General question about the "leftover" funds in my SDIRA. Say I have made some investments secured by a deed and a promissory note and I have some leftover funds sitting idle in my IRA account, earning basically nothing. For arguments sake lets say $5,000.
I read a post recently about a note investor looking to raise capital by selling a years worth of his note payments at a discount. It made me think that might be a good way to put my "leftover" cash to work in another short term investment, that might make a decent yield.
I checked with my IRA custodians website and did not see anything relative, before I reach out to them and ask if its even allowed I thought I might put it out here and see if anyone has done this, or better yet, if someone has a better investment vehicle to put small amounts to work?
If this is an allowed transaction, how would it be secured? I know my custodian will charge me for monthly deposits made to my account, but it is not much of a fee, and it would be better than letting it ride earning nothing.
Appreciate any feedback,
Thanks in advance,
Purchasing a partial should be allowed by any custodian that allows note purchases.
If your custodian is like mine, you describe your investment in terms of the number of payments purchased for the funds you are investing. Your custodian’s customer service reps can tell you specifically how to complete their forms.
Just like when you purchase a whole note, your custodian or servicer will hold the note for you. The note will be endorsed (without recourse) and trust deed will be assigned to your custodian fbo of your IRA, like you were purchasing a whole note. Avoid fractionalizing the note between you and the seller unless you have a securities license.
Once the borrower has made the payments and fulfilled whatever terms you and the seller agreed in your purchase agreement, the note is endorsed and trust deed assigned back to the seller.
Some of the key details in your partial purchase agreement should include:
- How is each payment applied toward the note returning to the seller?
- What happens if the note is paid off early or payments are later than anticipated?
- What happens if the note goes into default? What happens if you foreclose and take the property back? What are your fiduciary responsibilities to the seller? When will seller be notified and what are his rights and options in event of default?
- Seller is never allowed to cure the default on behalf of the borrower. That could lead to your transaction being deemed a loan.
I started my IRA buying $5K to $10K partials since I did not have much cash and more time to service notes this size. Servicing often eats into much of the yield on smaller investments so you will need to take that into consideration.
Let me know if you have any other questions.
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