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If you’re new to the note space or planning to do it actively any time soon, then you tuned in to the right episode. Becoming a note investor comes in five distinct phases. Each of these steps represents a specific area of learning that ever aspiring active note investor has to go through in one form or another. Listen in as Dan Deppen goes through each of these phases and throws in some actionable tips that you can apply to your own investing journey.

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The 5 Phases Of Becoming A Note Investor

In this episode, I’m going to talk about the five phases of becoming a note investor. The note investing journey can be quite long. The goal for most people is to go from just being introduced to the space, to being someone who’s active. What I’ve observed is that different note investors take a variety of paths to get there and they take wildly different amounts of time. I went probably faster than a lot of people and maybe it’s the majority. They tend to go in circles for a long time, maybe even years and don’t ever get there. The people who get to the point where they’re buying notes, they’re active, there’s an even smaller subset that get to the point where they’ve got what I would call a real functioning business where they’re not just buying 1 or 2 notes. I’m going to talk about some of those phases that people go through and how to get there.

Phase 1- Learn The Foundations.

I’ll call phase one where you’re just learning the foundations or learning the fundamentals. One of the first big steps to this doesn’t even really involve notes. It’s getting your head and mind right, and having the right outlook and the right set of expectations. Investing to me is almost more of a mental game than a game of knowing specific knowledge and having the right set of processes. I think it’s like sports in a little way. If you know me, I play a ton of golf. If you look at especially the higher levels of golf, what differentiates players is not even so much the physical skills.

If you look at the PGA Tour or something, all those guys have amazing physical skills, amazing swings, great fundamentals, but a lot of what differentiates them are their mental skills and how they handle different things. With note investing, I’ve talked about this before but it’s definitely got its share of ups and downs, and being able to handle those and knowing what to expect is key to success. Along with those foundations goes learning the basics of notes. Understanding what note investing is, what a note investor does, what kind of vendors you’re going to need. You’re going to need loan servicers, attorneys and other kinds of folks. Understanding those essential basics of what a note is, how the documentation works, the difference between a mortgage and a contract for deed, performing notes versus non-performing notes and all of those different things.

It’s also getting an understanding of some of the basic exit strategies and how to put together your plan as a note investor and understanding what entities you need to get set up. Most people are probably investing out of a self-directed IRA or whether you’re direct investing out of an LLC or something else that’s after tax. The other thing too that I haven’t been to the foundation, some people never do this but I would also include in this foundational phase one, learning how to market yourself. In one place, this comes up big in notes is marketing to sellers. A lot of note investors particularly new ones tend to be extremely flaky. Sometimes they’re just dabbling, they’re not going to do anything. As a result, your note sellers tend to be very skittish when they deal with folks that are new.

When I first started investing in notes and I was dealing with sellers and they were standoffish, I got offended because in any other facet of life, if I have money, I want to buy something and somebody’s selling that thing, we’re going to have a conversation. It’s not that hard. When I got to the cycle of being a note investor where I was starting to exit deals, sell some of my own notes and started running into some of these characters who would waste a lot of time and not close, that’s where the light bulb went off. I was like, “I get it, that’s why sellers can be very standoffish.” That’s where marketing comes in. What I mean by this is marketing yourself to sellers in that you want to make sure you put out a professional presence so that if you approach a seller, maybe they have some assets they’re looking to get rid of and they go look you up or your business, what you’re presenting to them is like you’re a legit person that they should work with.

Phase 2- Start Buying Notes

There’s the whole other aspect of marketing, which comes later in the cycle of if you’re going to take outside money, you might be marketing to investors. To start off, marketing to sellers is one of the biggest and most important things. Some people might consider this more advanced, I consider it foundational. Once you got those foundations set up, now it’s time to go out and start buying notes. I’m talking about five phases. Overall, some people think of buying notes as the end point. To me, this is early on. I have this in my phase two. As part of this phase is being able to source notes. Can you find notes for sale? Some of this is getting access to the easy-to-access sources, things like Paperstac, some of the bigger brokers and then also learning how to cultivate more what I would call off the grid sources.

