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The 3 Fs – Funding Assets
I’ve got a lot of great comments and emails from the previous episode about flipping, the first episode in the three F part series of find, fund and flip nonperforming notes. This episode is all about the second F in the three F model of buying nonperforming notes. It’s the funding side aspect of things. I’m not an accountant or an attorney. You always want to check with your legal department about advice before you dive into anything. I always think it’s great to talk with an attorney to make sure you’re set up properly for your funding, especially when it comes to nonperforming notes because there’s a lot of different moving parts that are involved with it.
This episode’s aspect is about funding. Everybody has mixed feelings about it. Some people don’t have a problem reaching out and talking to people and other people are a little intimidated by reaching out to other people in their tribe and in their circle. What it all comes down to is the funding. You’ve got to have deals first. That’s what starts this whole thing off. Reaching out to asset managers, reaching out to your tribe and other note investors. We’ve covered a lot of topics in the previous episode about how to find deals. The thing is while you’re looking at assets, while you’re looking at deals, funding is an integral part, especially if you’re not going to be using your own money. I know some of you out there, our extended note family are like, “I’ve got my own money. I’m going to fund with my own money.” That’s great. That’s totally fine. There’s nothing wrong with that at all. Make sure you do me a favor that you don’t rely solely on your funds.
At some point, you’re going to run out of your own funds unless you’ve got millions and millions of dollars. Most of you don’t. What I don’t want you to do are to fall in the trap, “I’ve only got $50,000. I’m going to follow the $50,000 again.” That’s not enough to build a business long-term as a note investor. You’re going to be using other people’s money. You’re going to be using funding sources to make things happen. If you’ve ever read one of our previous episodes of Merrill Chandler, Merrill does a great job with CreditSense on showing you how to build your credit profiles to go out and get funding from banks and the lines of credit. That’s a little bit of a process. In regards to getting started brand new now, one of the easiest ways to raise capital is to reach out to your warm audience. Reach out to your online social media platforms. Reach out to your LinkedIn connections. Reach out to your local self-directed IRA companies and network with the investors that are attending those things, whether it’s the Quest Trust events they have going on. There are all sorts of other great networking events to go to raise capital.
Let’s take a little bit of a back step and talk about your deal. Let’s talk about the deal you’re marketing to get funding for. You want to make sure that you’re buying what I like to refer the first lien. The easiest way to raise capital is by buying a first lien note. There are some people doing seconds and there’s nothing wrong with seconds, especially nonperforming second behind a performing first that’s a smaller dollar amount. The thing I like is in the first lien position, the only thing that’s going to wipe you out is their taxes and you can double check those or you not taking action. That’s not the case. All of you are action takers out there that I know of. If you were making money and not using your own, let’s talk about some of the things you’ve got to do. You’ve got to understand what your exit strategies are. If you’re picking up a note deal and you’re buying the first lien on a property, let’s say the debt is either equal to the value of the property or they owe more than what the property’s worth. If you’re beginning asset is somewhere around $0.50 of the asset’s value or less, you should not have an issue raising capital.
You need to know what your focus is. If your note is on the $100,000 property you’re buying the note on, you’re paying that for $50,000. There are a lot of options, especially if it’s an occupied asset. You’ve got the option to get it reperforming, which can be a good yield for your investors. If you’re out talking to people and a lot of people coming from the ex-banking side as an ex-financial adviser, a lot of people have money stocked in their certificate of disappointments, their CDs, making less than 1%. When I was a banker for JPMorgan Chase, people had sliced their grandmother’s throat or would spend all this time moving their money from Bank of America across JPMorgan Chase for a one-eighth difference in their interest rate. “It’s in for an eight. We’re going to four in a quarter. I’m going to move it.” I would find it funny a little bit. I’m like, “You’re making 4% on the CD at record time, but making that, you’d have to have $100,000 or so if not more.” Most people’s CDs aren’t making anything.
Everybody Is A Funding Source
Their 401(k) has taken a hit. You have to realize to have that funding mentality, everybody is either a buyer or a seller or a funding source. I’m a big believer too that everybody in your tribe, everybody that surrounds you is a potential funding source for you. You’re not going to reach out to your grandson to have him fund the deal. Everybody that’s in your tribe is worth at least $1,000 on average in potential private money. What does that mean? Let’s say you have 1,000 people in your database either through LinkedIn, through Facebook, through your database online, through your emails. If they’re average worth $1,000 that means that you have a total of about $1 million in private capital at your disposal, if not more. Usually, it’s more, but we’ll go on the low end. How are you going to get access to that? I’m a big believer that you have to share what you’re doing on a regular basis to start to get your tribe to start looking at you differently as offered opportunities versus Joe the auto mechanic or Jolene the secretary or whatever it is that you do.
