Posted by John Behle on October 18, 1998 at 11:08:12:
Your easiest and safest focus when financing paper is one investor for one note. The fewer investors the better. There are restrictions in raising money that you need to be careful of. Look for or create an investor you can form a close relationship with. Ideally someone you already know in some other setting. Prior relationship is an important factor relating to some securities exemptions.
What state are you in?
For example, in California if you were to put two or more investors in a note you have to set up servicing. Look for investors with cash, not the monthly contribution you mentioned. That is a possibility for some point, but would be hard to monitor.
When it comes to “pooling” funds or simplifying the control issues, an LP has worked very well and doesn’t have to be expensive. Many investors have used “Reg. D” offerings, corporate debentures and even stock. Any of those forms needs to be done properly and is probably just where you want to head in the future. LLC’s are becoming more common.
Start out just looking for one or two investors. It’s best if they have already done some investing or have a background in real estate investing. Teach them well, so they know what the basic forms look like and the basics of due-diligence on the note. I’ve had some investors that wanted to learn discounting so they could crunch the numbers and others that would just look at the computer printout.
Look for the lowest cost of funds that you can. The 18-33% you mentioned would be way too high for this market. You should be able to find investor funds easily in the 10-14% range. Pension funds are wonderful for paper investment. Accountants and pension companies may know of people or refer them. You may be able to partner in some ways with an accountant. I had a friend raising over a million per month in funds to buy notes through some financial planners and “Self Directed IRA” contributions. When investors realize they can invest in paper through their IRA’s and get the high rates of returns while having the tax benefits, they are excited.
Go easy and look for one investor right now. Get that started and then look for another as a backup. Also look for investors for different types of deals. I have some investors that want real conservative deals and others that would be thrilled to take the property back.