob Malecki Was your recent webinar recorded and available to watch anywhere? As a newbie with more money than know-how, I'm currently researching ways to invest passively into someone else's well-established system. Might start with some simple crowdfunding but also want to move into business relationships with locals as I learn more. I like the idea of helping each other out where we live.  :)

On another note (haha), I'm looking for a CPA to help me structure my business and handle future tax returns, and I wonder if you have any people to recommend. Thanks so much!

Jay Hinrichs · Answer

@Chuck VanDyne  your scenario is a new mortgage origination its not investing in existing notes.. big difference.

@Bob Malecki  Nice the Mod's let you spell out your whole business model they must like you  LOL>

I like my SIDRA for notes  having been doing it since the early 80's... But like all investing there is risk and reward.

I take it in your model you take a cut of the gross return for the heavy lifting.. this could be a good alternative for a newbie... And it really comes down to any other investment were its one persons money and another great idea.. its all about the sponsor first and foremost then look at the asset.

However correctly done NOtes are a nice alternative to rentals.

Although I am in Chuck's camp on the short term investor loans as opposed to buying owner occ notes and repositioning them... Not something I would personally want to do with the new laws and rules etc.. and the drama and emotion that surrounds owner occ folks. you work for those 30% returns.

Mark Gibbs · Answer

@bobmalecki just curious, is it an LLC that holds your share of ownership in the trust or do you have it directly in your name? Seems like good protection if you can skip the LLC altogether but I am always concerned about reach through with litigation.

Chuck VanDyne · Answer

Jay, I do not believe investing in real estate notes are complicated for a new investor. Of course, I am not referring to non-performing note investing which I would not advise a new investor to undertake.

However, Sandy, say you had $100k in your SDIRA. You could lend the entire amount to a real estate investor who has a duplex worth $130k which is rented out for $1450.00. All you need to do is have a lawyer draft a private mortgage note document, file it with the town clerk, authorize the investment with your custodian, and waula! You have just invested in real estate notes.

The interest rate, payment period, and length of loan can be what ever you two decide. If the mortgagee does not make payments you can foreclose on the house and get a house worth $130k for only $100k or how ever much is left on the balance.

Find a local investor and they will want to keep coming back to you because they want your money to invest in more real estate.

Jay Hinrichs · Answer

your first instinct is correct just because someone is on BP or has done a pod cast does not move them to some special class of investor. I have done business with a handful of BP contacts all have been good save one.. who cost me a significant loss.. frequent poster etc etc  but could not execute.

and the note business is semi complicated for someone just starting out there is a lot of detail.. with each state being different etc.  Lots of work.

Good luck with it.  Why would anyone who is active in the Note business want to bring on a newbie ?  that would be my first question..

Note Newbie: What is a good JV partnership?

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