You want them to start thinking of you as you’ve got opportunities like, “I’ve got some deals. I want to talk to Brent. I want to talk to Megan. I want to talk to Aaron. I want to talk to Scott. I want to talk to Stephanie.” They’ve got some deals available based on what they’re providing because everybody wants to be a real estate investor. Everybody wants to make money, but they don’t always know what to do. The fact that if you’re out there sharing what you’ve got working on, sharing that you’re looking through these different deals, it will often raise some great questions from your tribe. It will also have people reaching out to you and say hey to you. Funding is all about marketing more than anything else. Getting good funding sources is about marketing your deals. A lot of that comes originally from funding. If you’re getting a tape in and it’s 100 assets, you’ve got to start building that rapport with your audience. You’ve got to start letting them know what you’re doing so they can fund with you or they’ll start talking more with you or start seeing, “Scott is doing something different. Lucas is doing something different. Christopher is doing something different.”
What I would recommend you to do is you get a tape and map it in BatchGeo real fast. That’s BatchGeo.com. It’s a great service that you can drop up to 250 addresses and it’ll map it all and show you a nice photo or image that you can use. It’s also interactive with Google street map so you can hone in down on the addresses and look at what’s going on with the street views. It’s a great tool for real estate investors to share what they’ve got going on. “I’m making offers on these twenty assets or these 200 asset tapes that came to me that I’m working through.” That’s a great post to send out to your audience and to post to your Instagram, Facebook, Twitter, LinkedIn. “Here’s the deal that I’m working.” That drives the eyes. Eyes are attached to images. You’re going to get a much better response by posting a photo or doing a video. Out of that, if you’ve eliminated a bunch of those and you’re making offers on ten, I would then pull up the street view photos of those ten assets and post those as well. I wouldn’t share the addresses.
What I would do is take a screenshot of the street view. “Here’s an asset in Columbus, Ohio. It’s a semi-performing note that we’re getting ready to take down. If you’d like to learn more information, feel free to drop me a line.” It’s something simple like that. You get the conversation started with what you’re doing. They start seeing what you’re doing. The second or third email is where you get to the point, “We’re getting ready to close on these. We got this approved.” Now your audience is already starting to see the momentum you’re building and that’s what funding comes about is building momentum. You’ve got to stay on top of your audience. You’ve got to share what’s going on. You’ve got to stay in contact with everybody, not on an individual basis.
One of the great things about social media is the ability to be able to connect with a lot of people and share what you’ve got going on. I don’t think it’s all about Farmville or games with friends. It’s a big waste of time. You can raise a lot of capital with your audience by sharing what you’re doing on a daily basis. A day in the life of a real estate investor, a day in the life of a note investor. It doesn’t have to be anything complicated. “What are you working on now?” That’s how we started the whole podcast thing was we started doing Facebook live videos like, “Here’s what we’re focused on now. What deals were you working through? What are the events we’re going through?” Sharing those little things is all about marketing your business. If you don’t have a tape, that’s where I would start. Start sharing that stuff off there because it leads to helping you raise capital. It helps to build rapport.
We’ve done an earlier episode about starting a fund. Putting a fund together is great, but if you have nobody to market to, it’s a waste of time and waste of fees. All the good crowdfunding educators out there will tell you, “You have to build your audience online.” Building your audience is one of the great things that will help you with your capital, whether it’s through Facebook like we’re doing as well or YouTube, LinkedIn or any other social media platforms. Building your audience is critical to help you raise capital because it goes back to building that tribe. Somebody who has 500 contacts in LinkedIn is great, but someone who’s got 5,000 contacts is going to have an easier time raising capital as long as their marketing on a regular basis. Let’s say you have somebody to reach out to. I’m a believer that there are still good habits to do and use when you’re talking to potential funding partners.
There are some great things that you should be doing. Let’s say you meet somebody at a local REIA club when you’re walking around. For those who don’t know, it’s the Real Estate Investment Association club. There are real estate investment clubs all across the country. You can jump on MeetUp.com to find them whether they’re in your backyard or in an area you’re investing or if you want to join something in states that you’re interested and the states that you visit. It’s a big group across the country with great investors. MeetUp.com is a great place to go to find those. You’ve got to have someone that stands out. Most real estate investment clubs have a wants and needs where they allow their members to get up and talk in front of everybody about what they’re looking for. “I’ve got a deal that I’m looking a capital for.” “I’ve got a note I’m looking to sell to Kristin Gerst.” “Do you know anybody that is looking to buy notes?” Get up and share what you’ve got going on with your tribe, with the audience.
