The Investing Guide To Starting A Note Fund

July 28, 2021




GDNI 162 | Note Fund


As a note investor, starting a fund can be challenging. There are a lot of factors that go into it. Do you have the right team? Are you raising money? Is this your first time because the first times is always the hardest. Do you have an LLC, a bank account, or an attorney? There is so much that it can be problematic in the long run. However, the end result could be worth a lot of money. Join Chris Seveney and Jamie Bateman as they get into the nitty-gritty of starting a fund. Learn all the intricacies that go into starting a fund. Discovery tips and tricks from Chris and Jamie so that you can start a fund today.

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The Investing Guide To Starting A Note Fund

Let’s roll into what’s been happening and what you got going on.

There are so many different things I could talk about here. I’ve got a bunch of deals looking like they’re going to be exiting soon. We’ll see, which is good. I just can’t believe that 2021 is half over already. What do you want to talk about, the blight issue?

What happened with that house with all the mattresses? I’m curious.

GDNI 162 | Note Fund

Note Fund: A fund is a pool of money from different investors. Specifically, a note fund is a way to pull together passive investor money to go out and buy notes.


Apparently, she rented a commercial dumpster and she’ll have it fully cleaned up.

Is that your biggest challenge? I know you’ve had some fun with some New York loans as well.

I’ve presented some opportunities for learning.

It’s a great example. I love that. I’m going to start using that one.

Your attorney is just there to tell you what you can and can't do. It's up to you to figure out what you can do within those guidelines. Click To Tweet

My North Carolina deal, that one’s been interesting, too. Learning all kinds of different things about what’s recoverable, what’s not. Publication of forfeiture notices. One foreclosure in New York got rejected because the land contract was not recorded so we’re going to go with a different strategy. I know you’ve talked previously about it. It was a Pennsylvania loan where you did an ejectment. I can’t remember which state. You were looking at it at least doing an ejectment. That’s the strategy that we’re going to probably go with next. There’ve been all kinds of different things going on with our portfolio but then you and I have our fund that we’re getting underway and doing some due diligence on some small pool of assets to get that rolling. There are lots of different balls in the air. As you know, we’ve been working on another project that we can’t talk about yet but it’s taking up some time. I feel like we’ve been pretty busy. How about you? What do you have going on?

First, I got my little self-promotions. My membership site is pretty much done so I’m in testing on that to be like, “You sign up for this. It does the money process.” There are two different access levels so it’s like, “You got access 1 or access 2 to make sure all that stuff works.” That’s in the final throws. I had a few tweaks on my calculator I needed to make as well. I got those resolved. At some point, I want to get people fully testing it for a few weeks to a month. My goal is August 1, 2021 to open it up live for everyone. That’s one project. We’ve got another project we’re working on. From another standpoint, it’s a lot of nuisance work, grind and waiting on things from that perspective. From the note space, honestly, it’s been a little uneventful. Some of the COVID relief stuff has been a waiting game. I’ve got probably a half dozen assets in Maryland that we can continue to move on. I was hoping in Pennsylvania to start moving on some more assets. Unfortunately, they’re following CDC, which got pushed until the end of July 2021, which I don’t know if people also saw but the Supreme Court came out and didn’t take the case.

They essentially said they’re not going to shut down the moratorium but it was a 5/4 decision. Kavanaugh mentioned that if it goes past July 31, 2021, they’re going to open it back up. My consensus of quickly reviewing it was we don’t agree with it but for another month, it’s not worth the aggravation probably to not extend it for at least one more month. It’s been this long but it goes after that we might see some stuff. A lot of transfer has been going on for those out there. Allied Servicing noted that in Pennsylvania, they’re not servicing loans anymore. I had 30 loans with them that are getting transferred. With the transfers, some of them had been lines of credit. It’s been a struggle on transfers. Michigan as well, they’re not servicing. That’s been a lot more time I’ve had to spend on stuff like that than on some of the regular note management stuff.

