Why do experienced investors JV on notes?

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Why do experienced investors JV on notes?

Leighann Davis
Lakeland, FL · Member since 2017 · 23 posts · 13 votes

Hi all - 

I see forum posts referencing JVs frequently as a good place to start for new note investors. 

My question is this - At what point is it "worth it" for veteran note investors to JV with a newbie? How much of those JVs are actually worthwhile from a business standpoint versus the veteran taking on a JV to "give back"? Is it worthwhile for the experienced investor simply because they're getting "free" funding?

I'm fairly new to note investing (and real estate investing in general) and am not accredited, however I have worked in investments (stocks, bonds, mutual funds, etc) for 6 years and actively invest in those arenas and am a CPA, so I'm pretty comfortable with financials/investments/risk/etc. (though I know note investing is a different game). My preference would be to "learn the ropes" from someone for my first couple notes but I would still want to provide value in some way and would want the transaction to be worth it to them as well. 

I would consider providing the capital for a couple notes and allowing the other investor to keep a chunk of the profit in exchange for being able to really learn the process. But is this something that experienced investors are actually interested in? Or would it probably not be worth their time from a business standpoint because of the time required to teach and relatively low volume involved? Or is it worth it to the experienced investor simply because they're getting "free" capital? What's the motivation for the experienced investor to JV?

(And yes, I've seen posts on the forums about the standard setup of the newbie providing the funding, the experienced investor finds/manages the deal, and then splitting profits 50/50.... but I've also read where some newbies were not very involved in the process and therefore didn't feel like they were prepared to do it on their own after that JV, which is what I would want to avoid. Learning/experience would be my priority.)

Sorry for the long post - just trying to understand the motivation from both sides. 

Leighann

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Patrick Desjardins
Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
8y
Originally posted by @Leighann Davis:

Hi all - 

I see forum posts referencing JVs frequently as a good place to start for new note investors. 

My question is this - At what point is it "worth it" for veteran note investors to JV with a newbie? How much of those JVs are actually worthwhile from a business standpoint versus the veteran taking on a JV to "give back"? Is it worthwhile for the experienced investor simply because they're getting "free" funding?

I'm fairly new to note investing (and real estate investing in general) and am not accredited, however I have worked in investments (stocks, bonds, mutual funds, etc) for 6 years and actively invest in those arenas and am a CPA, so I'm pretty comfortable with financials/investments/risk/etc. (though I know note investing is a different game). My preference would be to "learn the ropes" from someone for my first couple notes but I would still want to provide value in some way and would want the transaction to be worth it to them as well. 

I would consider providing the capital for a couple notes and allowing the other investor to keep a chunk of the profit in exchange for being able to really learn the process. But is this something that experienced investors are actually interested in? Or would it probably not be worth their time from a business standpoint because of the time required to teach and relatively low volume involved? Or is it worth it to the experienced investor simply because they're getting "free" capital? What's the motivation for the experienced investor to JV?

(And yes, I've seen posts on the forums about the standard setup of the newbie providing the funding, the experienced investor finds/manages the deal, and then splitting profits 50/50.... but I've also read where some newbies were not very involved in the process and therefore didn't feel like they were prepared to do it on their own after that JV, which is what I would want to avoid. Learning/experience would be my priority.)

Sorry for the long post - just trying to understand the motivation from both sides. 

Leighann

 Good question. The simple answer is that it is almost impossible to buy notes without running out of your own money, even when you're somewhat successful.

Let's use an hypothetical scenario. You start with 100k. There are a few options but let's say you decide to buy 2 notes for 45k each, one in Florida and the other in South Carolina. 

You get into a workout agreement where the people will pay you 5,000 upfront and then XYZ a month for 25 years. I would have to calculate the numbers but let's assume it gives a 20% just for argument's sake. So you're successful, but now you have $5,000 in your account plus whatever is left of your reserves. You spent a year working on this note, got a successful agreement, and yet you don't even have enough money to go buy another one. Now the only thing you can do is wait 6-12 months and then sell it to another investor. All in all you just spent 18 months+ on a single note.

This is how I started, using only our own money. It's good in some ways because there isn't as much pressure. But it is very slow.

On the other hand if you do JVs, you could keep buying for as long as you find partners. 5 deals at 50% is worth more than 1 deal at 100% ownership.

So.. this is why JVs exist and why experienced investors want to do them. Notes are a bit different from house flippers because there are no easy way to get loans.