If you’re in front of 50 or 100 or 200 real estate investors and you have the opportunity to talk about a deal or two, use that to your benefit. Make sure you are talking with them and have something that makes sense like, “I’ve got a deal that I’m working on.” Know the numbers. Know what’s sexy about the numbers. Those are one of the most important things you can do. What’s exciting about this? “It’s a deal to three or two on a great market. We’re picking up at $0.50 on the dollar. We’re going to pick it up at $0.35 to $0.40 on the dollar. It’s worth $80,000, but we’re picking it up cheap at $25,000. I would love a funding partner to come in or somebody to partner with me on the deal.” It’s a great company for you to do that. That’s what’s great about Quest. They cannot endorse an investment, but they’ll let you go to one of their networking events to get up and talk about some things you’re working on. That’s a great thing to do. The whole idea is once you make a connection with somebody, don’t get diarrhea of the mouth. Don’t throw up on them.
The Three-Touch Approach
A lot of new investors get so excited like a puppy. They almost piss their pants. “I’m talking to an investor.” You don’t want to be there not just one that pushes your investors away. You want to make sure you have some breath mints and gum when you’re talking to people because you still want to build rapport with people. You’re going to be close. Nobody is going to tell you to make it out with your investors, although some of you may feel like doing that because you’re like, “I got an investor.” It’s still a touch approach, but I’m not talking about assaulting somebody. What I’m talking about is a three-touch approach as you make contact with somebody or they say, “Let’s talk. I’m interested in your deal.” I’m a big believer in spending a little time getting to know that person. “What’s your background? What have you done in real estate? Are you brand new? What are you looking? What are your goals? What are your past and present and future goals that you’re trying to do? What are you trying to accomplish?” It’s one of the funniest things I like to ask.
Sometimes you’ll hear people say some great things and other times, they’re way out there and that’s great. There’s nothing wrong with having great goals, but let’s work in real life here and work to get some things done. Maybe my deal might be a fit for you getting to your goals. This is the reason you want to build rapport with people and talk to them and get a chance to know them. Are they going to be great people to work with? Are they going to going to be PITAs? What I mean by PITA is a pain in the ass. If somebody is a PITA, you don’t want to work with them. You just want to walk away and go to the next one. I know that’s hard to do sometimes as a new note or real estate investors because you get excited that you got somebody and you don’t want to lose them. Some of the best decisions I’ve ever made is to walk away from an investor to avoid the PITAs out there. There are plenty of them out there.
It’s talking with that potential funding partner, talking with that person. “Where’s that money coming from? What are your expectations? What are you looking for?” That’s one of the biggest mistakes some investors make. It’s one of the biggest mistakes I made early on in my funding and raising capital. Coming from the bank, I knew a lot of people. I knew what they had in their accounts. I knew those who had money. I reached out with several people. “Being a real estate investor, I can give you a 12% return.” Their money was sitting on IRAs, CDs or something like that making 4%. They weren’t comfortable with that. My advisor has told me that 12% is extremely risky. I don’t know. I don’t think I’m going to invest with you. I burned a lot of bridges because I didn’t ask what they were looking for. When you’re raising capital, it’s a good thing to use the ratio of what God gave us all, two ears, one mouth. Ask questions, but listen because oftentimes the people you’re talking to will tell you exactly what they’re looking for.
I asked them, “What’s your money in? Tell me where it’s at?” “It’s in my CD, it’s in my 401(k), it’s in my Solo 401(k) and it’s in a checking account.” “How has that done for you? How has that performed for you?” If they tell you it’s in a CD, then you’re probably getting somewhere between 1% these days. If it’s in 1%, you have to show you’re three to four times that in over 12 to 24 months on a short-term investment. Would it be something that you’d be interested in? We find out it’s making 3% to 4%. If I could show you double that, 6% to 8% in a short period of time, 12 to 24 months. Would that be something you’re interested in? This is all valuable stuff, whether you’re buying real estate fix and flips or notes or whatever it is this conversation. Give me a chance to talk with them out there. Talk with your potential funding sources.
You want to have some profile sheet and here’s a great thing that you can do. If you ever go to your local bank and say you’re looking to invest, have a banker give you a phone call or sit you down for an appointment with a banker. What are they going to do? They’re going to pull out a profile sheet and start taking questions, asking questions as you go down like, “Tell me about your past. Where’s your money at? Where is it located? What returns does it give? What are you looking to accomplish?” They do a great job of bankers being able to brainwash clients. Why did I say that? It’s because I used to be a banker. 1% to 4% is safe, 5% to 8% is mid-level, 8% to 12% is risky. You’ve got to be careful. In real estate, we know that there are high returns available than 8% to 12% and they’re not necessarily the riskiest things.
