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Promissory note investing, or private lending, is an investment approach that has the potential for steady returns with less work than some other types of investments.
“Private lending” means an investor lends their personal capital for an investment, often dealing with real estate funds or real estate opportunities.
A promissory note is a written promise of payment from one person or organization to another. Promissory notes contain terms including how much is being borrowed and the frequency and amount of payments.
There are various types of notes such as promissory notes, mortgage notes, car loans, hard money lending, real estate notes (for rehabs), and draw notes (also known as construction notes). Notes can be secured by collateral or unsecured (Learn more).
Many investors use their retirement accounts, in the form of self-directed retirement accounts, to invest in notes. As long as the guidelines are followed, there are several advantages to lending money from your retirement account.
You might be wondering, “Why should I invest in notes with my IRA?”
Here are five reasons some investors find this asset attractive.
Potential Benefits of Holding Notes in a Self-Directed IRA
1. Note investing can be more passive than other investment types
If you’re interested in real estate investing but don’t want to deal with the issues that can arise with managing a rental property or finding tenants, note investing may offer a solution.
Lending money to a real estate investor only requires you to collect monthly payments (or whatever frequency you agree upon) from the borrower. There are no property or other maintenance concerns to consume your time.
2. Note investing provides the potential for steady returns
The terms of the note set the interest rate you’ll receive, eliminating any guesswork on the return on your investment. That often isn’t the case with other investment types.
Generally, the interest rate charged on notes from private lenders makes the investment lucrative. For example, a majority of Equity Trust clients with notes in their accounts received interest at rates of 10 percent or greater on their notes. That’s a better rate of return than you see with many asset types.