Investing in Mortgage notes using your Self-Directed IRA

Real estate can be a great investment. However, owning and managing properties can also be stressful and time-consuming. Managing a rental property means staying on top of maintenance costs and dealing with possible rental vacancies. It also means handling tenant complaints and needs.

What if there were a way to invest in real estate while bypassing all the stressful aspects of the investment?
You can set up a Self-Directed IRA (SDIRA) and use it to buy mortgage notes. This is an easy way to invest in real estate on a tax-free or tax-deferred basis.

Here’s how it works.

A mortgage note, or deed of trust, allows an investor to lend money to a borrower using real estate as collateral. The deed of trust, or trust deed, legally secures the loan. The specific terms of the loan are set out in an accompanying promissory note. You can use funds from your SDIRA account to buy an existing note or interests in a fund that invests in notes.

Many people don’t have enough funds in their SDIRA account to meet a funds minimum investment amount or purchase an individual note. If you have a 401 (k) account with an employer, you may be able to transfer funds from that account to you SDIRA to invest in notes. While there is no tax implications for transferring your funds to a SDIAR account some employers have restrictions and you should check with them to be sure.

IRS Regulations

The IRS imposes some restrictions on how you can use a SDIRA, so you’ll have to make sure that the note is compliant. If you invest in notes with a fund, they will have to insure that the notes meet federal lending standards.

You can’t use your SDIRA to buy notes from yourself, for example. You also can’t use it to buy notes from family members, or from anyone who is named as a beneficiary of the SDIRA.

The basic rule is that, since your SDIRA will be buying the note, only the SDIRA can benefit from it.

Final Thoughts

Investing in real estate can be a great way to earn extra income towards your retirement or other long-term goals. It’s also a great way to help a new homeowner get started on the property ladder.

Done with care, using your SDIRA to buy notes is a safe, wise way to invest in real estate while avoiding the headaches that often accompany property management.