I’ve got one fund closing out so we’re going to be putting assets out for sale. I still got about 80 assets in that fund that I need to close out. We’ve got the Integrity, which we’ve launched as well. That’s moving full steam ahead, as well as everything else. By the way, I have a new summer job. I volunteered to be a basketball coach for my son’s team so I’m also coaching basketball in my free time. I needed something else to do. Once I finished grad school, I twiddle my thumbs on what to do. After this other venture, I’ve got in the works, I do have another one after that that I want to spin off of that one. It’s an idea that popped in my head at 1:00 in the morning. I’m like, “I need to do this because nobody else is. It would be an added value benefit to the note space.” We’ll see.

No shortage of ideas going on over there. That’s for sure.

I’ve always got lots of ideas. The question is I always have to run them by Brian Gallagher, an attorney because probably 80% of them are like, “You can’t do that.” The ones that can do have done well. In this episode, we were speaking about funds. We were going to talk about starting a fund, what’s involved, what is a fund because a lot of people don’t even understand what a fund is, the different types of funds, which we’ll talk about briefly between the 506(b) and 506(c). A lot of the setup and everything is very similar from that perspective. We wanted to start with that. Jamie, I know with Integrity, it’s your first fund so we’ll let you start with explaining in your own words what a fund is.

GDNI 162 | Note Fund

Note Fund: A 506 B is for sophisticated investors. They can’t advertise. A 506 C is for accredited investors and they can advertise.


A fund is a pool of money from different investors. Specifically, with a note fund, it’s to go out and buy notes. In our case, the Integrity Mortgage Note Fund, we opened up an LLC, you and I did. Each investor puts in a certain amount of money. We pull that money together. They own a security or multiple securities. They own a portion of that company. That company will go out and buy assets. It’s a way to pull together passive investor money to go out and buy notes. That can take on many different forms. You get the benefit of economies of scale. You and I may be able to buy assets at a better price point then the individual investor may be able to with $25,000. If we’re working with $1 million to $2 million, we may get better pricing. It’s the economies of working the systems that we’ve already got in place. There are a lot of benefits to go in the fund route. I’m getting a little bit ahead of myself but those are the basic elements of a fund. What would you add to that?

One thing I want to correct. You mentioned they’re investing in security. They’re investing in shares. I’ll step back a little bit further. Most people when they get in the note space, if they raise money, they like to do JV partners, which is a mano-a-mano, one-on-one type of deal where they have an LLC or investment that they invest with you and you issue a joint venture agreement. That’s one investor for one deal or it should be. With a fund, we start an LLC and we have a goal of raising $5 million. It’s $1,000 per share to keep it easy. You have available up to 5,000 shares. Jamie may buy 25 shares. I may buy 25 shares. You’re buying shares into that LLC, which at the end of the day, if Jamie had 25 shares and we sold $1 million worth, Jamie’s got 4% ownership in that entity as a member but not as a manager. That’s one of the things that are a little different. If Jamie invests in that fund or an investor invests, they’re just a member, not a manager. The manager is the one who operates it. It’s predicated by an operating agreement like your LLC is. The big difference I see is you have to register as an exemption with the SEC whether it’s a 506(b) or 506(c). Quickly, the difference is B is sophisticated investors, can’t advertise. C is accredited only, can advertise, long story short. There are other nuances but I don’t want to get into those.

Those are both Regulation D. You can get into Regulation A and other types.

Technically in a 506(c), you don’t need a PPM but you put one together because nobody would invest if he didn’t one anyways, which is called a Private Placement Memorandum. It goes with the operating agreement, which is how you operate the company. The PPM also outlines what the investment is, how you’re investing and a lot of information for the investor as well.

By the way, we’re not attorneys. This is not legal advice.

We’re not accountants, bookkeepers, any of that good stuff. We’ll throw that caveat out there. Jamie, do you recall what it roughly costs to start a fund?

I’ll let you fill that one.

I would tell people, estimate around $10,000. It could come in and out.

I would say $5,000 to $10,000.