It could be funds that aren’t as well-known or really to me, off the grid means building a big network of people within the industry so that when they have something to sell, they’ll give you a call if you’re known as a reliable buyer. It’s also putting together your business model and knowing what you’re looking for. If you’re new to this, as you get into it, you’ll have people send you all sorts of different assets. For me personally, I focus on single-family residences but I’ve had people send me notes on commercial properties, vacant land, mobile homes, all sorts of other things that I’m not looking for, but then also within notes for single-family residences, there’s only a subset that I’m going to buy.

I have my set of states that I look for. I have certain parameters in terms of the type of property, the loan terms, the value, balances. Somebody sends me a tape of notes. I just got one in Illinois. I don’t buy in Illinois, it requires a license. I don’t have a license there. I’m not even going to look at that. Part of putting together a business model is understanding what we’re looking for, and this is going to tell us how to filter things as we get them. The other part of the buying process is being able to do your pricing, calculate and do your ROI analysis. This is another foundational thing that a lot of people struggle with.

It’s interesting, I’ve had a few conversations with folks around pricing and calculating returns. This is something people get wrong in a big way. Understanding how to do your pricing whether you’re talking about performing notes or nonperforming notes is key. The good news when people do make errors, they make a fundamental error but it tends to make them more conservative, which is okay on one standpoint because that causes them to walk away from deals as opposed to buying a bad deal. You also need to be able to do your pricing, you’d be able to get through the bidding process and negotiating process with the sellers. These are often involved. You make an offer, they make a counter, sometimes they make a re-counter. There can be a lot of back and forth.

The big part that if you read my blog or follow my other stuff that you’ve heard me talk about a lot is the due diligence phase, which is critical because there are many bad notes out there or notes with problems. You need to learn how to actually close these deals. Closing a note deal is different than closing a traditional real estate transaction. You’re generally not going to a title company, getting a settlement statement and all of those other things. These are private transactions, it’s a little bit like the Wild West unless you’re doing it through Paperstac, where they have a nice process that I like.

Phase 3- Add Value To Your Assets.

Once you understand that and get to phase three, which I call adding value to your assets. If you are buying performing notes, hopefully you buy them and they keep performing. There might not be a lot of value to add, but you can also work that portfolio efficiently. This comes down to what you do as a note investor on a day-to-day basis, what some of your processes are, what you’re keeping an eye on in a regular interval. The other question is how do you actually make money in notes? It could just be buying hold of a performing note but even then, you need to keep tabs on those. There are some things you can do to keep those on track. Also, if you’re an investor in nonperforming notes, there’s a big difference between someone who can work that portfolio efficiently and someone who just doesn’t and tries to depend on the loan servicer to do everything, which can be a pretty dark road.

One of the big pieces of magic is being able to turn a nonperformer into a performer or making a nonperformer profitable. That’s one thing that people new to the business often ask is like, “If I buy you this loan that the borrower is not making payments on, how on earth do I make money on that?” There are a lot of ways you can do that but knowing how to do that and knowing how to do that efficiently is really where a lot of your profit comes from as a note investor. That’s what can differentiate you from the pack. One of the big areas this comes up in is when you get REO properties, I’ve talked about this a lot too, but when I have a note that turns into an REO whether that’s through foreclosure or say we did a Cash for Keys, that’s where things get interesting.

I’ve noticed that my returns are wildly variable because one of the big challenges in note investing is you can’t see the inside before you buy the note. That’s always a big X-factor. Sometimes I get an REO, the process is clean. The property is in good shape, I happen to have a good realtor in the area. They just get it sold for me, I make a lot of money and it’s awesome. I then get other ones that go sideways and those do not have good returns and can suck up a lot of time. Knowing what to do when you get these is key. In fact, I have one I’m dealing with that I have to do an episode on at some point in the future when we get this wrapped up.

