Buying a Note Within Your Self-Directed-IRA

So I've had a few members here on BP ask me about buying notes with a Self-Directed IRA (SD-IRA). I will go over buying a promissory note, secured by real estate, with Equity Trust (my current SD-IRA custodian). Here are the steps:

1. Go to www.trustetc.com

2. Click on "Client Forms" on the LEFT Menu.

3. On the "Buy Asset" Menu, click on "Invest in Promissory Notes, Mortgages, Deeds of Trust, or other types of Loans". A Promissory Note DOI (Direction of Investment) form will pop up in a new window.

4. Page 1 is the Cover Sheet. Skip to Page 2.

5. Section 1 is self-explanatory. In Section 2 I normally choose Option 2.

6. For Section 3, just be sure your titling is correct. The entity buying the note is "Equity Trust Company, Custodian For Benefit Of (Your Name) IRA Account #XXXXX." In my case, it reads "Equity Trust Company, Cust. FBO Loc Rao Roth IRA Account #12345." As you can see, I've shortened "Custodian" into "Cust." and "For Benefit Of" into FBO, and I've distinguished that my IRA is a Roth IRA.

7. For Section 4, the answer is typically "No", as the only documents you will need to send to Equity Trust will be the Purchase Agreement (signed by you), the Original Note, and the Assignment of Note (signed and notarized by the seller).

8. (Section 5 is self-explanatory).

9. Section 6 has been a big pain in the @ss. Even though technically you are NOT lending money, in Equity Trust's eyes as the note-holder to be, you are "owning" money lent to the payor/borrower. So, fill this in with the payor's information. I had 4 deals delayed because of this section.

10. Click "Buying an Existing Note" in Section 7.

11. Section 8 is redundant, but go ahead and fill in "Yes" and write "I am buying the note at a discount because I am an investor" in the space provided.

12. In Section 9, everything is self-explanatory except for "Total # of Payments" and "Date of 1st Payment" - fill this in as it applies to YOU. For example, if you are buying a 48 payment note that originated 6 months ago, the "Total # of Payments" is 42, not 48, and the "Date of 1st Payment" is the 1st payment YOU are collecting, not the 1st payment the payor made.

13. Sections 10 & 11 should be easy to fill in. Ignore Section 12, as we would NEVER invest in unsecured notes!

There you have it. Now all you have to do is find a good note, buy it, and sit back and watch the monthly payments come in!

I hope this proves to be helpful.

Snowballing Your Money

I wrote this "strategy" to a fellow BP member, and I thought why not share it with everyone on BP?

So, the concept is Snowballing Your Money. And here is the basic outline:

1. Set up a self-directed Roth IRA (remember, your contributions to your Roth IRA are with after-tax money. Whatever you can grow it to is all yours to keep). If you make too much money, a self-directed IRA or 401(k) is fine.

2. Pay yourself $416.66 per month. Since the Roth IRA's annual contribution limit is $5000, $5000 divided by 12 months is $416.66 per month.

3. After a while you should have some working capital. Let's say you have $25,000. You can buy a note that looks like this:

N = 120

I = 7.0%

PV = $30,000

PMT = $348.33

at a 12.0% yield for $24,278.46.

Now your Roth IRA will grow by $764.99 ($416.66 + $348.33) per month.

4. After 24 months your Roth IRA will have an additional $18,359.76 to work with. You might say buy a note that looks like this:

N = 60

I = 6.0%

PV = $20,000

PMT = $386.66

at a 12.0% yield for $17,382.14.

Now your Roth IRA will grow by $1151.65 ($764.99 + $386.66) per month.

See where this is going?

And remember, because it is a Roth IRA, you have already paid your taxes, so whatever you grow your Roth IRA to, is ALL YOURS, TAX-FREE.

Just imagine what your Roth IRA will look like once you are getting paid 10 times per month. 20 times per month. 50, 100...

Cashflow Central

Buying a Note Within Your Self-Directed-IRA

Snowballing Your Money