$5,000 is a little light. One of the big things about it though, as well as the time it takes is the attorney will put everything together that keeps you compliant but the physical terms or stuff that you have to include you as a sponsor is he’s not going to tell you how much you’re paying. He’s not going to tell you, “Are you giving a preferred return? How are you splitting profit? Is there a clawback? Can they reinvest their interest? How long is the fund? How often are you wishing distributions? If there’s a management fee, how is that calculated?” Their attorney doesn’t tell you any of that. That’s all stuff that you have to tell them. Depending on how quickly you can turn that stuff around is important to understand the framework of putting together a fund.

Joint venture deals and partials are the worst to deal with when it comes to self-directed IRAs. Click To Tweet

Your attorney is going to tell you what you can and can’t do and then it’s up to you to figure out what you want to do within those guidelines. In our case, you had worked with Brian Gallagher several times before. We made some adjustments. Our fund is unique to your other funds but in a lot of ways, some of the building blocks were already in place.

The way you manage it is the same, essentially. You go out. You buy assets. I manage them the same. The only difference is on the bookkeeping end of things. A few things may be a little different here and there. I know the way. You manage your assets the same. If you’re doing your JV deals right and you’re reporting on a monthly basis to the investor or quarterly, whatever it is, providing them their dividends or however you’re paying them. Everyone is like a separate entity where you have to provide different reports for different people. In a fund, it’s one report that you provide about here’s the status of the fund, which is much simpler and it’s easier to scale. Would you agree with that?

Yes. There’s a lot more work with a fund on the front end for sure. This is my first fund. Once it’s set up, it is much more scalable and easier to manage as opposed to a bunch of joint ventures or other arrangements on a one-off basis. We can get into advantages and disadvantages from the passive investors’ standpoint or from the operators’ standpoint. We did an episode on how to choose a note fund. If the readers want to go back and check that out, it was Episode 149 on April 28, 2021, I believe. If you want to dig into from the passive investor standpoint how to choose a note fund, I’d recommend you check that out. There’s a little more work on the front end than if you’re setting up a joint venture with one investor, one partner. You’re going out and buying one deal together. That’s fairly straightforward on the front end but I agree with you. There’s a lot more going on and a lot more to manage from an administrative standpoint. If you start scaling on the joint venture side then there should be a fund.

For somebody looking to potentially start a new fund, what are some of those administrative tasks? I know you’re in the throws of them because I ignored you and pushed everything over to you. What are some of the things that you have to do where you’re like, “I didn’t realize we had to do this?”

In some ways, it’s similar to the things you might forget. If you’ve ever started an LLC, you’ve got to open up that LLC in a particular state. You’ve got to register that LLC and open a bank account or more than one. You’ve got to get access to that bank account, figure out how you’re going to use the bank account and how are you going to communicate to your investors. At this point, we’re finalizing the capital raise. There are a lot of bookkeeping tasks from that standpoint. Essentially, what you’re collecting from each individual investor are a subscription agreement and the investor questionnaire. We’re also asking for some, in our case, proof of accreditor investor status since that’s required with our fund. Those are three documents that are required for each investor.

The other one that I’ll throw in there also which is the next step we have to do is once the money comes in the door and we got everyone to sign up then everyone has also signed the operating agreement as well because they are members. We got to get them to sign off on the operating agreement is the last thing. The subscription agreement is signed before you send the money or the investor sends money but it’s a soft commitment. The sponsor knows if they meet their minimum raise or how much do they have in commitments. That’s one of the first questions people ask. How much you have in commitments? If nobody sends their subscription agreement, I said, “I got ten people who keep telling me they’re going to send it.” If you’re looking to start a fund, it’s one thing to say, “It’s nonbinding. I can’t come after you. I just need to know what you were planning on investing in so I can also report it. Also, track to make sure I either don’t oversubscribed but also make sure I’m not undersubscribed.” In a fund, you have a minimum threshold to start it, as well as a max.

Also, for planning purposes with regard to going out and finding assets, we need to have a general idea of what we’re working with. Is it $500,000? Is it $10 million? Those are totally different pictures as far as to deal flow and that kind of thing. Another thing that you have to do from a compliance standpoint is report to each state that the investor is in. That’s within fifteen days of receipt of funds. It’s one more thing up front that you need to do to register with each state’s SEC, I believe.