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  • Dan Zitofsky
    Real Estate Coach · DE · Member since 2013 · 64 posts · 85 votes
    8y

    Great post and question.  There are many ways to set this up but most importantly please make sure your working with investors with enough experience. Most newer investors in the game now a couple years are running around taking money as experts from other nesbys. This is how they are being taught and then doing deals without proper due diligence or exit strategy.

    Ive sat back and watched investors who are presenting themselves as experts bringing money (JV partners) into a deal and buying notes in Illinois. They had no clue themselves they needed a license their and now put their JV partners money at risk. I've also seen issues like acquiring notes where the due diligence was barely or not done at all and then they call me to get them out of trouble.

    It’s fine to be new and learn but I’ll always preach don’t do it on someone else’s dime. Be a steward to their money better then you would your own. 

    My suggestion is to think about paying for coaching and also doing JV with someone so you can learn the deal from start to finish. That's how I've worked with people asking the same question. For me I wouldn't of been able to spend the time teaching each deal to my investors and be able to work effectively when I have others I teach as well as I'm sure you can imagine. If you really want to learn this the right way and more importantly work towards your exit strategy it's the best way but just do your due diligence on who you decide to work with or JV with.

    I wish you the best of luck and am happy to answer any questions you may have. 

    Dan Zitofsky 

    6Reply
  • Patrick Desjardins
    Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    8y
    Originally posted by @Leighann Davis:

    Hi all - 

    I see forum posts referencing JVs frequently as a good place to start for new note investors. 

    My question is this - At what point is it "worth it" for veteran note investors to JV with a newbie? How much of those JVs are actually worthwhile from a business standpoint versus the veteran taking on a JV to "give back"? Is it worthwhile for the experienced investor simply because they're getting "free" funding?

    I'm fairly new to note investing (and real estate investing in general) and am not accredited, however I have worked in investments (stocks, bonds, mutual funds, etc) for 6 years and actively invest in those arenas and am a CPA, so I'm pretty comfortable with financials/investments/risk/etc. (though I know note investing is a different game). My preference would be to "learn the ropes" from someone for my first couple notes but I would still want to provide value in some way and would want the transaction to be worth it to them as well. 

    I would consider providing the capital for a couple notes and allowing the other investor to keep a chunk of the profit in exchange for being able to really learn the process. But is this something that experienced investors are actually interested in? Or would it probably not be worth their time from a business standpoint because of the time required to teach and relatively low volume involved? Or is it worth it to the experienced investor simply because they're getting "free" capital? What's the motivation for the experienced investor to JV?

    (And yes, I've seen posts on the forums about the standard setup of the newbie providing the funding, the experienced investor finds/manages the deal, and then splitting profits 50/50.... but I've also read where some newbies were not very involved in the process and therefore didn't feel like they were prepared to do it on their own after that JV, which is what I would want to avoid. Learning/experience would be my priority.)

    Sorry for the long post - just trying to understand the motivation from both sides. 

    Leighann

     Good question. The simple answer is that it is almost impossible to buy notes without running out of your own money, even when you're somewhat successful.

    Let's use an hypothetical scenario. You start with 100k. There are a few options but let's say you decide to buy 2 notes for 45k each, one in Florida and the other in South Carolina. 

    You get into a workout agreement where the people will pay you 5,000 upfront and then XYZ a month for 25 years. I would have to calculate the numbers but let's assume it gives a 20% just for argument's sake. So you're successful, but now you have $5,000 in your account plus whatever is left of your reserves. You spent a year working on this note, got a successful agreement, and yet you don't even have enough money to go buy another one. Now the only thing you can do is wait 6-12 months and then sell it to another investor. All in all you just spent 18 months+ on a single note.

    This is how I started, using only our own money. It's good in some ways because there isn't as much pressure. But it is very slow.

    On the other hand if you do JVs, you could keep buying for as long as you find partners. 5 deals at 50% is worth more than 1 deal at 100% ownership.

    So.. this is why JVs exist and why experienced investors want to do them. Notes are a bit different from house flippers because there are no easy way to get loans.

    9Reply
  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    8y

    Hi @Leighann Davis I run 2 private equity Reg D funds where we pool investor capital into distressed debt and essentially deploy OPM into assets for both of my companies benefit and our subscriber's benefit. This is a pooled fund with many investors sharing the risk across many assets, and our investors are entirely passive. Its a team effort with multiple partner/managers in each fund.

    I have also partnered with individuals in joint ventures on a one-to-one basis for those who are looking for potentially higher upside on the outcome for the project. These are usually folks who want a more "hands on" interaction with me and the asset from selection thru disposition. In practically all cases the upside is higher than the pooled model if I do my job well. Since this is a single-asset based project, the risk/reward ratios are higher. 

