Promissory note investments hold particular allure to IRA investors as they yield predictable and often above market returns. Note terms are outlined in advance and are available to investors before a transaction takes place. This is quite different than investing in a publicly traded asset where the profits are all speculative. Notes provide IRA investors with peace of mind as they can account for the exact return on their investment and balance their portfolios accordingly.
Self-Directed IRAs allow investors to invest with promissory notes by loaning money to emerging companies and small businesses. In these cases, investors perform their own due diligence to determine the creditworthiness of prospective borrowers. Besides for the predictability associated with scheduled loan repayments, the interest rate charged on such loans tend to be higher than market rate. This results in a stable revenue stream for the IRA account holder.
Notes secured by real property
Secured notes, such as mortgage notes and trust deeds, are Promissory Notes that are backed by the borrower’s collateral. In this case, the collateral would be the real property in question. In the event of default, the lender is entitled to the underlying collateral. Repayment of the loan follows the terms that are outlined within the promissory note itself. Examples of repayment options include fixed principal and interest payments amortized over a specified time period; a balloon payment of interest and principal, or interest-only payments for a set period of time with a final balloon principal payment.
Notes secured by non-Real Estate
These are secured promissory notes where the borrower pledges non-real estate items to the lender. Examples in this category include factory or farm equipment, company stocks, or even manufactured homes.
Unsecured notes are promissory notes where the borrower does not pledge any collateral to the lender. The loan is made to the borrower based solely on the merit of the borrower’s ability to repay. This results in a riskier investment, and lenders typically require a higher interest rate to compensate for the greater risk.
When issuing a loan from your Self-Directed IRA to a third party, title must be held in the name of your IRA and not in your personal name. The exact titling is as follows: “Madison Trust Company Custodian FBO [Your Name][MTC Account #]”. Upon your instruction, Madison Trust Company will send the requested loan amount to the Borrower, and the Borrower will repay the loan by making payments directly to your IRA.
Security Document such as Deed of Trust, Mortgage, or Personal Guarantee (if applicable)
When the loan has been repaid in full, you will supply Madison Trust with a Satisfaction of Note and Madison Trust will retire the asset from your IRA. Secured Notes may require additional documents.
Madison Trust has streamlined the Promissory Note investment process making it easier than ever to issue a loan with retirement funds. Refer to the following step-by-step flowchart for instructions and supporting document requirements.