Writing own note on a investment property

7 Replies

Does anyone have experience with writing my own note on equity that is in an investment property? I have a few rentals that all have equity (as well as my primary residence). I would like to use this equity to re-invest into other deals. I am exploring options such as HELOC and potentially note writing. Does anyone have any experience in this area? Also three of my investment properties are in my Roth IRA so I am not sure if this makes a difference.

sorry I meant writing your own note on your own investment property....

You cannot use any asset of your IRA/Roth IRA as collateral for a personal loan, nor can you use any equity in those IRA-owned properties for personal investment.

What you may be able to do is refinance those properties within the IRA via non-recourse loans, and then use the cash out to purchase additional investment properties within your retirement account, to grow your retirement portfolio.

Otherwise, it's hands-off those properties.

Do you have someone to lend against these properties already? Often a private lender will have their own attorney or standard not that they would prefer to use since they know what it contains.

It sounds as if you are trying to just create your own note on the properties? I'm not really sure I understand what you mean by "note writing"? In order to create a note there must be a borrower (you or your IRA) and a lender (the person actually giving you the money). An attorney will generally draft the note and then it would be signed and recorded against the collateral property and you would receive the funds due to you. It seems as though you want to create a note without any actual lender, and then using that somehow to fund additional investments?

For the properties in your IRA it makes a huge difference on how the loan is structured. The majority of loans are "recourse" meaning there is a personal guarantee for repayment should you default. With IRA investments the loans made to the IRA must be "non-recourse" meaning they can only take the property nothing else, and there can be no personal guarantee. Also be sure you understand UDFI (unrelated debt financed income tax) and the taxation structure your IRA will be subject to due to utilizing leverage on a tax advantaged account.

It's also important to understand that even with a non-recourse loan for the IRA-owned properties, those funds can only be used for investments made by the IRA. That money cannot be used to make personal investments.

You could write a note in second position on your properties (your ownership interest in the company, mortgaging over a balance to you), but these second position notes are severely discounted when you try to sell it for cash on the open marketplace.  You'd likely give away 40-60% of your equity just in the discount.  I would not recommend it.  

Instead, try to pay off first mortgages so you have a free and clear property.  Then get a first mortgage from a normal lender on that property to free up more money to invest.  You won't be selling yourself short that way.

Divina Westerfield

If you have significant equity, there is no reason to discount anything. I am assuming you have someone willing to give you a loan wishing to use your equity as collateral? As mentioned above, make sure you understand all the laws involved w/ properties held in an IRA>

Some of this is just a bit off in the wrong direction.  As @Matt Devincenzo  clearly pointed out, you do not lend your self money since, you would already have your own money.

A "Note" ('Promissory Note') is simply evidence of a debt with terms of repayment.  Someone besides YOU has to give you money, which is then evidenced by the NOTE.  The Lender (entity giving you the money) does both, gives (writes) the NOTE and the CAPITAL.    

A Borrower (YOU/OP) would give a MORTGAGE or DEED OF TRUST depending on the state where the Subject Property is located.  Giving the Mortgage would mean the Note is secured by the Mortgage or Deed of Trust which is attached or holds the property.  

You can NOT Sell a Note when you are the Borrower, it is NOT yours to sell.  Just because a loan is in second position or later does not automatically mean a discount is applied.   

Title to most of the real property sounds like it is primarily in the IRA excluding your primary residence. The IRA holds title so, you can not mingle those assets in the IRA with personal assets like your primary residence or assets owned in other entities like an LLC or LP. Proceeds must stay in form as stated above, meaning you can tap into the equity of the assets in the IRA provided that money is used to purchase more assets held by the IRA. Again, as stated above by Doreen.

A HELOC is a Mortgage that is open ended opposed to closed ended. For this discussion purpose, HELOC's and Mortgages (or Deeds of Trust) are not separate things. Open ended means, proceeds can be drawn down and paid back and drawn back down, etc. Closed ended means one time use.

There are Lenders (banks, private lenders, etc) that may look to cross collateralize the properties and offer a loan.  That loan may be open ended, although I think those are pretty tough still.  The issue of mingling title will still be a barrier.  Essentially you could combine/cross all assets which are held in title to the same entity such as all the IRA properties or all the properties held in your natural name, like your primary residence. If you hold properties outside of your Primary Residence and IRA properties in LLC or LP those would all have to be held in the same entity.   Where ever title is held differently, there would be a new transaction which can not combine with others.  PROCEEDS can not be mingled with the IRA.  Outside of the IRA you can mingle proceeds all you want, but your accountant may not like it if you are not systematic in some fashion.  

It is not clear what "some equity" actually even means in the post.  Property not used for primary residence is reduced in the maximum amounts loaned against them.   Pulling cash out of said properties even further reduces the level a lender will use to lend in maximum.  

The cross I mentioned above could be done in first or second positions.  All of the details not included in the post will make a difference on all of this but that is the nuts and bolts (some repeated) pertaining to the OP question.

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