    For me, since I've already deployed the majority of my personal funds into assets, my motivation is having OPM on individual projects which allows me to leverage that capital to increase my income streams while providing my partner a profit and exposure to the process of acquiring and repositioning distressed debt. Although I'm not promoting myself as an educator and do not provide any formal curriculum or program, I do foster a "learn by doing" experience from the nature of the JV relationship

    I hope this helps to answer your question about the motivation from the experienced investor side.

    Bob

    ***Moderator note that this reply is to respond to the poster's question and not intended to be a promotion of any of kind***

    5Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Leighann Davis Like others have noted, it is about growing your business. I started out in notes investing my own funds, after doing about a dozen deals I started to take on JV partners as a way of growing business as my capital was tied up. This is typically the 2nd phase of a note investor on their growth. The 3rd step would be to start a fund where you can raise capital and not have one JV for one note. If you decide to partner,, make sure to do your due diligence on your partner and get references and how many deals they have done. There is no right number to this but you want to know all the information involved. Also find out how active you can be and to what extent. I typically recommend if you have the funds to partner with multiple people so you can learn from multiple people as everyone does things differently
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  • Mengdi Lin
    Lender · Houston, TX · Member since 2017 · 3 posts · 0 votes
    8y

    @Bob Malecki I'm sure everyone will have different answers for this. For you guys with more experienced who's willing to take on a JV partner who is completely new, how much capital do you guys usually look for?

    As a follow up to her question, is there anything that the newbie like me can do for you aside from providing capital?  Would definitely love to get my feet wet but just have no idea what I can provide.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    Also keep in mind this is taught in note guru school.  so this is why U see this.. 

    I suspect those that are asking for partners are taking a larger % and they probably should .. 

    but if its just dollar for dollar I don't see the reason to do that.. but that just me.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    Plus you now went into a partnership that has potential to go on for many years with folks you really don't know.

    so in your day job think about how partnerships go long term LOL.. rocky road sometimes.

    to me I am thinking  invest in fund  or invest in Reit or buy your own.. and pay someone to help you with it. 

    But again that's just me. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    PSS if your business model is to buy NPN and then go straight to foreclosure IE its a vehicle to buy property that is a different partnership.. And one I have done many many many times. But if you have it in your mind your going to have long term cash flow.. then that is something altogether differenet.

    what happens 3 years down the line and your note partner who is co bene and doing all the work gets hit by a truck and is no longer here.. Ya you can have all the paper work and JV agreements.. but still going to cost you money as they probate his or her estate .. etc etc. there is simply a lot to think about with long term JVs on ANYTHING really.

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  • Tim S.
    Investor · California, CA · Member since 2016 · 367 posts · 375 votes
    8y

    "What's the motivation for the experienced investor to JV?" Well, the obvious answer is money. They are making a profit with zero of their money invested. That's the business model for many of them. Find investors (JV partners), find deals, do the work, split the profits.

    There is nothing wrong with that model, it's a win-win for both as long as both sides have integrity, the proper expertise, and the active partner is treating the JV's funds with utmost care.  

    Some experienced note investors don't want to lead you by the hand.  They don't want high maintenance JV partners who want to be involved in every little decision and may have unrealistic expectations (in terms of %return, and time it takes to complete the deal).  Make sure you ask them what level of involvement with you they are comfortable with.  Some are good with monthly phone calls, but not more frequent.  Others may be fine talking to you every week.  There needs to be a balance that both parties are comfortable with.  

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  • Leighann Davis
    OP
    Lakeland, FL · Member since 2017 · 23 posts · 13 votes
    8y

    @Dan Zitofsky @Patrick Desjardins @Bob Malecki @Chris Seveney @Jay Hinrichs @Tim S.

    Thank you all for your insight! Definitely a lot to consider. Getting involved with notes is a little tricky when you're first starting out... you don't want to get screwed over by diving in and trying to "learn from doing" but then losing money because you're not prepared and don't know how to execute, you don't want to get screwed over by paying $2k for a course that won't give you enough knowledge to be able to start on your own (and gives you info you could probably find for free online), and you don't want to get screwed over by partnering with (i.e. trusting) someone that you really don't know much about. 

    Obviously due diligence significantly reduces the risk of all three of those avenues but it's a lot to consider when deciding which path to take and how much to invest/risk on that path. 

    Thanks again. 

