How did you start your note fund ?

Question

How did you all start your note funds???

And if you were to start a note fund business today  for non accredited investors what would be the steps and process you would take..

From a-z please

Thanks in advance

Chris Seveney · Answer

CAVEAT If you have never bought a note, your odds of raising $ for a note fund are slim to none and slim left town. If you do, you most likely will end up in shackles and hand cuffs, especially if you are dealing with non-accredited investors as right off the bat stating you have not bought a note will get you in a lot of hot water.

1. I called my attorney, cut him a check for $10,000 and told him I wanted to do a 506(b) type fund. They sent me a questionnaire regarding terms, min. investment, returns to investors, length of time. NO TWO FUNDS ARE THE SAME. It is like your business plan, it will be different and every fund is structured differently.

2. After cutting them a check for $10k then I got my CPA involved as they needed to confirm the tax components of the fund.

3. With a 506b fund you cannot advertise to the public. It must be people you have a pre-existing relationship with and as part of that they must fill out a questionnaire acknowledging they have a pre-existing relationship.

4. Once documents were completed, started getting subscription agreements. Once you start getting those you need to file form d's, which cost around another $2,000.

5. During this time how are you managing the fund, are you using a firm to assist at around $1500/month or are you doing it alone. I did the do it alone and paid $20,000 for the software (versus $1500/month over life of fund).

Andy Mirza · Answer

@Bradley Ritter As mentioned in other posts, it will take $10k to $30k to have an attorney draft your Private Placement Memorandum (PPM), operating agreement, subscription agreement, and subscriber questionnaires for an offering issued under a Reg D, 506 (b) exemption, which allows non accredited but sophisticated investors. (You can go cheaper and use a template that you find online for even cheaper. I've seen stuff in the $2000 to $5000 range but you're taking a big risk if you don't get things set up properly.)

Before you search for an attorney that specializes in drafting these documents (and spending the money that entails), you should have a clear idea of what your business plan will be. How will you structure your fund? What are you offering your investors? So many questions need to be asked and answered before you even take the first step to get started with a fund.

It's a lot of work to set up a note fund and to do it properly.

Now that you've been warned, here is your A-Z list:

1. Get your required documents to set up your fund. (Private Placement Memorandum (PPM), operating agreement, subscription agreement, and subscriber questionnaires)

2. Form the proper entity for your fund. (Our funds are set up as Delaware LLCs) 3. Register your Fund with the SEC through EDGAR. (You can do this yourself or have an attorney do it for you.)

4. When an investor subscribes to your offering, make the appropriate Blue Sky State filing through NASAA. (Again, you can do this yourself or have an attorney do it for you)

5. Conduct your business through your investing entity to completion of the investment

(I'm not giving legal advice because I can't. This is just what I do and is for informational purposes only.)Hope this answers your question and gives you the info you were looking for :)

Andy Mirza · Answer

@Steve Hodgdon I think you do, my friend!

There is a learning curve as with learning any new thing. It's not easy and there are a lot of moving parts.

One mental shift that's important is to look at your portfolio as a whole instead of as individual deals. For example, when you do JV's and a note liquidates, it's easy to calculate the returns and split the money between yourself and your partner.

In a fund, when you have a liquidation, you need to look at how much you need to keep in reserve for ongoing company and liquidation costs for the remaining assets, including rehabs. You don't want to run out of money and go back to your investors for a capital call! But you also don't want to sit on too much idle money when that could be distributed back to your investors (or used to purchase more assets if that's how your fund is structured).

Chad U. · Answer

Haha, do you really expect someone who potentially dropped $15k to $30k to set up their fund to come on here and lay it all out for you for free?

Bob Malecki · Answer

Well the first step is to establish that you are a savvy and experienced note investor. Those who may invest in a real estate or note fund do so because the fund manager has the experience to do the "heavy lifting" and provide a high likelyhood to earn the fund subscriber the return described in the PPM. Without that you would be wasting your money on setting up the fund.

Steve Hodgdon · Answer

40 years of credit and collection experience, 20 years of commercial land lording, 20 years of debt buying and I'm still not sure I know enough to start a fund.

Steve Hodgdon · Answer

@Andy Mirza  Yes, reserving anticipated expenses is often overlooked. I write checks post purchase and it always feels like "bad money after bad". But if I actually allocated at beginning, I'd at least have a better mental image.

As always, you have great well thought out contributions to the forum.

How did you start your note fund ?

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