IRAS and Real Estate Notes

Written by Posted On Tuesday, 12 May 2015 02:27

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Those enamored with real estate choose self-directed IRAs for their retirement plans as they are flexible and lucrative. It is fairly well known that these vehicles can invest in raw land, commercial and residential property, condos and apartments (rental units), REITS, and other forms of real estate. There are some limitations in other areas (collectibles and insurance), but this field is well covered. Some may not know that these IRAs are eligible to handle real estate notes as well—lending for someone to buy a property. Choosing successful real estate entrepreneurs is icing on the cake.

Some basic pointers will keep investors on track and help them avoid mistakes.


1.If the note defaults, you will then own the property in question. Thus, you would only want to accept a note for one you would want to own in any case. While high rates of interest prevail to add to the value of your investment, the risk of foreclosure is also great.


2.You may loan money to the property owner for repairs, but it is recommended to pay after the fact when the work has been completed to ensure adherence to any prior agreement. 


3.You may face foreclosing on the buyer’s note. Select someone you feel comfortable taking this last resort against in the event of default. Avoiding close friends is therefore suggested.


4.If foreclosure is impending, take action quickly. There is no advantage to waiting. Learn the laws in your state well in advance.


5.To monitor the status of the buyer, collect interest during the loan period, not at the end. It is a good way to find out if he or she is in trouble.


6.When in doubt, even in a Self-directed IRA, hire a legal professional to evaluate the loan. You will head off unforeseen problems and therefore headaches. There is paperwork and the matter of appraisals and insurance. They must be done correctly. The buyer usually pays the fees in any case.


7.Title insurance will protect the IRA and the fees are low.


8.Protect the IRA with hazard and flood insurance for the property subject to the note. The IRA must actually be named and some forget this requirement.


9.Requiring evidence of payment of property taxes, insurance, and homeowners association fees is wise, if not mandatory. Penalties and legal costs can lower an investor’s equity position.


10.Some notes are suspect when it comes to a buyer’s finances. If you insist on investing anyway, take some precautions. A personal guarantee will help collect funds due down the road, helping to avoid an unpleasant lawsuit.


Taking these factors into consideration, a real estate note is a perfectly plausible option for a self-directed IRA. The list above is not exhaustive but does indicate the basic issues of concern. Knowing the ropes is essential for financial success. Some people limit themselves to first-lien loans and have other specific objectives. Learn your options to enhance the performance of your IRA during retirement.


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Rick Pendykoski




Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for blogs at MoneyForLunch, Biggerpocket, SocialMediaToday, NuWireInvestor & his own blog for Self Directed Retirement Plans. He writes about topics related to retirement planning, investing, and securing future.

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