You can hold mortgage notes or trust deeds in your self-directed IRA, which is a way of investing in real estate without worrying about maintenance costs and vacancies. In these instances, the trust deed investor is lending money to the borrower using real estate property as collateral. If the borrower can not keep up with the loan, the property will then be transferred to the IRA.
Your IRA can also purchase or sell portions of mortgages. Your retirement account holds an undivided interest in a portion of the note, and receives the proportionate amount of income due under its terms.
There are two types of notes:
- Secured notes are backed by collateral, providing the lender with additional assurance that the loan will be returned, and guaranteeing them some type of property in the case of a default.
- Unsecured notes are not backed by collateral. You might consider an unsecured note for a trusted opportunity, but it is a higher risk than a secured note.
Understand Private Lending
At the risk of sounding too cliché, money and experience are the most important aspects a private money investor needs to exhibit. Essentially, when it comes down to it, the most successful private lenders have an increased propensity for the real estate industry and a proven track record of identifying powerful lending opportunities. Perhaps even more importantly, however, is a their tendency to remain hyper localized, as a working knowledge of a region is absolutely critical to success. Understanding a particular market, and in particular the direction it is headed, is an invaluable asset.
Your Private Lending Business: Determining Deal Viability
Private lenders are in the business of making money. Therefore, mitigating risk is a top priority. There are essentially eight factors to consider when deciding whether or not a potential loan opportunity is viable. They are as follows:
- Market Value
- Borrower Credit
- Borrower Equity
- Lien Priority
- Pricing Strategy
- Exit Strategy
- Due Diligence
Each of these factors must be taken into consideration when determining whether or not to pursue a loan opportunity. Failure to mind due diligence and neglect either one of these could result in harsh consequences. Due yourself a favor and navigate the process with precision.
Promissory notes can be either in first or subordinate positions, and can be purchased from brokers or private parties. Usually, the documentation is recorded at a county recorder’s office, and title to the collateral property is insured as instructed. You can arrange the terms of the note, and the payments will go back into your retirement account.