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Promissory Note Investing
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.
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.
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.
|Interest Rate Compared to Maturity||2 Years or Less Maturity||2-Plus Years Maturity|
Your note investment grows free of short- or long-term capital gains taxes when it’s inside an IRA or other government-sponsored savings account.
The accounts bring other potential tax benefits as well. Any qualified withdrawals you take in retirement are either tax-deferred (in a traditional IRA) or tax-free (in a Roth IRA).
[Related: Guide to self-directed accounts and taxes]
Investing in notes in an IRA or Roth IRA allows you to build toward a comfortable retirement. It also could allow you to establish your legacy: You may leave the account to your children and/or grandchildren as beneficiaries.
Self-directed note investing can help you save toward other goals as well. Notes can be held in other self-directed accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, as well as retirement accounts geared toward small-business owners.
To be able to invest in promissory notes in an IRA or other retirement account, the account must be held at what’s known as a self-directed account custodian. Even then, it’s important to do your due diligence and research your options, as not every self-directed custodian is the same.
At Equity Trust, it’s easy to find an investment, invest, and manage your account:
Have questions about investing in notes and private lending in a retirement account? Our knowledgeable IRA counselors are here to help. Talk to someone today.
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