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:
Here’s how it works:
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.
The difference here is straightforward:
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 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.