You have to talk to people like, “What have you invested in before?” It’s one of the most valuable things you can ask. If they start going down bonds and stocks, that’s great, but find out what type of real estate deals they have done. If they’re an active fix and flipper, they’re not going to get them on a 6% funding amount. You’re probably going to get them on a split of some sort. They’re going to want to see a good return. I would never take less than 50% of the deal. It goes down to one of two things. They’re going to be a flat return investment or it’s going to be like an equity split where you’re doing the heavy lifting. You’re consulting back and forth and talking about the deal and where it goes. The biggest thing to getting people to get into the funding table is you have to get a series of yeses along the way. This is why we talk about the whole profiles and asking these questions. “If I could get you a double or triple of what you’re getting for a short-term 12 to 24 months investment, will this be something interesting?” That’s a yes. “Let’s meet for coffee,” which is a second yes.
Have A Pitch Deck
Don’t spend an hour to two hours out of your day. If you’re going to be meeting with people, keep it to 30 minutes. You can get directly to the point. There’s nothing wrong with building rapport with people, but value your time and value their time as well. If you’re meeting with people and you want to talk to people, have a pitch deck that’s available whether it talks about your past or what your experience is, where did you go to school, your experiences as a real estate investor. If you’re brand new, that’s okay. You say, “I’m relatively new, but I’ve been educating.” Maybe share the classes you’ve taken. Share your network. A lot of people are sharing, “I’m a member of the Dallas Fort Worth Real Estate Investment Club. I’m part Austin REIA or Austin REIA or Tampa Bay REIA.” Share that you’re a part of this network. If you’re a part of the mastermind, it’s valuable to share a picture of the mastermind with the people you’re with. One of the great things about our note mastermind group is we make certain that we take great group photos. Everybody can use that in their marketing in helping them raise capital as they go forward. Why do you share that aspect? It shows that you are not alone.
If you’re asked, “How many deals have you done?” You’re like, “I’m still getting rock and rolling, but that’s okay because I’ve done a lot of fix and flips or I’ve made a lot of short sales.” They’ve done something similar in the real estate field. What’s more important than me is in the note space I say, “I’m not the person doing it all. I have my vendor. I have my attorney. I’ve got my servicing company. I have our entity asset protection team. I have an insurance company. I have all these vendors that are here to help support me and I can rely on their 40, 80 or 100 years of experience or work with 1,000 other clients of their servicer. Focus on your strengths, identify your weaknesses, but then have that gap being filled in your weaknesses with your vendors and your team. It’s a powerful thing to have in your pitch book. Get into the case that if you have not done a lot of deals, here are the types of deals that we do. Talk about the types of deals you’re doing. Talk about, “Here are some sample case studies. Here are some of the deals that I and my team or some of my team has done. These are the deals we’re targeting. We’re targeting performing notes or nonperforming.” Whatever it is, share those.
If you want a good photo of the property, you don’t want to have everything slammed on a piece of paper they can’t read. A confused mind is no mind. You want it to be simple. “Here’s what happened. Here’s a short little paragraph. Here’s what we bought it for. Here’s what we sold it for. Here are the profits. Here’s what our funding partners made. Here’s the timeframe.” What it comes down to more than anything else is not the returns you’re going to get. People want to know a couple of things. Can they get the principle back? Can they like and trust you? The number three is the return. People will understand things happen along the way and that’s one of the great things I love about note investing more than anything. There are different exit strategies I have along the way. Things can go anywhere from three months to sometimes two plus years. The idea has solutions in place.
Getting A Pledge Letter
Solutions are one of the most valuable things you can have. Not everything is going to go smoothly. Here’s what happens if this happens, we can go this route. If they don’t perform, then we move to Cash for Keys. If that won’t work, then we move to foreclosure. If we start the foreclosure process and it doesn’t work, then we move to try to offer Cash for Keys or short sales. That’s the thing you have to keep in mind. When you’re talking to people, especially about the note business, talk about the strategies. Talk about what could go wrong, share your due diligence. “We pulled comps. Here’s what the property looks like. Here are the rental meter numbers. Here’s why we think it’s going to go one of these two or three ways. Here’s how we’re best prepared to do that.” One of the most important things you can also do in funding is once you’re talking to people and profiling, I like to get a pledge letter.
A pledge letter is an interesting thing. It’s not difficult. It’s simple and I don’t want you to overthink this for those reading this. Pledge letter is a simple one-page email. That’s the thing too you always have to keep in mind. How much are you looking to put the work? If they say, “I’ve got 100,000,” then immediately start to think $50,000. If they say $200,000, I’m thinking a $100,000.” Those are the numbers that we look at. Take what they tell you and then they usually divide it in half. It doesn’t mean you can’t go up to that amount, but I want to say, “Let’s start first with this and work so we make sure that we get along well because you may not like working with me and I may not like working with you. I like you right now, but let’s do a deal or two to start rock and rolling and then we’ll go from there.” It puts people at ease. Another thing with note investing, when they start thinking mortgages they all think 30 years. “I have to deal with you for 30 years.” This is a short-term deal, 12 to 24 months. Maybe 36 months in some states, but 12 to 24 months for the most part. That’s one of the most valuable things that you can do to put them at ease.