It’s been a complete nightmare from top to bottom. We did a Cash for Keys, my attorney missed something and I have a title issue I was trying to clear. The property was vacant. I was waiting to get the title cleared so that I could sell it. Someone then broke in and stripped all the copper and wire, which I didn’t even realize was that big of a thing now. Apparently from what I looked at online, some of the commodity prices have increased. People are doing that again, so that’s something to keep in mind. I had someone dump a bunch of trash in the yard, which that’s one thing I’m still trying to figure out exactly how and why that happened. REOs can get very weird.

The other part of what I would call phase three, part of your adding value or adding profit is when it comes time to sell your assets. If you had a nonperformer that you turned into a performer, now you’re going to be on the selling side of the note business. That has its own nuances in terms of how you price them now when you sell, where you go to sell them, how you market and position the asset and get it ready for sale. It’s something that not a lot of people talk about, but if you’re going to become active in the business, you’re not just going to be buying but you’re going to be doing a lot of selling at different points as well, especially if you’re taking on investor money and your investors want an exit at some point or another.

Phase 4- Build For Scale.

We get to phase four, which is what I call building for scale or now you’re ready to scale up your business. When you get to phase four, you’ve understood the basics. You can source notes. You can buy notes. You can be what I call an efficient operator. You know what to do with your portfolio. You can exit notes. Phase four is the point where we want to scale and turn up the volume on our business. Some note investors get into the business and they just want to buy 1 or 2 notes for their portfolio, and that’s great. There’s nothing wrong with that. The cool thing about notes that I always felt was once you get a process down in place, it can be a very rinse and repeat business. Once you get all the systems in place and you know how to handle different things, there’s not a lot stopping you from turning up the dial and scaling especially if you get outside funding to keep growing.

There are a lot of different things that we’re going to do when we’re scaling. Part of it is understanding how to use a CRM or Customer Relationship Manager. I use Pipedrive for this. Some people use Podio. There are a lot of different tools out there. I don’t think which tool you use matters very much, but this is your database where you’re going to keep track of all of your note deals. You’re going to keep your list of things to do. You’re going to set reminders. You’re going to take notes and keep data on all of your deals. That’s the system you use to keep everything organized because I think you’ll find that if you’ve got a couple of notes, you can probably keep everything in your head, set little calendar reminders or remember to do different things. You scale it up, you start getting beyond 10 notes and 20, 30, 50, forget trying to keep stuff in your head. It’s not going to work. You have to have some database where you’re keeping track of everything, and that’s your CRM.

The other thing you’ll do at some point which I’ve done is hire outside help. Bring on an assistant. That is the key to scaling overall. What I’ve done is I’ve built a set of standard operating procedures. I have Wendy, who is awesome. She helps run a lot of the day-to-day things that I’ve still got my hands in that as well. Some people have the idea like, “This is great. I’ll hire somebody in the Philippines for $4 an hour and they’ll do all my work for me, and I’ll make tons of profit.” I don’t think it’s quite that straightforward. I like to have a better, more sophisticated help who can deal with things as they come up but it’s going to be essential to scale.

If you’re doing everything yourself, you’re going to be limited in what you can do. They’re also going to help keep track of your portfolio. I have processes around when a payment gets missed that I was expecting, I do a lot of early intervention. I send letters. I send the servicer on them and that helps things from drifting off track. If you have a borrower, they miss a payment and they don’t hear anything, sometimes they go, “Maybe this isn’t such a big deal.” If they know that you’re watching, you’re going to react as soon as something gets weird, then they have more of a tendency to stay on track.

