Promissory Note Investing: What it is and Real-Life Examples

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: real estate note

An IRA can hold a promissory note. The webinar provides a look at a real estate note investment Equity Trust client Joe in Minnesota completed with his retirement account. Here’s a summary:

Joe’s promissory note investment

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.

[Read another case study: Guy’s Hands-Off Note Investment]

Notes about the investment

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: free 15-minute guide

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, access our 15-Minute Guide to Building Your Wealth with Self-Directed Note Investing.

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.