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Investing in Notes & Trust Deeds with a Self-Directed IRA

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Promissory Notes

As its name suggests, a promissory note is a promise to pay. Often simply called “notes,” these are ways for one individual or entity to extend credit to another individual or entity. In short, a note is a loan. 

Just as there are different kinds of loans, there are different kinds of notes.  Here are the most common:

  • Secured notes
  • Unsecured notes
  • Mortgage notes; Deed of Trust

How Does a Self-Directed IRA Invests in Mortgage Notes?

 Here’s how it works: 

  1. Open and fund a self-directed IRA with IRA Resources
  2. Find an individual or entity that wants to borrow money. For a secured or mortgage note, make sure the borrower has collateral to secure the note.
  3. If it is a mortgage note, complete and submit a Real Estate Note Buy Direction Letter to IRA Resources. Be sure to include all required supporting documents.
  4. When IRA Resources has received all of the documents, we will process the investment and send the funds to the party responsible for closing the transaction.
  5. The party responsible for closing will close the transaction and record the deed of trust.
  6. Your IRA now owns the mortgage or secured note.

 

Documentation Needed for a Mortgage Note

  1. Buy Direction Letter
  2. Promissory Note
  3. Deed of Trust or Mortgage Deed
  4. Lender’s Preliminary Title Report

Increasingly, people with self-directed IRAs are using notes to diversify their holdings, hedge against risk, and gain returns. It is important to note that the borrower(s) must not be a disqualified person entering into a transaction as it will become prohibited. 

About Notes

Secured and Unsecured Notes

The difference here is straightforward:

  • Secured notes are backed by collateral. If the borrower fails to repay a secured note, the lender can take the collateral used to secure the note. Often, the collateral is real estate, but it also can be personal property.
  • Unsecured notes are not backed by collateral. Because the lender has no simple way to be repaid if the borrower decides not to pay, these are riskier investments.

Sometimes there is more than one lender on a note. The first lender—as the name suggests—is the first to be paid back. Subordinate lenders are repaid later on after the first receive the full payoff. In addition to lending directly from your self-directed IRA, your IRA can buy notes from brokers or private parties. 

When you buy a note or lend money on a note from your self-directed IRA, the documentation is typically filed at a county recorder’s office. On a secured note, you also will insure the trust deed on the collateral. As the note is repaid, the payments go directly into your retirement account. 

Mortgage Notes; Real Estate Notes; Trust DeedFree SD IRA Consultation

Mortgage notes are an alternative way to invest in real estate in your retirement account, without the hassle of looking for property, renting and maintaining it. 

A mortgage note—called a trust deed in some states—is created when one party loans money to another individual to purchase real property.  This arrangement is called private financing. Instead of going through a bank, the borrower repays the lender directly. In the case of a mortgage note made from a retirement account, the payments go directly into the lender’s retirement account. The terms of a mortgage note specify the type of mortgage (fixed or variable, for example), the amount of the principal, repayment schedule, and interest rate(s). They also obligate the borrower to repay the loan. If the borrower defaults, the lender can take the collateral. 

Call (888) 322-6534 to speak with one of our account specialists for assistance.