    Leighann

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y

    @Leighann Davis 

    I do not believe any $2,000 course will teach you enough to get going in notes. It will provide for a solid foundation. Just my opinion and curious to hear from others who only took a weekend seminar then started buying

    I have been in real estate 20 years and I took several courses and my own studying / due diligence / research and after about 6 months I bought a note. Looking back at what I know now vs then - I was still very inexperienced. Buying a note is the best way to learn - I just do not want you to think that after a $2,000 course you will be up and running and ready to go.

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  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    8y

    @Leighann Davis Just curious, but what is your goal with buying notes and why are you venturing out to notes verses other types of real estate such as flips or buy and holds?

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  • Leighann Davis
    OP
    Lakeland, FL · Member since 2017 · 23 posts · 13 votes
    8y

    @Shiloh Lundahl 

    Well, my career started in financial planning and investments, so I started out in the stock market and am very comfortable in that area. My interest in real estate in general grew because I wanted to diversify my portfolio. Not just for the sake of higher returns but when the stock market inevitably pulls back there seems to be a little more stability in real estate from a cash flow perspective if you go the rental or lending route (barring another real estate meltdown I suppose). 

    I was exposed to notes through my reading and I kind of just feel like that's right up my alley. I love analyzing investments, I love the numbers, structuring deals, etc. I know there's much more to it than that (relationship building, vendor and borrower communication, etc.) but I feel like this area plays more to what I know and what I love doing. Lending in general really appeals to me. 

    When I first started reading up on real estate it was primarily focused on rentals. I've made some offers on potential properties in my area but, as I'm sure you've seen in other areas, there are multiple bids on properties above asking... at prices that wouldn't provide the COC return that I'd be looking for. I've been looking at some off-market deals recently but haven't jumped for anything yet (some have been in pretty rough shape and don't feel it would be wise to take that on for my first investment). Still working on that. I haven't had much desire to go the flipping route yet because I have very little knowledge/experience in construction/contracting/etc. That comfort level may rise after owning a few rentals but I'm definitely not there yet.

    In my perfect world, I would get to the point where I would have my stocks, some rentals, and some notes. I know I've read people saying "focus on one thing", but stocks are a no-brainer for me at this point and I feel like rentals and notes can go hand-in-hand. 

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    8y

    Originate your own. You can do well in FL/ 18% max return when you originate your own. That is before early payoffs which can increase your return to over 60% per anum. Most won't do that will but some do. I often get returns well over 25% per anum. 

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  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Leighann Davis As so many others here have stated, experienced investors are looking to JV as a way of getting more capital. They've used up their own capital and that of friends, family, and colleagues willing to invest with them but they still have access to more deals.

    I linked up with my business partner by providing capital for the first few deals and I learned and he taught. He has built relationships with other traders and has access to more deals than we have capital for. We JV'd with a couple of investors before we decided to go the Fund route, which is where we are concentrating our efforts. As you've pointed out, taking on an inexperienced JV partner requires a lot of time and effort. For our business model, we've decided not to take on any more JV partners with this kind of arrangement. We want to raise capital with passive investors, ones that want to take advantage of the opportunities that NPN's create but are perfectly content and happy to have us do all the work and heavy lifting.

    Learning the "how to" is only part of the equation. The other huge part is having access to notes and the best way to get access is through networking. You don't necessarily have to find a more experienced JV partner, in my opinion. Instead of focusing on the NPN's, re-performers, scratch and dent notes that we're all after, try finding notes in your own backyard. Find your niche where there is little or no competition.

    A couple of years ago, Bill Gully (I tried to use the @ symbol but he didn't come up) suggested in this forum that there were more than enough notes to buy in your own area. He suggested contacting people who provided seller financing to sell a home and offer to buy their note. After 18-36 months many of these people tend to be more willing to sell their notes at a discount. If you could pick them up at 60-65% ARV (seller carry lenders typically don't have robust notes and deeds of trust, servicing notes, and pay histories) and work with the borrow to refinance at or near a full payoff, you'd make a killing. I took the first couple of steps towards doing this but stopped to combine forces with my partner. Just a thought....

    4Reply
  • Leighann Davis
    OP
    Lakeland, FL · Member since 2017 · 23 posts · 13 votes
    8y

    @Andy Mirza This is great, thank you!

    0Reply
  • Patrick Desjardins
    Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
    8y
    Originally posted by @Andy Mirza:

    @Leighann Davis As so many others here have stated, experienced investors are looking to JV as a way of getting more capital. They've used up their own capital and that of friends, family, and colleagues willing to invest with them but they still have access to more deals.

