Creating a debt fund for owner finance strategy
Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes
Creating a debt fund for owner finance strategy
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesQuote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
That being said, raising capital for a blind pool fund is much more difficult than raising capital for a syndication where the property is already identified and the potential investors know exactly where there money is being invested. It’s doable, just more difficult, time consuming, with a lot more “contacts” needed for each “sale”.
I see a conflict of interest in your role as fund manager and principal in the “operating” company. As fund manager you owe your investors a fiduciary responsibility which I can foresee as a basis for lawsuits should the fund not perform as anticipated. I would check this out with a seasoned securities attorney for their opinion/guidance.
Most likely raising funds from passive investors would utilize a Reg D 506 b or c safe harbor exemption from registration. Typical cost for the setup would be in the $15,000 range which would include production of the Private Placement Memorandum, Subscription Agreement, and Operating Agreement, Investor Qualification Forms, as well as filing Form D with the SEC, and state “Blue Sky” filings in those states where your investors reside.
There are other ways to legally raise capital, however, they have some inherent disadvantages making them considerably less desirable for what you’re trying to do.
29 Replies
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
so U want investors to put firsts on the property at 9% and then let buyers either assume those or your going to wrap them ?
that would be sub prime lending to owner occ.. And most of those buyers dont have a very big down payment / unless you think you can get bigger BP..
so if these are high ltv loans then no I dont think HNW folks will jump on it.
if the LTV is about 60% then that might work.
- 1yJaycee GreenePro MemberReal Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
Hey @Ram Gonzales! Have you thought about starting a CDFI?
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
Quote from @Jay Hinrichs:
so U want investors to put firsts on the property at 9% and then let buyers either assume those or your going to wrap them ?
that would be sub prime lending to owner occ.. And most of those buyers dont have a very big down payment / unless you think you can get bigger BP..
so if these are high ltv loans then no I dont think HNW folks will jump on it.
if the LTV is about 60% then that might work.
I would use the funds to buy at deep discounts (60-70% LTV) and then wrap with seller financing. Buyers would put 10% down. This is what I do currently but it's a process of purchase, rehab, wait 4-6 months, refi, then wrap and sell (and risk DOS clauses). A fund would streamline and scale things significantly.
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
Quote from @Jaycee Greene:
Hey @Ram Gonzales! Have you thought about starting a CDFI?
Yes, that's the plan and I have bankers lined up to invest through the CDFI but, per the guidelines, I need a track record as a fund first to qualify (the bankers also want to be second round or later). My plan is to raise and deploy the first fund and then use that to qualify as a CDFI. I mostly work in low to moderate income areas anyway so it checks all those other boxes.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
How do you make money as a fund manager?
7e investments53 Reviews - 1yJaycee GreenePro MemberReal Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
Quote from @Chris Seveney:
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
How do you make money as a fund manager?
IME (in my experience), you would charge a fee (say 50-100 basis points) to the banks/investors, often times based on the either the commitments or the outstanding balance of the fund.
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
Quote from @Chris Seveney:
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
How do you make money as a fund manager?
Normally, as @Jaycee Greene suggests, you make a management fee plus a split of cashflow with investors (oversimplified explanation). In this case however, since I'm raising debt, my profit comes from the deals. I'm essentially creating my own bank from which to borrow capital.
- Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes1y
For myself, I would want to see an operator that has had at least 20 deals with the structure that you are discussing. How many deals have you already done? Also consider when you sell house with seller financing to owner occupied person as their primary residence you cannot balloon per Dodd Frank.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Ram Gonzales:
Quote from @Chris Seveney:
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
How do you make money as a fund manager?
Normally, as @Jaycee Greene suggests, you make a management fee plus a split of cashflow with investors (oversimplified explanation). In this case however, since I'm raising debt, my profit comes from the deals. I'm essentially creating my own bank from which to borrow capital.
But how do you exit the deal, as Randy mentioned these are long term loans and investors are not going to want to be in a deal locked up for that long of a period of time. Your overhead and cost of capital are something to consider as part of your plan. remember if you get an investor to invest $250k but it takes you 3 months to deploy that capital that is $5625 in interest you owe them, and say you can only invest $200k of it you are gonna have money always sitting on the sidelines. You also have K-1s and overall management of the fund to account for.
Thus the question I asked is, how do you make money and what is the exit strategy as when you go to sell these loans they will also sell at a discount.
As a sidenote I see people doing this and jacking up the price of the home to seller finance to above market value - if you do this you better be VERY clear with your investors that you are writing a $300k loan on a $250k property as if you do not you can get in some serious hot water later on down the line when doing valuations of the company.