I got a letter at one point in time because I registered an individual in a state. There was a question that came through. I got a letter that says, “Securities and Exchange Commission of State of X.” It was nothing. There was a clarification they needed because there was a typo when it got submitted on the form or something but it was resolved very quickly. There’s a lot of administrative function upfront that you do have to go through like the form D’s. The other thing, too, is trying to get that money in the door because you’re dealing typically with self-directed IRAs, custodians and some of them might have different requirements or paperwork to go through. One thing I’ll mention though in dealing with funds with self-directed IRA companies, it’s much easier to deal with that company than it is if you’re doing a JV deal or a partial. Partials I find are the absolute worst to deal with the self-directed IRAs. Each time it’s a different process or procedure depending on who you’re dealing with, even with the same custodian. Funds are the simplest investment for them to provide.

It seems pretty straightforward. I’ve found the same thing especially with partials. A lot of the custodians don’t know which bucket to put that in. Are you selling a note? I agree. I’ve found it so far much easier to deal with custodians with the fund than I have with joint ventures or partials.

One thing I’ll mention to people. When you hear people talk about funds or they have a fund or so forth, you can go to the SEC website and search. These are exemptions under Regulation D but you can still search for these funds. If it’s somebody you don’t know, when somebody out of the blue reaches out to you, you can look up Integrity Mortgage Note Fund in the SEC. It’s probably going to say either Jamie’s name or my name on there with the information about the fund. It doesn’t go into too much detail but it does show it’s been a registered exemption. That’s something I’d say when we talked about funds invested in the past, it’s something to be cognizant of if we went down that path in the past. Some people might say, “I have a fund. I run a fund.” They may or may not. I don’t know but that’s one way to go check on things.

You do hear that term is thrown around a lot, fund or what does that mean. In our case, we’re talking about a registered fund.

I run a hedge fund and notes. A hedge fund is a fund that hedges money. If you’re investing with a self-directed IRA and somebody’s like, “We run a hedge fund,” it’s like, “I’m not investing in you. All my tax benefits are gone because you’re leveraging money that either you bid or whatever.” One of those things is wrong. That’s important to also understand as part of a fund, which we talked about in Episode 149. Do they borrow money or not borrow money? That’s interesting. Some standpoints are fun. When I started my first fund, it was a lot of work. Most people forget the amount. We told them, “You didn’t have to go through this as much because we tailored it somewhat off of some of the ones that I have done in the past.” Coming up with all the business terms, there are lots of them. Are you using accrual-based or cash-based accounting procedures? That’s one of the questions.

GDNI 162 | Note Fund

Note Fund: There’s a lot more work with a fund on the front end. But once it’s set up, it’s much more scalable and easier to manage as opposed to a bunch of joint ventures.


I left the option open to choose one but we can always alter it. You have to put in who’s doing your CPA, who’s your books being done by in there. That’s stuff you should already have. The waterfall or how you split and profit, the length of the fund and your management fee, there are so many little nuances. If something were to happen to the sponsor, how is it resolved? Can they overthrow the sponsor? Typically, there’s language in there for that. There’s a lot of information in a PPM, in an operating agreement that goes into a fund. If you were doing your first fund, Jamie, what would you think from a timing perspective of in advance? If you were doing your first fund and say, “I’m going to reach out to an attorney to start my first fund,” when do you think you would be able to physically want to start raising and then closing. What do you think?

It’s 3 to 6 months, honestly. You could do it faster but do it right if it’s your first fund. This is maybe your fifth fund or something. I don’t know how many funds you’ve run but it was a little bit shorter from my perspective than it would have been. We still had some back and forth. We did tweak some things. It was still a process for sure. For us, it probably did take several months to get it up and running. If I were doing this on my own, honestly, 4 or 5 months realistically to get it up and running before I would start advertising it.