    I linked up with my business partner by providing capital for the first few deals and I learned and he taught. He has built relationships with other traders and has access to more deals than we have capital for. We JV'd with a couple of investors before we decided to go the Fund route, which is where we are concentrating our efforts. As you've pointed out, taking on an inexperienced JV partner requires a lot of time and effort. For our business model, we've decided not to take on any more JV partners with this kind of arrangement. We want to raise capital with passive investors, ones that want to take advantage of the opportunities that NPN's create but are perfectly content and happy to have us do all the work and heavy lifting.

    Learning the "how to" is only part of the equation. The other huge part is having access to notes and the best way to get access is through networking. You don't necessarily have to find a more experienced JV partner, in my opinion. Instead of focusing on the NPN's, re-performers, scratch and dent notes that we're all after, try finding notes in your own backyard. Find your niche where there is little or no competition.

    A couple of years ago, Bill Gully (I tried to use the @ symbol but he didn't come up) suggested in this forum that there were more than enough notes to buy in your own area. He suggested contacting people who provided seller financing to sell a home and offer to buy their note. After 18-36 months many of these people tend to be more willing to sell their notes at a discount. If you could pick them up at 60-65% ARV (seller carry lenders typically don't have robust notes and deeds of trust, servicing notes, and pay histories) and work with the borrow to refinance at or near a full payoff, you'd make a killing. I took the first couple of steps towards doing this but stopped to combine forces with my partner. Just a thought....

     Donna Bauer has a course on seller finances notes. I don't buy courses but I heard good things.

    Watch out for this guy's advice. He is the typical self proclaimed guru on notes, that has never bought a NPN. He also recommended for people to call the homeowners before they purchased a note, which we all know is a big no-no.......

    1Reply
  • Bill De Jong
    Laguna Hills, CA · Member since 2018 · 6 posts · 1 vote
    8y

    I am curious what type of due diligence is recommended when evaluating potential JV partners?

    I am not looking to be heavily involved at this time, but instead would prefer a more passive investment in NPN in exchange for half of the return.

    Also, if it matters, I am not accredited. 

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Bill De Jong Ask for references from other note investors and JV partners. The note world is very small and if they don’t have references they most likely have not done deals Also Ask for some samples of THEIR deals. These are just a few, but you want to know more about them personally, background etc. make sure it’s a fit. Also you will want to know how often the report, how do they report etc
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  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    8y

    @Bill De Jong

    @Chris Seveney gives some great advice. When he says deals, make sure you ask how many they've taken from cradle to grave. There are many newbie note buyers soliciting JV partners who purport to buying 5, 10, 20 notes as their experience yet have never actually taken any through to the end yet.

    2Reply
  • Bill De Jong
    Laguna Hills, CA · Member since 2018 · 6 posts · 1 vote
    8y

    @Chris Seveney @Chad U.

    Thank you both for the input!

    Good point about completing deals. 

    0Reply
  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    8y

    This is a great post and you are asking the right question.  Too many people approach mentors asking what they can do for them -- that is obvious.  Figure out what you can do for somebody and you are more likely to get somewhere.   

    In your case, you are a CPA and you have some level of credible experience in capital investments, so you really have plenty to offer.  You'll find somebody, I am certain.

    I'm also interested in doing a small deal within my SD IRA to start, just to learn. Maybe I could build it up enough to replicate the process on my own one day, or roll it into a buy & hold. Or both. But I need to figure out a way to make myself interesting to the experienced partner.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Mark Sewell:

    This is a great post and you are asking the right question.  Too many people approach mentors asking what they can do for them -- that is obvious.  Figure out what you can do for somebody and you are more likely to get somewhere.   

    In your case, you are a CPA and you have some level of credible experience in capital investments, so you really have plenty to offer.  You'll find somebody, I am certain.

    I'm also interested in doing a small deal within my SD IRA to start, just to learn. Maybe I could build it up enough to replicate the process on my own one day, or roll it into a buy & hold. Or both. But I need to figure out a way to make myself interesting to the experienced partner.

    talk your custodian you want to make sure you don't violate some of the sidra rules about directly working on the investments just something to consider in the NPN space.. which is all about work..

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  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    8y

    Not sure I understand what you mean @Jay Hinrichs about working directly on the investments. Are you referring to restrictions on what you can and cannot invest in using your SD IRA? Our custodian here in Houston is pretty good about running regular education classes on that, and I go them as much as I can.

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  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Mark Sewell I think that what Jay is referring to is that funds from your SDIRA need to be involved in a passive activity. If you buy a NPN with your SDIRA and you work the note personally, you would be in violation of ERISA. If you buy a performing note, you would be ok. If you partner with an allowed individual to buy a NPN and that individual does all the work, you would be ok as well. That's my understanding. Anyone, please correct me if I'm wrong.

    1Reply
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