7e investments53 Reviews - Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@Randy Rodenhouse thank you for the feedback. I've probably done about a dozen or so deals this way. Only limitation has been the long-term funding. I've only ever had one borrower who fell behind in payments, in which case, I paid him some cash to move on, and got a new buyer within a few weeks. The new buyer brought a new down payment that made me whole and then some, and despite the original buyer falling behind, I continued making the underlying payment on the mortgage with reserves from his original down payment. It's a very sustainable and resilient structure.
As to the balloon, my attorney has told me that balloons after 60 months and done through an RMLO are fine under Dodd Frank. There is also the alternative of doing a step up in the rate after 5 years to encourage them to refinance. It's also worth noting that, given my community development background, the intent is to help them refi into traditional financing after they've established a payment history. So from the outset, they'd start working with a mortgage broker who can prepare them for a refinance within a few years. That refi allows me to recapitalize and repeat the process.
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@Chris Seveney Great questions. The exit is the refinance. For the few that don't/can't refinance, we would sell the note, likely at a discount, but considering they would have been paying for 5 years consistently at that point that would make it a very attractive for most note investors. Again, the goal is to work with them early on to prepare them for the refi within 5 years.
As to capital deployment, that is the advantage of the fund model. Pooling the funds together allows me to maximize every investor dollar and minimize idle cash. I am still obligated on the interest payment regardless of how much has been deployed but that is worked into the fund proforma and can be covered by deal cashflow.
As to resale price, one of the last one's I did I sold for $125K and had a private loan for $85K which I wrapped. I could have fully rehabbed that home and sold for $175K but instead I sold as a fixer upper (only needed cosmetics). The buyer got an affordable home in exchange for doing the repairs himself (sweat equity), I got a cashflowing note, and my private lender got a steady interest payment. He has since refinanced and cashed me and my private lender out. There's no shortage of deals like this here, but I lack the flexible capital to move on them. Private lenders are certainly an option but a fund structure would be much more efficient and scalable.
- 1yJaycee GreenePro MemberReal Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
Quote from @Ram Gonzales:
@Chris Seveney Great questions. The exit is the refinance. For the few that don't/can't refinance, we would sell the note, likely at a discount, but considering they would have been paying for 5 years consistently at that point that would make it a very attractive for most note investors. Again, the goal is to work with them early on to prepare them for the refi within 5 years.
As to capital deployment, that is the advantage of the fund model. Pooling the funds together allows me to maximize every investor dollar and minimize idle cash. I am still obligated on the interest payment regardless of how much has been deployed but that is worked into the fund proforma and can be covered by deal cashflow.
As to resale price, one of the last one's I did I sold for $125K and had a private loan for $85K which I wrapped. I could have fully rehabbed that home and sold for $175K but instead I sold as a fixer upper (only needed cosmetics). The buyer got an affordable home in exchange for doing the repairs himself (sweat equity), I got a cashflowing note, and my private lender got a steady interest payment. He has since refinanced and cashed me and my private lender out. There's no shortage of deals like this here, but I lack the flexible capital to move on them. Private lenders are certainly an option but a fund structure would be much more efficient and scalable.
@Ram Gonzales IMO, the funding of such a structure is probably better directed towards "social impact" or "community development" investors. An example in my experience would be a local/regional foundation with a mission that is aligned directly or indirectly with Affordable Housing AND a longer-term investment horizon with less of a focus on the financial return and more on the "social" return for the community.
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@Jaycee Greene I agree. I'm just in a bit of a chicken-egg situation. The ideal funders want to see a successful first round first, so I need to find more traditional investors for the first round. I agree that they will likely be investors who are also community-minded. I have some lined up but will need more so I appreciate all the feedback/concerns as I start to shop it around.
You mention offering homeownership opportunities to people who have been rejected by traditional banks.
Do you have an estimate, or a track record, regarding how many of these homes will not be purchased under the contract and the borrower defaults and the home will revert to you to resell?
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@Scott Mac Of the 12-15 I've done, I've only had one default as I described earlier. The others are either still paying as agreed, the notes were sold, and two have refinanced out. Because of the funding structure I use now I don't include balloons or rate adjustments. That would be new under the fund structure. The goal is not to get the house back. The goal is for them to prove a track record of payments and leverage that to refinance with a traditional lender into a lower rate.
Quote from @Ram Gonzales:
Quote from @Jay Hinrichs:
so U want investors to put firsts on the property at 9% and then let buyers either assume those or your going to wrap them ?
that would be sub prime lending to owner occ.. And most of those buyers dont have a very big down payment / unless you think you can get bigger BP..
so if these are high ltv loans then no I dont think HNW folks will jump on it.
if the LTV is about 60% then that might work.
