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?

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.
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.