Holding Promissory Notes, Deed Trusts & Mortgage Notes in an IRA
Did you ever think that your IRA could lend money to an individual or entity?
Self-directed IRA owners are permitted to lend money from their IRA or use IRA funds to invest in trust deeds, mortgages and notes available from online platforms.
Loans may be made directly with the borrower or obtained from licensed note brokers or online loan marketplaces.
It is the responsibility of the IRA account owner and the borrower to determine the terms of the loan including duration, interest, payment schedule and collateral, if any. If purchasing existing loans from a note broker, the IRA owner selects the note and completes the paperwork provided by the note broker. The custodian is then provided with an Investment Direction and all documents related to the loan in order to deliver funds to the borrower.
Principal and interest payments must be paid directly to the custodian for deposit to the IRA account unless a third party note servicer is employed. In this case, the note servicer will receive the loan payment and send net proceeds to the custodian for deposit to the IRA account.
When considering note investments the IRA account owner should remember that the following are prohibited:
- Borrowing money from your IRA
- Lending IRA money to a family member or other disqualified person
- Using IRA funds as collateral for a loan
- Lending IRA funds to an entity in which you are a highly compensated employee, controlling member or 50%+ owner
We always recommend consulting with a tax professional prior to directing any alternative investment.
Click here to review Forge Trust Promissory Note investment requirements.
There are two types of Promissory Notes:
This type of promissory note is backed by collateral. In the event the borrower does not pay back the loan, the lender receives the collateral in lieu of payment.
This type of promissory note is not backed by collateral. In the event of default, the lender has no recourse but to take legal action against the borrower.
Once the terms of the promissory note are put into place and the borrower has signed the note, Forge Trust can be instructed to send funds to the borrower. A secured promissory note may require additional documents.
Investing in Trust Deeds and Mortgages
Trust deed and mortgage investments (the term varies from state to state) are passive investments secured by real estate with the return on investment being realized from the interest income generated from the loans. Loans are available through state licensed loan brokers.
When your IRA lends money, and the subsequent note is secured by real estate, a deed of trust or mortgage is recorded against the title of the borrower’s property. Monthly principal and interest payments, as described in the promissory note and amortization schedule, are paid directly to the IRA custodian until the debt is paid off. This type of investment is not liquid, subject to some risk (loan default) and is not insured by any federal agency. If the there is a default on the loan, the IRA could own the property and any outstanding expenses related to it.
Investing in trust deeds and mortgages may make sense for the IRA investor searching for higher than average returns on the investment, however as with any alternative investment, the investor should take the time to thoroughly evaluate the intermediary, the investment worthiness and the consequences of a default in payments on the loan.
There are essential elements of trust deed and mortgage investing that every investor should consider and evaluate before lending money from an IRA.
- The knowledge, experience, and integrity of the mortgage loan broker through whom the transaction may be made or arranged.
- The accuracy of the market value and equity in the Property and the security for the loan.
- The borrower’s financial standing and creditworthiness.
- The escrow process involved in the funding of the loan or the purchase of the promissory note.
- The documents and instruments describing, evidencing, and securing the loan or purchase of the promissory note.
- The loan servicing provisions, authority and compensation.
- The process for recovering your investment when the borrower fails to pay.
- The custodian’s requirements and transaction processing timeframes (which may vary depending on time of year).
What types of Alternative Investments does Forge Trust custody?
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