Securing An Investment Profile Sheet
We can either sell this off. After twelve months we’ll know where we’re going on this exit strategy whether it’s a performing note we’re selling off that point or wrapping up to foreclosures. Worst case, I’m working on getting you to refinance out after twelve months in case you need to move your money. There are things that you want to share as you’re talking with people about the elephants in the room and address them. “What could happen if it goes wrong?” “Here’s what could happen. Here’s this. Here’s where we’re cognizant.” Setting those expectations will calm people, but the most important thing is when you calm them, you have to ask this. If you don’t ask this, they won’t do it, then the likelihood to fund is small. Once you’ve built rapport and overcome and answered their questions and they still want to proceed. The first yes is they want to talk with you. The second yes is a conversation. The third yes is, “You said you want to do some stuff with me. What I need you to do is I need you to go ahead.” I have them fill out an investor profile sheet. I include a lot of the questions that we may have talked with the one-on-one aspect, but there are some questions on there that we may not have covered. Questions like years of experience and what you’ve done.
An investment profile sheet is one page. It asks them questions like where they live. What do they do for a living? How long they’ve done that? What their income has been in the last couple of years? What’s their wealth with or without real estate? In that way, you can identify roughly if they’re an accredited investor. I’m not going to go ask, “I need you to submit your tax returns for the last couple of years.” I don’t do that. It’s a little bit extreme. What we will ask them to do is in that pledge letter, “Scott, it was great talking to you. Attached is a statement from my savings account. It shows $100,000. I’m willing to pledge $50,000 to you for doing deals. I’m willing to pledge $25,000 or $75,000.” Whatever that number is, you want them to send an email with a copy of the proof of funds. It’s not a letter of intent, but it is a pledge letter to you.
The reason you asked them to do this besides having them also fill out the investor profile sheet is you want to make sure they’re saying another yes. If they don’t fill that stuff out, I can guarantee you they’re not going to fund. If they don’t send in that profile sheet or a pledge email to you, they’re not going to fund. The only time I would not do this is if I’ve done many deals with this person that I know them. If you’re dealing with someone brand new, these are critical steps to help you in your funding for your real estate deals. I am talking with them, building rapport, asking a pledge letter. The pledge letter can be a statement from their 401(k), their IRA, their checking or savings account. I don’t care as long as it’s a statement. It’s relatively recent, the last 90 days. I’m not going to take a copy of a check. I’m not going to take a letter from a banker. They may say this, “I could provide with the local banker.” That’s fine. I will maybe take that or a letter from their CPA. Something that shows they’ve got some funds. They’ve got funds to do what we need to do.
The most important thing you want to ask this is you want to see where that money is coming from. If the money is sitting in a Scottrade account or 401(k), you’re going to have to move that into a self-directed IRA account to be able to use it. If It’s in a normal trading account, they’re going to have to sell out of those assets, which can take at least three days to get it into cash so that they can wire to you or wire to the seller to fund the deal. Keep that in mind. That’s one of the critical things I’ve asked on that investor profile sheet. Where is the money coming from? 401(k), savings, self-directed IRA, the line of credit, credit card. Some of those are a no-no. If somebody circles credit card, that’s a no. I’ve had people like, “We’re going to fund the deal. I got cash.” I didn’t know that they took it out as a line of credit off their credit card. They make the cash advance, which is the stupidest thing you could have done. If I had known that, I would never have approved or put them in a deal because it’s a twelve-month deal I had them in. Six months in and they’re like, “Why this percentage is going away? I now have to pay $700 a month. I can’t afford it.” I’m like, “What?” What you have to realize is those investor profile sheets need to be filled out completely.
There are also a couple of questions that we’d like to include as well. Have you been sued or in bankruptcy? If you have, can you tell us about it? Especially if they’re sued, the last thing you want to do is work with someone who’s sued. Some people are asking, “What’s the paperwork that goes into this? It’s the flat interest rate return. If you’re using from a self-directed IRA, they either have a flat loan, notes, private placement or private entity investment. There are a variety of things there for you that you can do with your self-directed IRA accounts. What we usually do is we’ll use some joint venture agreement. I will not disclose what’s in that joint venture agreement. You need to speak to an attorney to outline that for you. You need to speak with them to talk about how to set up the things. You can have a conversation and an agreement. You need to have some agreement. You want to have it open. I know you’re going to wire me $50,000 with no type of agreement.
