Posted by John Behle on November 01, 1998 at 11:26:43:
The article on “Financing Paper” should help answer many of your questions. The Paper Game 5 day video course has almost a full day on funding with the primary emphasis on working with private investors.
What I offer the investors is a good yield secured by the note. “Good yield” to me is a figure that is negotiated and varies with each investor. I have some investors that want 18% plus, but will do deals few others would touch. I can use them occasionally. Others think 9-12% if amazing. I learned long ago that it’s important to find out what the investor thinks is a good yield. At first, I sometimes offered the investor too much. I found the same investor might view an 18% return as risky and 10% as prudent but attractive ------ with the SAME NOTE as collateral!
Many investors have been fed the “Risk vs. Rate of Return” theory. Lower yield means lower risk to them. So we find out the number that motivates them without taking them too far out of their comfort zone.
The rate an investor wants will determine how I work with them or whether I do or not. If the rate is too high, I may have no deals for them and we have a conversation about widening their criteria or lowering their yield.
Each investor is secured by one note. This is the best way to start and really only should only be changed when you end up with a portfolio of 500k+. At that time, you could consider rolling it all into an LP (Limited Partnership) or LLC. They contribute their notes and get back an interest in the entity. This can somewhat simplify investor managment. Once you head that direction, you may need to comply with securities laws. For example, a “Reg. D” offering can be fairly simple, but will still require an attorney and a couple thousand dollars for the first one. Once you have one, you can make a new offering each year.
The offering could just consist of what can be called a “Blind pool” where you raise money to buy notes with no specific notes identified - only the general principle and parameters. The other extreme is to identify all of the notes (that your current investors are involved in) and bring them into the LP or LLC.
The best is a mix. Let’s say your portfolio is $500k. You do an offering of 1 million. Half goes to buy the existing paper and the rest is available to buy more of the same as it comes along. Your existing investors may move their funds (of course it’s their choice) into the new LP or you can keep some or all of their funds available for snapping up the notes quickly.
The advantage of some kind of pooled fund is your greater control of the capital, the notes and the investors. When you have cash in the bank, you can snap up some great deals. CAUTION - don’t raise more funds than you can invest. This is a step to take only when you have tons of paper to fund. Start with the first few notes and build the portfolio one on one with investors. Even with a big investor, do the notes one at a time. You can always work some sort of staged funding with them if it works well.
As far as how “Pooling” funds and notes grows into a hybrid form of PMI, that is way beyond what we can cover here. It is covered in the five day video or live seminar.