Secured & Unsecured Notes
Secured & Unsecured Promissory Notes
A note is a written agreement between a lender and a borrower. In the note the lender agrees to lend, and the borrower agrees to borrow a set amount of funds in return for the borrower’s promise to pay principal and interest payments to the lender according to a repayment schedule that is defined by the terms of the note. You can use funds from your self-directed IRA to make a loan for almost any purpose.
Depending on your desired level of risk and your desired return, you can look at funding the following types of notes with your self-directed IRA:
- Real Estate Notes secured by a Trust Deed
- Notes secured by other types of collateral as long as the collateral would not be a prohibited asset
- Unsecured Notes
Real Estate Notes
A note secured by real estate is often referred to as a mortgage note. The requirements for your IRA real estate backed note should be very similar to the requirements a bank would require.
Things to remember:
- You will need the services of a title company or real estate attorney. The title company will prepare the note and record the trust deed which will secure your position as the lender on the property.
- Title insurance is required to ensure that the note is properly secured, with the lending IRA named as beneficiary. IRA Express will not process a real estate secured note transaction without the use of a title company or real estate attorney.
- You should always do your due diligence on your IRA investments, and the case is no different here. You should do your due diligence on the borrower and inspect the property to make the collateral for the note is sufficient.
- You cannot lend money to a disqualified party. This would cause a prohibited transaction.
- Principal and interest payments made by the borrower should be returned to your account with IRA Express.
Notes Secured by Other Collateral
In addition to real estate it is permissible to make loans in your self-directed IRA that are backed by other types of collateral. When looking at other types of collateral to secure your loan it is important to make some considerations:
- It is not advisable to accept collateral that is not allowed to be held as an asset your IRA. For example, your IRA cannot hold collectibles as assets, so you cannot secure your note by antiques, stamps, or other collectible assets. Doing this could cause a prohibited transaction.
- Even with these limitations it is possible for your IRA to fund a note secured by assets such as automobile titles, stock warrants, or accounts receivable.
Unsecured notes are very risky. If the borrower were to default on the note it could be very hard to recoup your investment. The note is only as good as the borrower who is signing the note. If you are considering an unsecured note you should do your due diligence on the borrower. Although unsecured notes are risky they are easy to execute with a self-directed IRA. It is advisable to seek good legal and investment counsel when looking to fund this type of note.
How Do I Fund a Note in a Self-Directed IRA
Step 1 – Fill out a new account packet and send the appropriate documentation and forms to IRA Express. We usually have your account open within 1 – 2 business days.
Step 2 – Fund your account by performing a Contribution, Direct Rollover from a 401(k), or an IRA Transfer from another IRA account. This usually takes about 2 weeks.
Step 3 – Fill out the appropriate Buy Direction Letter form and return it to IRA Express along with the other appropriate documents.
Step 4 – After all documentation is received IRA Express will fund the note as the lender.