A Look at Joint Ventures: The Pros & Cons of Using Other People’s Money to Acquire Notes

by | BiggerPockets.com

Let’s face it, there are many ways to joint venture (JV) on a real estate deal. The same is true in the note business. There’s also an old saying that “just about anything you can do with a house you can do with a note.” For example, you can broker it, rehab it, flip it, borrow against it, buy and hold, and so on. You can also do a joint venture or even raise private money to acquire a note or a pool of notes.

Ways to JV

If you’re trying to purchase a note but just need a money partner to help acquire the deal, there are a few ways to set this up.

One way would be to take joint title at the time of purchase. For example, I once bought a note with my Roth IRA, my wife’s IRA, and my HSA all owning a portion of the note, and our assignment of mortgage and note sale agreements spelled out the exact percentage of ownership. I’m not sure I would recommend always doing this because most loan servicers may charge you additional fees to send a statement to each person on the title, but it’s really a business decision. With certain tax advantages or just the benefits of doing the JV, a lower yield after the fees may not be as big of a deal.

How to set up the JV also has a lot do with your exit strategies. What’s your business model or strategy?

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If my strategy is to broker a note, I may be able to just line up a seller and buyer and make a fee just for putting the deal together.

If I want to buy a nonperforming note (NPN), I may just need access to capital until I can purchase and work through the note, whether I can exit through the borrower (usually a cooperative situation resulting in a payment plan or a discount on arrears) or exit through the property (foreclosure, deed in lieu, etc.). If I exit through the borrower, I usually have a re-performing asset that I can recapitalize on in some way, often by selling a note or a piece of the note (aka selling a “partial”), or I can even borrow against it via a collateral assignment of note and mortgage.

Related: 10 Vital Aspects of a Bulletproof Joint Venture Agreement

If you’re a buy and hold investor, you may just need a partner to acquire the deal, and you can buy him/her out of the deal later or continue to share revenue until maturity or cash-out.

This is more complicated, but just as you can take joint title of an actual note, you can also JV on the ownership of the company or entity (e.g. the LLC) that owns the notes.

One final strategy that my company uses is that we JV with hundreds of money partners in our private placements, where we use their capital to buy thousands of mortgages with the intent of paying our investors a fixed return, with the plan to pay them back upon maturity or roll them into a new offering. By having a note fund, it enables us to perform various strategies depending on current market conditions.

Regardless of which way you choose to JV, there are a few things to consider first.

Advantages

There are many advantages to being able to JV on a note deal. Sometimes it’s access to capital. For the money partner, it could be access to a deal that pays a nice yield with collateral. The investor may not have the time or wherewithal to work with the actual notes, so he or she may prefer to be a passive money partner. This can be a great way to share not only the workload and skill sets, but also the risk. Doing so well also help you diversify, especially in a note fund. Many high net worth folks prefer note funds just for that reason, along with the fact that there’s limited liability in that they can’t be sued as a limited liability partner.

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Related: 4 Steps to Growing Profitable Joint Venture Relationships

Disadvantages

I’d say the biggest potential disadvantage of a JV is that you’re giving up some form of control. Although notes are an asset-backed investment, you still need to know your partner and your deal. Be sure the terms of your JV are spelled out, along with all the roles and responsibilities. Who’s in control of what? Who’s responsible for what?

Most importantly, what happens when things go south or there’s a default or liquidation trigger? Along with defaults, there can be compliance and third-party risks, as well as various market risks. Pricing or the supply of notes can change as well. But it’s important to know that you can adjust accordingly, just like you would if there are changes in the real estate market. In fact, note values are in direct correlation to real estate values.

After thinking through the advantages and disadvantages, I still believe that it’s a business decision to be made by each party. Personally, I enjoy sharing the workload with my partners, while providing an opportunity to my investors to diversify amongst many note deals.

Do you prefer JVs for your real estate? Better yet, would you consider a joint venture on a note deal?

Let me know with a comment!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

14 Comments

  1. Joshua Howaniec

    I find the note business fascinating. The whole concept of buying debt, creating an income, having relatively little contact with the owner and zero responsibility for the condition of the house has got to be the coolest strategy in REI.
    It makes me wonder why someone would be a landlord of single units at all when you can own the debt instead.
    On top of it all you can raise money from the outside. Which means the rate at which you can raise capital for more notes is dynamite.
    Out of curiosity, do you typically raise part of the cost or all of it?
    Anyway, great blog. Definately something to work towards

  2. Interesting. I think these are contributing factors but at the end of the day we are all responsible for your personal economic growth or lack there of. At any rate, it appears that I am bucking the trend in a couple of categories so it is possible!

    • Dave Van Horn

      Hi Cliff,

      There are plenty of places that sell notes. I often suggest looking at Note Funds, Loan Exchanges, and Servicers like FCI Exchange and Loan MLS to start.

      You could also try looking here in the BP Marketplace or on a LinkedIn Group I run called Distressed 2nd Mortgages Group to purchase from individual note investors.

      Best,
      Dave

  3. Kay F.

    I’m fairly new to the note investing arena and am having a difficult time getting started. I’m not even sure how I’d find an investor in my area to enter into a joint venture. I plan to scour this site for information and resources though.

    • ted lillie

      Kay Besides here on Bigger Pockets, the 4 best starting points to learning about note investing are:
      1. Noteschool.com- Best training and education available-anywhere.
      2. NoteMBA-Best Podcast on note investing.
      3. Join your local Real Estate Investors group, and look for note investors there.
      4. Be the Joint Venture investor Dave talks about in this article. Learn while partnering with an expert.
      Ted Lillie
      Accretive Wealth Enterprises

  4. Paul Vincent

    Great article. Hoping to meet a JVer out at Paper Source in a few weeks.l, actually! My partners and I want to create our own fund in the near term, but want a JV to learn some best practices first.

    Thanks for putting this great piece together.

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