I would think probably somewhere in that range. You could get it done faster. One of the things, too, that I thought was very helpful is when investors start reviewing things and they ask questions, there is the opportunity to change stuff. As long as you issue an amendment of, “We’ve modified this. This could change.” There’s probably going to be a typo in there that you got missed because you’ve read this thing 27,000 times that it all looks the same every time you read it.

We moved our management fee to be paid out after the preferred return. We hadn’t given it too much thought initially. We’re like, “We’ll do that.” Somebody very thoroughly reviewed it with us, one of our investors.

There’s another one in there that said there was a provision about a clawback provision on profits. If we’ve issued dividends, we could claw back some of those dividends. Not the principal but some of those dividends we’ve issued. We honestly went to returning like, “We’re never going to do this.”

I have a couple of questions for you. What would you say you would do differently? What are some lessons you’ve learned from managing funds so far?

The first one, which is a constant tweaking, is the investor returns. I’ve done it several ways. I’ve done one that was like a JV deal, which was a straight 50/50 split. As a sponsor, that is the best as a sponsor. Here’s the reason why. As money starts coming in the door, you start making some of that money upfront. I didn’t have a management fee in that one but it’s like one big JV deal. That was one way. Another way I did it was a pref with an upside. One of them I did like that, I gave too much of an upside in pref. I have a small management fee on that but I’m not going to see significant income from that pretty much until we sell assets. If you look at it, I’m a numbers nut, I bifurcate returns. Meaning, how much do I get during the performing phase versus how much at a sale to see where you make your money. You try and keep it balanced. You make more at the end but try and maximize it during that process. I’m one of them. I gave up too much. In one of these funds I was running and there was integrity, you go in your other fund and you were giving more. I’m like, “Because I gave too much,” I’m being flat-out honest. We were giving too much return on that deal.

It has to be a win-win. That’d be worth your time, too.

Investors want it to be a win-win. That is one. A few other, I had one fund that was a two-year timeframe. It should have been three years.

Is that because nonperforming loans take a while to work out?

Yes. At two years, you only get one buy. You can buy assets. It’s tough to flip assets in twelve months and then another twelve, whereas assets take 12 to 18 months. Plus the thing that you got to remember is your launch is fun on day one. You don’t have assets under management day one. You have assets on the management if you’re lucky in day 30, most likely, day 60 to 90. They’re already three months in. All of a sudden, I only have 15 or 21 months left. It’s very difficult to get two rounds. That was another. The last, I don’t think I fell into this but I see other investors who may fall into this a little bit, is they try and raise too much money. Trying to raise $20 million from a fund is going to be challenging. Can it be done? Yes. This is why my earlier funds start at $1 million-plus here and there. I knew that if I would have run a $20 million fund with the one where I was giving up too much pref and equity and meant to say if I did that one for five years, I’ve got $20 million. I’m invested in that. I might be making nothing in for five years. I wouldn’t have the time to run any other funds because of the amount of assets in there. Intentionally, I wanted to start small to go through the process like investors. People like to buy a $10,000 note to start. I wanted to start a smaller fund to make sure I understood, learn the process if there are additional steps and also find what that right formula is for those returns.

It is not recommended for newer investors to go down the path of starting a fund. Click To Tweet

I’m certainly not saying every note investor should have the goal of running a fund but when do you think a note investor might be ready to go down that route?

First, you have to look at, have you raised money? That’s important. Some people use their own funds. Some people don’t raise money then they probably don’t need to run a fund. If you’ve got 2 or 3 JV deals, I would say no. I was over 30 when I decided to start a fund. I bought over 100 assets at the time, to give people an idea. I’ll be honest. The way my first fund panned out was I had Brian Gallagher create documents for me so I had them on the bookshelf to dust off at any point in time. John Keith was at a pool of 100 assets that they were selling for dirt cheap. I was like, “I’m going to go raise money for this.” I got assets at a very good price. We took down all 100. I went and raised money. Gail Greenberg helped on that pool. We raised $1 million in two weeks. I went out, bought this pool and then manage it from them. That’s the one that’s closing at this point in time.

It’s something every investor needs to figure out for themselves. Honestly, based on my experience, I wouldn’t recommend most investors go down this path.