An agreement there is to be the CYA, Cover Your Assets. What happens when everything hits the fan? What happens when this deal goes south? What happens if the deal goes south? Who’s responsible for what? What steps are we taking to help us overcome these obstacles? What’s plan A? What’s plan B? What’s plan C? What are you doing to fix it? You should always check with your legal advice, but you want to have some agreement in place that they sign off on and it’s notarized or not notarized or whatever. A lot of people will do one or two things for the most part when it comes to securing assets. They may put the person on the assignment of a mortgage in a distressed note sale that transfers ownership from one fund to another or one bank to another or one note investor to another investor. It’s an assignment of mortgage. If you invest in me, I want to say, “50% interest to inverse asset fund and 50% interest to Quest Trust for the benefit of Bob’s IRA.”
Some people might want that. Some people may create special entities or special LLCs for a deal where they’re both codenamed on it on the operating agreement, which outlines the duties of things. Others do a special separate lending agreement or they’re buying a piece of property. What’s easy is slapping a lien on a property if it’s a property nearby. That’s an easy thing to do for the most part. Talk with your accountant or attorney on how you’re structuring that deal and work with them to get it taken care of. The things you have to realize are the things that we have talked about so far as getting the yes. Yes, I’d like to talk to you about your deal. Yes, let’s meet in person. Yes, I’d like to perform. Yes, I’ll send you a pledge letter with proof of funds. It all comes down to prepping those people on when you need to get stuff wired. The biggest thing I tell people is if you need to wire on Friday, you better make sure that their funds are available to go by that Wednesday, a couple of days before. Why is that? That gives you plenty of flexibility there.
Don’t Pull People’s Last Money
It’s an extra day to close out of the funds. You’ve got to follow people and tell them, “I’ve got a deal. I’ve got these deals we’re working through. Here are three or four deals that we’re working through.” Help them put your money to work. I’m a big proponent of never using somebody’s money if it’s the last money they have. If they’ve only got $10,000 or $20,000 and that’s all that they’ve got, I would highly recommend you move on and use somebody else’s. If you get your funding to $30,000 deal and you’ve got two people that have $15,000, reach out and find somebody who’s got $30,000. You don’t want to be pulling money. It’s illegal and once you’ve got a private placement memorandum. Worked with the SCC, get an attorney to do that. That’s the only time you want to be pulling money. I’m not saying that you can’t partner with somebody else’s money and you split the cost and go in or you’re partnering with Your IRA or somebody else’s IRA. If we’re partnering with some equal percentage and the profits are split by that percentage, you can do that. You plus one, that’s okay.
The thing you want to keep in mind is don’t start pulling people’s money. If you start bringing in three or four people to fund one asset, that’s not a good thing. For those that are buying twenty to 40 assets, you can have separate joint venture agreements or funding agreements with specific assets. If there are twenty assets, you can have one investor funding five and one funding four and one funding three and one funding five, depending on what those funding amounts on that loan-level pricing is. That’s okay. That’s not pulling funds. You want to keep your investors secluded to the specific individual assets they’re funding. You’re not going to be pulling money and cross-collateralizing. All your money that is coming is going to be making profits across the board. That’s not the smart thing to do. That’s a bad thing. You’ll get in trouble fast.
Always keep your investors clear and concise and limited to their specific assets. It’s not saying to pay an asset that sells off and you take a quick loss on an asset to get rid of it because of some issue. It doesn’t mean you say, “I’m going to pay you, Mr. Investor, out of my profits from this other one.” That’s a different thing. “I want to get rid of this one. We’re going to get you back your investment. We didn’t make much of this, so I’m going to pay your percentage of this other asset.” One of the beautiful things about note investing is having your risk leverage across multiple deals or also having other deals they can come in and help out in case there are issues. Not every deal is a home run. You’re going to have some things that strike you out in real estate. That’s obvious. It’s going to happen. Are you going to get sued at some point? Yes, you’re going to get sued at some point from either borrowers or funding sources.
They get tired of deals dragging them longer because you have a bad tenant or bad borrower. It happens out there. You’re not going to make money in every deal. If somebody tells me they’ve never lost money in real estate, I don’t believe them. They haven’t been around long enough. I’m not saying they can’t have a deal that took care of their investors. That’s one of the most important things. That’s a good sign. That’s why you’re taking care of investors. If ever the deal goes south, “We’re going to get you taken care of.” That’s one of the most important things you can do as real estate investors. Take care of your investors. Take it serious. When it comes to funding, you’ve got to prep your investors. You’ve got to see where the money is coming from. You’ve got to see if they’re a fit for what you’re doing. They may not be a fit. “I want my money to flip every 90 days.” “I want to make 20% of my money.” You’re not a fit.