I would use the funds to buy at deep discounts (60-70% LTV) and then wrap with seller financing. Buyers would put 10% down. This is what I do currently but it's a process of purchase, rehab, wait 4-6 months, refi, then wrap and sell (and risk DOS clauses). A fund would streamline and scale things significantly.
Do you know if investors are wrapping DSCR loans?
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Joe S.:
Quote from @Ram Gonzales:
Quote from @Jay Hinrichs:
so U want investors to put firsts on the property at 9% and then let buyers either assume those or your going to wrap them ?
that would be sub prime lending to owner occ.. And most of those buyers dont have a very big down payment / unless you think you can get bigger BP..
so if these are high ltv loans then no I dont think HNW folks will jump on it.
if the LTV is about 60% then that might work.
I would use the funds to buy at deep discounts (60-70% LTV) and then wrap with seller financing. Buyers would put 10% down. This is what I do currently but it's a process of purchase, rehab, wait 4-6 months, refi, then wrap and sell (and risk DOS clauses). A fund would streamline and scale things significantly.
Do you know if investors are wrapping DSCR loans?
if your asking me Joe I suspect wrapping a DSCR loan would be an event of default with those lenders.. and one would risk having the loan called and a lot of times if you have multiple loans with the lender they can call them all in default.. Personally I would want to make darn sure before I wrapped a DSCR loan.. ( make sure you dont violate the covenants) - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Ram Gonzales:
@Chris Seveney Great questions. The exit is the refinance. For the few that don't/can't refinance, we would sell the note, likely at a discount, but considering they would have been paying for 5 years consistently at that point that would make it a very attractive for most note investors. Again, the goal is to work with them early on to prepare them for the refi within 5 years.
As to capital deployment, that is the advantage of the fund model. Pooling the funds together allows me to maximize every investor dollar and minimize idle cash. I am still obligated on the interest payment regardless of how much has been deployed but that is worked into the fund proforma and can be covered by deal cashflow.
As to resale price, one of the last one's I did I sold for $125K and had a private loan for $85K which I wrapped. I could have fully rehabbed that home and sold for $175K but instead I sold as a fixer upper (only needed cosmetics). The buyer got an affordable home in exchange for doing the repairs himself (sweat equity), I got a cashflowing note, and my private lender got a steady interest payment. He has since refinanced and cashed me and my private lender out. There's no shortage of deals like this here, but I lack the flexible capital to move on them. Private lenders are certainly an option but a fund structure would be much more efficient and scalable.
Have you actually ran the numbers on how much money you as the manager would make? It is very hard running a fund and paying 9% with performing assets at such a small scale and making it worthwhile for the fund manager.
Sidenote: if borrower is paying P&I and investors receiving interest only it gets more challenging as you are receiving dribs and drabs of principal back every month which is impossible to deploy but you are still paying investor interest on it.
7e investments53 Reviews - Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@Chris Seveney We don't plan to make money by managing the fund. We plan to make money on the properties. Essentially the Fund would be our bank that lends to my LLC who purchases the properties. The Fund gets a first lien on the property. LLC sells the property to Buyer by wrapping Fund loan with a loan (BBB) to Buyer.
Purchase Price: $85,000
Rehab: $5,000
Loan Amount from Fund (AAA): $90,000
Interest: 9%
P&I: $724.16
ARV: $145K
LTV: 62%Sales Price to New Buyer: $145K
Interest: 9%
Down Payment: $15K
Amount Financed: $130K
P&I: $1,046.01
Cashflow
Down Payment: $15,000
Monthly Spread: $321.85
Backend at Refi: $38,352There will be costs to administer the Fund but it's manageable given the upside, particularly at scale (I've done a full proforma with those costs in mind). Let me know if you think I'm missing something.
- Member since 2018 · 1k+ posts · 1k+ votes1yIf you can set up as a non-profit you might get foundation/grant funding for you initial capital. Then become self-sustaining at a lower interest rate.
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
- Investor · San Antonio, TX · Member since 2009 · 106 posts · 50 votes1y
@John Clark I ran a nonprofit for 5 years and considered that option for this strategy, but, for a lot of reasons, it would be more limiting in the long-run.
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesI don’t know what the costs would be to “scale” from the volume you do now to a volume you’re targeting, but it’s probably a reasonable investment. Certainly from a capital raise perspective, $5 -10 million is a reasonable amount.
Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
That being said, raising capital for a blind pool fund is much more difficult than raising capital for a syndication where the property is already identified and the potential investors know exactly where there money is being invested. It’s doable, just more difficult, time consuming, with a lot more “contacts” needed for each “sale”.
I see a conflict of interest in your role as fund manager and principal in the “operating” company. As fund manager you owe your investors a fiduciary responsibility which I can foresee as a basis for lawsuits should the fund not perform as anticipated. I would check this out with a seasoned securities attorney for their opinion/guidance.