My initial comment is if you’re not using a bookkeeper and a CPA, don’t start a fund. You need to have them on board and you need to be working with them for at least a year, make sure they understand you and you all work together well. That would be number one. You better make sure you’ve got a great team in place with all of your partners as well. Somebody who’s bought 10 or 20 notes should not be going out starting a fund, in my mind. It’s more because I don’t think they have a note experience, honestly. If they went out and raised $1 million and they could only put $500,000 out the door, that $500,000 is burning a hole in everyone’s pockets especially if it’s given a preferred return. You also have to be well-versed in managing a portfolio. If you have $1 million, you can’t go spend $950,000 on notes. $50,000 is not going to be enough to work out these notes. What is that magic balance? It’s something that is challenging. It’s another reason why I start with a lower amount of funds versus $20 million because you don’t want to overshoot or undershoot.

I remember Dave Van Horn mentioning if you got 5,000 notes for free, could you handle them? No. You’ve got to have your systems in place. That makes a lot of sense.

Is there anything else you wanted to cover, Jamie, before we head off into our Note and Bolt segment?

That’s been good.

We gave people a brief overview of what to expect when starting a note fund for those that are interested. If people want to start one, feel free to reach out to Jamie or me about that. I know Cody Cox has a fund running. Andy Mirza has a fund to keep going. He’s on BiggerPockets a lot as well. I’m thinking of some of the other investors who have funds that are easily reachable.

Rick Allen.

They’ve got a Reg A fund so that’s a completely different animal from what we do. They can have a minimum investment. There’s $100 or $1,000 and anybody can invest but their reporting processes and are very stringent regard. They have to report the SEC every quarter. I looked at one and I was told, “If you’re raising anything $50 million or below, you’re better off sticking with $20 million or $50 million,” which I’m below that either one anyways, “Stick with the Reg D.” Here’s what I was advised.

From what I’ve read, it’s pretty expensive and a lot of work up front but it does open up your investor pool significantly as far as the number of people who qualify for it. I’m sure we’re forgetting people. I know Martin runs a fund or more than one. This has been good.

Do you have a Note and Bolt?

I do and it’s relevant. It speaks to one of my questions about when are you ready to run a fund. I do think one thing that’s certainly not a requirement but if you’re a note investor who’s considering starting a fund, why not be a passive investor in someone else’s fund to figure out? I’ve done this. I’m not saying it’s a requirement by any means but that way you can see what you like and what you don’t like from the passive investor side. Maybe you have extra cash sitting around. Why not put that to work and test the waters? One fund in particular that I invested in, the returns were consistent. I have no major complaints about it but the one thing was it was little transparency so I had no clue what the underlying assets were, what was being purchased in the fund. That’s one thing that I learned as a passive investor in a fund. My Note and Bolt is why not be a passive investor first, test the waters and see what you like before you open up your own fund.

Thank you for that. It had mine pop off in my head for what mine was going to be. Mine is if you’re thinking about starting your fund, what is probably the number 1 or number 2 question, Jamie, we’ve been asked?

What’s the minimum investment? That’s one.

I will make a guess. Are you investing in the fund? If you’re starting a fund, I’d recommend you have the money to invest in the fund.

GDNI 162 | Note Fund

Note Fund: If you’re not using a bookkeeper and a CPA, don’t start a fund. You need to have them on board and you need to be working with them all the time.


Let me ask you. Are you?

That’s a valid question that people ask. Be prepared that you need to have the funds also to be investing in that fund because that will go a long way into raising money. Besides the $10,000 to start, a few minimums, $20,000, $25,000 or $50,000, you’re going to want to have those funds sitting aside as well to invest in the fund.

Our interests are aligned with all the investor’s interests as well.

Is there anything else?

No. I’m glad we were able to link up and do an episode.

It’s good to see your smiling face.

Hopefully, it will be a better year than 2020 in a lot of ways.

Thank you for joining us on this episode of the show. As always, please make sure to subscribe to us on your favorite listening platform. As always, go out and do some good deeds.

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