Realize that there are plenty of people out there. There are $7 trillion in retirement funds sitting on the sideline. Most of your large self-directed IRA companies, at least a third usually on average is sitting in cash making nothing. Don’t be tempted to go straight to offering something like 12%. Talk about where it’s going. “I made 30% on this one deal.” How long was your money out for? “It was only out for 90 days.” You may have made 30% in 90 days, but you didn’t invest the money for the rest of the year. You only made a 7.5% return on your money then. It’s good to divide it by four. If you only had it out for a fourth of the year, 30% in 90 days is great, but if you didn’t do anything else with it, your money made you 7.5% annualized. How about we get you to deal at 8% for twelve months? The only way you’re getting better from talking to people or getting to build rapport is practice. One of the best things I did early on as a note investor is I would practice profiling. It was one of the great sales tactics I have to give kudos to JPMorgan Chase about when I was a banker there. Bank One and then it became JPMorgan Chase in Manhattan. It was training.
They taught you to talk to people. They taught you to ask questions and listen. They taught you to ask that extra question to show that you’re listening. One of the great things I love about meeting with people is something like, “Can you fund my deal?” I find out that they’ve got kids or grandkids or pets or something that they’re excited about, then I like to introduce them to people. “You’re homeschooling your kids, why don’t you talk to Karen over here. They’re thinking about homeschooling their kids. You play in a band, talk to Darrell. He plays the guitar or the drums.” One of the great things about networking is bringing people together and that builds rapport that way. “You said you were looking for a winery. Check out Austin Custom Winery down in South Austin. They can help you customize some labels and some stuff out your tribe.” That’s the thing. Knowing what’s going on and communicating is a critical aspect as well too. Whether you’re using something like Basecamp online to communicate, text messages, regular emails, it’s up to you what you want to be doing to communicate with people. Hopefully, that makes sense for everybody.
You always to want to make sure to set clear expectations, under promise and over deliver. If you think the deal will take you six months, say it’s going to take you twelve to eighteen. If it’s twelve, then you say 24. It’s an important aspect of it because you want to set those expectations and there are also some things you may want to put into your agreements to help to protect your assets. You may want to put that you’ve got 90 days to get someone to refinance out of the deal. You may also want to put in there that they need to cancel. They’re giving me their money back prior to twelve months or eighteen and that there’s a penalty involved. They are only liable to get them back 75% of what they invested because it costs you money to go out and find new money. If they were to do a CD or annuity, put that in the agreement.
You may want to put that there’s an arbitrage so that if they don’t agree on something, instead of going to sue, they’ll meet with a local arbitrator in the state of your choosing. One of the biggest things I like to share is, “Here’s who our vendors are. It’s going to be with Madison Management.” Are you going to give your investors online access? Can they provide that? Are you going to use something else? You provide updates. Funding doesn’t stop when they wire. The funding continues. It’s the relationship after the funding of being able to get on the phone and talk to you and provide messages and updates. That’s one of the biggest things I see investors struggle with once they try to go beyond that twenty to 30 note barrier. It becomes a lot of moving parts of communicating the funding and communicating what’s going on with the different vendors and assets along with your investors and keeping that straight. Keep that in mind.
You want to build your systems. You want to focus on your systems for the most part because otherwise your systems and little things can eat you to death and hunt and peck your time and energy and not make it a happy and fun time. If you’re closing a deal, that’s awesome, but it’s not just about the funding. You’ve got this whole other F that we’ll get to on the next episode on the flip side of what do you do once you fund and where do you go from there? You’ve now bought it. What do you do with it now? It’s one of the biggest things I like to tell people. It’s great to fund a deal. It’s great to do the due diligence and the front end, but that’s just the first part. You want to rely heavily on your vendors to help you with the third F getting things done.
What Happens Upon Funding?
What happens upon funding? When you wire money in, it’s a wire. You’re not closing at a title company. You can use a real estate attorney and have them open up an escrow account and you pay $500 for them to open up an escrow account so you have your funding partners wire the funds into the escrow account. You’re wiring then onto the bank or the seller. If you are having a little bit of extra spread, if you’re funding 45 and you only need 40 to fund and you have that three spread, they’ll wire it to you afterward. The thing to keep in mind is if you have to fund extra. You probably want to outline that on the JV. “We’re going to spend 42 to fund this deal.” This other $3,000 will help cover servicing costs and attorney fees along the way. It’s always better to have extra funded because if the numbers still make sense for you to say, “I have to fund 42.” If it’s still good return if you fund return back 45 plus their profit splits, it’s still a great return.