The other thing you’ve got to keep track of too especially as you get to 50-plus notes, you might have several different forbearance agreements in place and then once the borrower’s completed them, you need to process a loan mod. I’ve got systems for keeping track of those. It wasn’t a big deal but back in 2020 or so, I had a borrower on a trial payment plan and the deal was they would complete this trial payment plan and then I would modify the loan. They completed the trial payment plan, kept making trial payments, I didn’t notice and I forgot to mod the loan. I didn’t mod the loan until a couple of months late. It didn’t cause an issue, but that thing is bad and that’s where I put in some additional processes in place to make sure that kind of thing didn’t happen again. Having standard operating procedures around all these things are key, and they’re what allows you to scale up your business.

Phase 5- Fund Your Growth.

We finally get to phase five, which I call funding your growth. This is the point where now you’re an active note investor. You can scale. You could operate well efficiently and you’re ready to take on outside funding. This is a whole subject in and of itself. I think down the road, I should probably do some episodes and some other videos for the YouTube channel specifically on this because I have a lot of thoughts on this that I’m not necessarily going to go into. When you’re taking outside funding, you need to be able to find the outside funders who are looking for deals and I gave them a spoiler alert. This still surprises me but it’s probably one of the easiest aspects of my business.

Especially these days, there are a lot of folks with cash and who are interested in deploying it in notes but don’t have the bandwidth to set it up themselves. They’ve got jobs. They’ve got other investments they’re keeping track of. Generally, it’s not too big a struggle to go out and find funding but finding funding is not the only thing you need to do. You also need to screen that funding. I have heard some horror stories of people who have taken on joint venture partners who turned out to be very challenging to work with. Knock on wood, I haven’t had those issues, which is good but when you’re finding somebody to be a funding partner, you’re not just looking for them to show up with money.

A lot of people can show up with money, that’s not that hard to find but you want people who have experience as investors, understand that there are going to be ups and downs so that as soon as you have a hiccup or some kind of issue and I have a lot of issues on note investments. Let’s say the county code inspectors starts harassing me or something else happens and then they go away. If you have a partner who’s going to freak out at the first sign of trouble, this isn’t going to be the business for them. You want to identify that upfront and more importantly, you want to make sure you as an operator not just know how to operate a notes business but also know how to be a good partner.

This involves understanding how to communicate, understanding how to do reporting to your partners and investors and being able to communicate bad news if something goes wrong. It’s easier said than done. I’ve had some difficult conversations before in the past. If you’re going to take outside funding, that’s part of the deal. If you’re going to do it, you better damn well be prepared to do that. Finding a screening funding is a big part of phase five and then also you have to understand the mechanics of setting up joint ventures, doing partials, doing loan hypothecation, which is one of my favorite things to do lately on performing notes.

Those are the five phases of note investing and if you want to learn more about this, I suggest you check out my Note Launchpad Training Course. You can go to NoteLaunchpad.com and get more information about that. The way I laid out the course is in these five phases so that if someone wants to take the course, maybe they’re already through a couple of the phases and they just want some of the other phases, they can do that. There’s going to be a webinar that I suggest you check out where I’ll go more in-depth on what the training course is. Definitely check that out and if you’re interested in it, I’m only going to have it open for a short window, maybe only 5 or 7 days or so. I’ve got a bunch of folks going through the beta version of it.

I’ve made some updates and changes. We’re going to do this short launch and then I’ll probably open it up at some point again later in the year. Whether you have time to go through it now or not, I recommend checking it out while the window is open. I’m trying to keep that contained because when people come in the course, I want to be able to give them attention, answer questions and be able to focus on it while that’s open. Definitely check out that webinar. If you get any other questions, anything, leave a comment. If you’re watching on YouTube, drop me an email at Dan@FusionNotes.com. Hopefully that helps you get started and understanding those five phases. That’s the framework that I use to think about my overall journey as a note investor. Until next time, thanks.

Important Links:

• Pipedrive
• Podio
• YouTube – Fusion Notes
• Dan@FusionNotes.com
• www.NoteLaunchpad.com

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