Note Investing Webinar Shares Examples of Self-Directed Note Investments

By Heather Taylor0 Comments
While the options for investments in a self-directed retirement account are nearly endless, there is one asset class that some Equity Trust clients prefer because it can be passive and offers an added diversification to their overall investment strategy.

Equity Trust’s recent webinar, The Powerful Potential of Paper: Note Investing with a Self-Directed IRA included an introduction to promissory notes and some examples of how investors use them to grow their retirement accounts.   

Promissory note: defined
A promissory note is simply a financial document containing a written promise to repay a specified sum borrowed, as well as the terms of repayment, any collateral, etc.

The term promissory note is a catch-all that could refer to a variety of different types of notes, including:
  • Mortgage notes/deeds of trust
  • Private loans
  • Corporate debt
There are two basic types of notes: 
  • Performing: The borrower is making regular payments on the loan
  • Non-performing: The borrower is not making payments on the loan
Self-directed note investing in action
The webinar provides a look at a note investment Equity Trust client Joe in Minnesota completed with his retirement account. Joe’s Roth IRA purchased a performing note on a single family residence in the form of a double-wide trailer in Florida. The market value of the property was $42,000.

There was a little over $31,000 left on the note when his IRA purchased it. The terms of the note were as follows:
  • 10 percent interest
  • Monthly payments of $318.
  • 203 monthly payments (just over 16 years) remained
Joe’s Roth IRA purchased the note at a discount for $24,425.

Due to the unique rules associated with investments inside of self-directed accounts, the note payments must be made a certain way. The borrower makes the checks payable to Joe’s Roth IRA, and the payments are sent to Equity Trust to be deposited into Joe’s account.

In accordance with the amortization schedule, if all payments are completed, Joe’s Roth IRA will receive a total of $64,554. Joe’s Roth IRA would potentially see a profit of over $40,000, which amounts to a 14.19-percent yield.  

Due to the tax advantages of a Roth IRA, if all rules are followed, it’s possible the profits will return to Joe’s account tax-free.

Learn more about promissory notes: on-demand webinar
For more information about promissory notes inside an IRA, including three more case studies illustrating different ways clients have invested in notes using their retirement accounts, view this webinar on-demand:

Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.

Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.