It’s always better to have a little bit extra funding versus go back in six months or twelve months. “I need another $3,000 or another $4,000 to complete this deal.” I don’t think that’s a good thing to do. It’s going to happen. Keep that extra in an escrow. Keep it in an account that you can tap into for your expenses. If you’re buying five deals or six deals or one deal, I guarantee you did not do marketing on one asset. You probably broke down twenty assets or ten assets or you made offers on 40 to get that one or twenty to get that one. There are some costs and times associated with that. Keep that in mind. If a deal goes well, they get reperforming in the first 90 days. If you’ve got a $3,000 extra, that’s awesome. Hold onto it. If it’s a good return and you’re splitting the profits or splitting the cashflows, there’s nothing wrong with it. It’s a phenomenal thing to do. I would always fund a little bit extra to make sure that your butt is covered with different things.
There have been times when things have happened on one deal where we had a performing note and we ended up getting funding extra. I ended up having to use that to cover expenses on another deal. It happens with those things. It’s a beautiful thing about QuickBooks and in using that stuff is it will link anything and help you keep track of expenses on specific assets and things like that. Always fund a little bit extra to make sure you’re covered on stuff like that. Funding is nothing to be scared of. Everybody has a funding source. Communicate what’s going on through marketing. Communicate through your due diligence process to your tribe. When you’re looking at assets, that’s a great way to raise capital and get the momentum moving. If you wait until you have a deal approved before you start marketing for it, you’re going to be behind the eight ball. Use your existing due diligence of that asset and market what you’re focused on. That’ll help get your tribe and audience ready to fund things a little faster.
Always take the three-touch approach. If you meet somebody in a Meetup group, it’s great. You meet for the second time or a phone call, then the third time follows up as well. “Let’s get rock and rolling it.” You want to make sure and ask questions. Find out what they’re looking for. Find out their goals. Some people’s goals are great. Others are not so great for what you’re trying to do. Always ask for the pledge letter. Always ask for them to fill out the investor profile sheet. Get those things. The reason I didn’t mention is if you get those things and your investor walks from you or leaves or gets cold feet and decides to hide from you and not fund the deal. You can use that investor profile sheet, the pledge letter, the email they sent on that. You could use that as proof that you did your job. That’s one of the things I tell people.
People call me, “I had an investor walk.” Did you get those things? If you got those things, I’d help you. You didn’t get those things. You didn’t do what I said that you need to do. You’ve got to follow up with it because some of your best friends will flake because they’ll get cold feet. Don’t overpromise returns. Ask questions and it will save you money. Prep it and makes sure everything is rock and rolling. Make sure you’re talking with your vendors because when you do fund something, then you want to put your vendors to work immediately. If you’re brand new, don’t worry about this. Work this into your pitch book. Work it into simple five or six pages. You don’t want to have diarrhea of the mouth. You don’t want to throw up in your potential funding partners. You want to talk to them and have a conversation. The better you get to have a conversation, the better you’ll get that raise in the capital and the better you’ll get at funding. Eventually, what’ll happen is people start bringing more money to you.
If your funding sources are happy, they’ll refer people to you. They’ll walk other investors over to you to help you out with it. That’s one of the easiest things. It’s a great thing when you’re funding partners are directing you to other people to fund deals because they want to share it in their audience. Everybody is a buyer, a seller or a funding source. Even people that don’t fund your deals and like and trust you. If they find out what you’re doing and see what you’re doing, you want them being a referral source for you. You want them as they hear people around the water cooling off and say, “I wish I could do something.” “You should talk to my friend Scott. You should talk to my friend Teresa. You should talk to my friend Stephanie. They’ve got some opportunities they’re working on that you might be interested in.” That’s a great thing.
I get people that say, “I’m going to send you money. Can I pay to commission to refer you money?” No, you can’t do that. You can give somebody a bottle of wine or something like that. “Thank you, but you can’t be paying commissions to other people for that.” That’s a no-no. You don’t want to be doing no-nos. We spend a massive amount of time going through the different funding options in our note buying blueprint. The online training course we offer, if you are interested, go to NoteBlueprint.com. It’s online with a lot of great modules. We got a whole module dedicated to raising capitals and other things, sample forms, sample agreements. Those things are valuable for you. There’s a sample pitch deck as well.
We think it’s one of the best things in the industry out there to help you get over that hump. It includes a lot of this stuff there as well for you. It includes how to fund and then flip the exit strategy. Hopefully, this episode has been valuable to you on different funding. I wanted to make sure that we’re able to provide good content to you all out there to help you in your note in real estate business. I’m Scott Carson and this has been another fun episode of The Note Closers Show. Stay tuned and we’ll cover the third F on our next episode, the flip side of things and how to make money in our business through the multiple exit strategies that are involved with distressed debt. Go out and make something happen. We’ll see you at the top.
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