Most likely raising funds from passive investors would utilize a Reg D 506 b or c safe harbor exemption from registration. Typical cost for the setup would be in the $15,000 range which would include production of the Private Placement Memorandum, Subscription Agreement, and Operating Agreement, Investor Qualification Forms, as well as filing Form D with the SEC, and state “Blue Sky” filings in those states where your investors reside.
There are other ways to legally raise capital, however, they have some inherent disadvantages making them considerably less desirable for what you’re trying to do. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Don Konipol:
I don’t know what the costs would be to “scale” from the volume you do now to a volume you’re targeting, but it’s probably a reasonable investment. Certainly from a capital raise perspective, $5 -10 million is a reasonable amount.Quote from @Ram Gonzales:
I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?
That being said, raising capital for a blind pool fund is much more difficult than raising capital for a syndication where the property is already identified and the potential investors know exactly where there money is being invested. It’s doable, just more difficult, time consuming, with a lot more “contacts” needed for each “sale”.
I see a conflict of interest in your role as fund manager and principal in the “operating” company. As fund manager you owe your investors a fiduciary responsibility which I can foresee as a basis for lawsuits should the fund not perform as anticipated. I would check this out with a seasoned securities attorney for their opinion/guidance.
Most likely raising funds from passive investors would utilize a Reg D 506 b or c safe harbor exemption from registration. Typical cost for the setup would be in the $15,000 range which would include production of the Private Placement Memorandum, Subscription Agreement, and Operating Agreement, Investor Qualification Forms, as well as filing Form D with the SEC, and state “Blue Sky” filings in those states where your investors reside.
There are other ways to legally raise capital, however, they have some inherent disadvantages making them considerably less desirable for what you’re trying to do.I think in this instance it would be better to do one investor per deal rather than doing it as a fund and hypothecate each deal as it comes along.
Numbers always look good on paper but between holding costs when acquiring and renovating property, closing costs on can also add up.
I am not saying it cannot be done, as I did it with about 75 loans in a very similar fashion (except I was buying NPL's and got them reperforming). Its just hard and if there is any softening of the market.
For the original investor:
1. I would include servicing costs of the loan and licensing costs. If you are originating more than 3 licenses in most states you need to be licensed. servicing will run you abour $35-$50/mo per loan. That is not something you typically can charge an owner on an owner finance deal.
2. Do not forget about holding costs. I assume you would use your own $ to put property under agreement and get investor to close around same time, but if not you will have 1-2 months of holding costs plus time to renovate and time to sell the property. I would calculate this as a 6 month period of interest to investor to be safe.
3. Closing costs - you will have to pay taxes/stamps etc. typically as a seller.
4. Company overhead - you will need to spend $5-$10k per year on taxes and company overhead.
5. Default rate - as you scale you will have a 10% default rate on loans. How do you plan on handling that situation
6. Raising capital - It will be difficult to tell an investor their $ is tied up for 30 years and you are only banking on the borrower selling or refinancing. An investor is going to want to have a specific date they can get their money out of the deal.
7e investments53 Reviews - 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Chris Seveney:
Quote from @Ram Gonzales:
@Chris Seveney Great questions. The exit is the refinance. For the few that don't/can't refinance, we would sell the note, likely at a discount, but considering they would have been paying for 5 years consistently at that point that would make it a very attractive for most note investors. Again, the goal is to work with them early on to prepare them for the refi within 5 years.
As to capital deployment, that is the advantage of the fund model. Pooling the funds together allows me to maximize every investor dollar and minimize idle cash. I am still obligated on the interest payment regardless of how much has been deployed but that is worked into the fund proforma and can be covered by deal cashflow.
As to resale price, one of the last one's I did I sold for $125K and had a private loan for $85K which I wrapped. I could have fully rehabbed that home and sold for $175K but instead I sold as a fixer upper (only needed cosmetics). The buyer got an affordable home in exchange for doing the repairs himself (sweat equity), I got a cashflowing note, and my private lender got a steady interest payment. He has since refinanced and cashed me and my private lender out. There's no shortage of deals like this here, but I lack the flexible capital to move on them. Private lenders are certainly an option but a fund structure would be much more efficient and scalable.
Have you actually ran the numbers on how much money you as the manager would make? It is very hard running a fund and paying 9% with performing assets at such a small scale and making it worthwhile for the fund manager.
Sidenote: if borrower is paying P&I and investors receiving interest only it gets more challenging as you are receiving dribs and drabs of principal back every month which is impossible to deploy but you are still paying investor interest on it.
yup drag on the fund will drag you down.
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