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Are Notes in Your IRA a Good Idea?

Once people understand that notes and mortgages can be assets in an IRA, they want to know more. The idea that your IRA can be a mini-bank is appealing – not to mention profitable. Each year IRAs continue to invest in more notes and mortgages. There are several factors that have contributed to this phenomenon over the years:

  1. Bank requirements have become burdensome, and increased processing and underwriting time has made traditional loans less desirable. There are now more people looking for loans outside the banking industry.
  2. Interest rates paid by banks and CD’s are historically low and many of the CD’s coming due are at reduced rates.  An individual’s income is consequently decreased as a result of the lower interest rates.
  3. Note and mortgage defaults are prevalent and many notes are available.
  4. Lack of confidence in traditional investments such as CD’s, mutual funds, stocks and bonds have motivated individuals to look for other investments.
  5. Landlords are tired of the work, aggravation, and liabilities associated with real estate and predict a future increase in property taxes. This makes notes more appealing.
  6. Control and consistency is a key component to note purchases. A known rate of return and an exact payment over a defined time frame relieves anxiety and provides peace of mind for the note owners.

Economic conditions account for some of the note purchases but investing in notes has been a long tradition and seems to work in most economic conditions.

The diversification in the note and mortgage arena is phenomenal when coupled with the different strategies available. The type of notes one chooses to invest in is based on personal knowledge and personal preferences and includes some of the following attributes:

  1. Performing and/or non-performing
  2. Primary and/or secondary lien positions
  3. New and/or existing
  4. Short term and/or long term
  5. Secured and/or unsecured
  6. All or part of note-front or back-end payments
  7. Interest only with a balloon and/or fully amortizing
  8. Fixed or adjustable rate
  9. Recourse or non-recourse

Instead of getting into a long philosophical discussion and a comprehensive analysis on the reasons notes are so popular, it is more interesting to ask attendees at a note class, “Why buy notes in your IRA?” The following is a summary of those answers:

“We are looking for a higher return on our retirement funds, and are turning away from paper assets for those backed by a hard asset such as real estate or gold as collateral.”

I was laid-off and want to work for myself and not go through this again—I want control of my life and finances.”

 “I was afraid to lend money or own a note because I wasn’t sure how to do it and it seemed really risky. Then I found someone willing to mentor me and invest in the same note. With her expertise, years of experience, and first-hand knowledge it does not seem as risky.”

These classes being offered by note buying gurus such as Donna Bauer, and companies such as Payments for Partner Relief and USMR have opened my eyes and now I am just trying to decide which notes to buy. These classes teach many different note buying and selling strategies and how to take “non-performing” notes and turn them into “performing” ones. These same companies have notes available for me to buy. It seems to be the easiest way to get a good return and minimize risk.”

“I always heard about buying notes but never could get a bank to sell me a note. You no longer have to be a big institutional buyer to obtain notes/mortgages/deeds of trust. I wanted to try a small one before I put a bunch of money into it.”

“I have been investing in notes for years to produce extra income and I just found out that my IRA can buy notes. It sure beats my other investments! I would rather my IRA invest in something I understand.”

“I lend money to a company that refurbishes distressed properties. It is next to impossible for them to obtain purchase or construction loans from a bank. I have a secured note and the company is using my IRA money to purchase, repair and rent the properties. Afterwards the bank is happy to refinance on the refurbished, performing real estate thus allowing for repayment of my interim, higher interest rate, short-term IRA note. I have done it many times over the past few years – so far so good. I am always looking for more opportunities…can’t have all my eggs in one basket.”

As you can see, there are many reasons people and their IRAs invest in notes. American ingenuity sees an opportunity or problem and then finds a solution. I am not sure that any of the attendees had to foreclose on any notes but you should always be prepared for the unexpected and look at worst-case scenarios. Invest in what you know and understand and hopefully can control. What’s in your IRA?

-Carl Fischer, CamaPlan Principal