When thinking about investing in real estate, most people understand  the process of buying a single-family home or rental property. You determine if the market and neighborhood will be a good bet, determine what size home you’re looking for, get together with a lender and a realtor, tour properties and make offers. 

However, when we start talking about purchasing the note behind a house (think of it as a mortgage or deed of trust), the process can be entirely foreign, especially if you are accustomed to traditional real estate investing through rentals.

Let’s explore the process together, from start to finish. You’ll want to be confident that your money is amplifying and that you can trust your partners. 

Here are the basic steps of investing in a real estate-backed note:

1. Determine your investing goals

2. Learn how purchasing a note works.

3. Review the JV agreement.

4. Transfer your funds.

5. Receive asset updates and join for key decisions.

Step #1 – Determine Your Investing Goals

You’ve likely arrived here because you’ve already decided to invest in real estate. With plenty of types of real estate investing, At this point, consider both your short-term and long-term investing goals so you can be sure to find opportunities that best fit your personal goals.

Think about the amount of capital you want to grow, the length of time you want that capital tied up, any tax advantages you hope to recieve, and if you hope to use the cah flow now to offset your income or roll it back into your original capital fund to accelerate wealth building. 

Take a moment to write down these goals. And give yourself time to think about them and refine them. You may be committing your own funds when investing in real estate or joining a joint venture partnership and you’ll want to be confident that it will provide you the maximum benefit you need.

Step #2 – Learn How Note Investing Works 

Once you’ve determined your investing goals, aim to find an opportunity or deal that aligns with  your goals. Even just within note investing there are multiple options. There are performing and non-performing notes available for purchase or funds that pool together multiple investors to purchase a bundle of notes.  

A potential partnership for note investing begins with a discovery call to learn what your financial goals are and if real estate backed notes may be a good fit. Often, this is followed-up with more detailed projections of typical note deals, presentation of a business plan and the schedule for key decision points within the joint venture partnership.

At this point, you should vet potential partners. Ask questions and read between the lines of any financial materials provided. Take some time learning about the possible exit strategies and the elements of underwriting and due diligence that go into a note workout analysis. Finally, consider how the proposed business plan makes sense given the current economic cycle. 

Basically, at this stage, take time to find any reasons NOT to put your money into notes.

Step #3 – Review the Documents

Once you’ve found good operator partners and decided to put your money into notes, the first official step is to review and sign the Joint Venture agreement.

This legal document provides in-depth details about the partnership structure, the risks involved, and your role as a capital partner. Although reading legal jargon may be no fun, it’s very important you gain a full understanding of the risks, subscription agreement, and operating agreement pertaining to the note purchase.

Step #5 – Transfer Your Funds

Once you’ve completed the JV Agreement, the final step is to send in your funds. Typically, you’ll find wiring instructions in the JV Agreement document.

Pro tip: Before wiring your funds, double-check the wiring information, and let the deal sponsor know to expect it so they can be on the lookout.

Step #6 – Receive asset updates and join for key decisions.

Once the funds are transferred, the operator partner will dive into the note evaluation and due diligence process to find notes that fit within the predetermined criteria (such as located in specific states, performing or non-performing, vacant, etc.). As the capital partner, you’ll receive regular updates and be engaged at several key decision points in the asset management. 

While the process isn’t fully passive, the operators are doing the heavy lifting and extreme detective work to purchase the best note. Since notes purchased with a JV agreement aren’t legally considered as “investments” by the SEC, you’ll be engaged at key decision points such as proceeding with any legal strategy (such as foreclosure) or creating the terms for the homeowner to reperform. 

When there aren’t decisions to be made, you’ll receive quarterly progress updates. Your total involvement typically requires very little time but is valuable for the process.

Conclusion

By now, the process of putting your money into real estate backed notes should be more clear, and perhaps, a little less intimidating.

With notes purchased within JV agreements, your active participation is upfront, during the time you’re choosing a partner, learning how notes work, reviewing the operating agreement, and wiring in your funds. After this, you’ll be engaged several times to participate in key asset management decisions while your operator partners go full steam ahead with all of the management tasks.

Don’t worry if this process still seems a bit daunting. That’s what we’re here for, and we’ll be with you every step of the way as your JV partner in a real estate note purchase. As you go through the process of a few note purchases, the process will become second-nature.