Note investing strategies for retirement using an IRA or 401-K

Real Estate Broker · Ravenel, SC · Member since 2014 · 24 posts · 14 votes

Can any of you please share your investment strategies for retirement by using/purchasing Reperforming or performing notes in your IRA or 401-K?

Is anyone purchasing performing notes one at a time via the exchanges to build a retirement nest egg? I'm just curious to know what other's out there are doing to build their retirement portfolio using performing notes.

Best regards,

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Dave Van HornPro Member

Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes

@Jeffrey Radcliffe

Outside of my note business, my wife and I have retirement accounts that hold a portfolio re-performing notes. I've probably been building this up for over 15 years now with with a variety of notes (1st liens, 2nd liens, private money deals, etc).

Not much strategy to adding re-performers though, it can be pretty cut and dry. I guess the best advice is to have them in servicing of course. Makes it easier to be compliant and is beneficial not only for me but for my heirs.

I also lend money out of these accounts to trusted financial friends for their real estate deals (and they do the same for me). It can be a good way to tap into each other's retirement funds.

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Dave Van HornPro Member
Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
8y
@Jeffrey Radcliffe
Outside of my note business, my wife and I have retirement accounts that hold a portfolio re-performing notes. I've probably been building this up for over 15 years now with with a variety of notes (1st liens, 2nd liens, private money deals, etc).
Not much strategy to adding re-performers though, it can be pretty cut and dry. I guess the best advice is to have them in servicing of course. Makes it easier to be compliant and is beneficial not only for me but for my heirs.
I also lend money out of these accounts to trusted financial friends for their real estate deals (and they do the same for me). It can be a good way to tap into each other's retirement funds.
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Mike Hartzog
Lender · Redmond, WA · Member since 2014 · 553 posts · 490 votes
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Holding notes is one of the best ways to utilize an SDIRA in my opinion. It can, however, get messy when one of them defaults, so be careful of the re-performers. Make sure they are well seasoned, and have tax and insurance escrows established (for first liens). Some of the more reputable sellers offer a warranty on the re-performing loans they sell and will buy back within a certain time frame if the loan defaults. PPR, for example, does this. Best to form relationships with established sellers rather than rely on the exchanges.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
WE like performing notes for SIDRA's that are well underwritten up front .. these are pretty rock solid and like @Mike Hartzog mentioned if your in a defaulted re performer and you need lots of capital to secure the asset it can be tough if you don't have adequate reserves in your sidra and you cant put anymore money in it.
I have seen this foul up those that buy rentals in the sidra if they are not careful .. you just need to be cognizant of that and make sure you have PLENTY of reserves in the SIDRA itself..
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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Originally posted by @Mike Hartzog:

Holding notes is one of the best ways to utilize an SDIRA in my opinion. It can, however, get messy when one of them defaults, so be careful of the re-performers. Make sure they are well seasoned, and have tax and insurance escrows established (for first liens). Some of the more reputable sellers offer a warranty on the re-performing loans they sell and will buy back within a certain time frame if the loan defaults. PPR, for example, does this. Best to form relationships with established sellers rather than rely on the exchanges.
Fresh chinook is 49 a pound at whole foods.. we need to go fishing !!!
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Mike Hartzog
Lender · Redmond, WA · Member since 2014 · 553 posts · 490 votes
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Agreed. :-)
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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Jeffrey Radcliffe As noted investing in performing notes with retirement funds is done by many. You can by notes off of exchanges and manage yourself or joint venture with someone who buys the note and you pay them a small fee for them to manage it in case it goes non performing.
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Angela Russo
Specialist · Milwaukee, WI · Member since 2018 · 87 posts · 22 votes
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@Mike Hartzog Can you expand more on what you mean with re-performers getting "messy"?
How much reserve funds would you recommend keeping liquid to clean up the messes?
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Mike Hartzog
Lender · Redmond, WA · Member since 2014 · 553 posts · 490 votes
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@Angela Russo - Expenses will be incurred in dealing with a loan in default. For example you may pay a 3rd party to do borrower outreach/collection, and pay for attorneys to pursue foreclosure. Once a foreclosure has been completed, you may end up owning the property and in that case, there is another set of service providers that will need to be paid to deal with the property.
If you have a standard SD IRA where the custodian writes the checks, it can be a real hassle paying for these things. Paying for these expenses with non-IRA funds would be considered a prohibited transaction (a form of sweat equity). If you have an SD IRA where you have checkbook control, i.e., you are writing the checks rather than the custodian, then it is manageable as long as you have sufficient funds available to deal with the issue. Regarding how much reserve is required would depend on the state. Generally speaking, judicial foreclosure states can be significantly more expensive and time consuming than non-judicial states. I think it makes sense to do your homework on states you are investing in so you can ensure you have adequate reserves.

All this is to say that it is best keep high-risk notes out of your SD IRA. Re-performing notes are, by definition, higher risk because the borrower has already defaulted once. It is not at all uncommon for these borrowers to default a second time.
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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
8y
Hi @Jeffrey Radcliffe I've been buying both NPLs and RPLs in our Roth SDIRA via the checkbook control method and recently established a Solo 401K to buy notes with my JV partners. Using a checkbook controlled system where a LLC is created with my and my wife's IRAs lets us buy notes and pay for incidentals as needed without having to deploy a request for payment with our custodian.
@Angela Russo I usually keep at least $5K per loan at the acquisition of a NPL to cover potential legal/FC costs, servicing fees, force placed insurance. If we get the loan reperforming and it seasons for >8 months, then the reserves can be removed or reallocated to a new NPL.
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Angela Russo
Specialist · Milwaukee, WI · Member since 2018 · 87 posts · 22 votes
8y
@Mike Hartzog & @Bob Malecki
Thanks so much for your replies! I'm getting my ducks in a row to transfer funds to a Roth SDIRA and purchase my first note, so I appreciate the responses to my beginner questions.
How much reserve do you keep in the SDIRA for performing loans? Or is it reasonable to consider that you could pull from other IRA "pots" in traditional (ie stock market) investments or contributions for the year if it were to go non-performing and need additional legal or servicing?
Also, after looking at some of the costs, it seems like at least when getting started it makes more sense to just pay the SDIRA admin fees per asset rather than going ahead and setting up an LLC for checkbook control, and then know that I could always make that transition later on as I make more deals. I'm looking at administrators who handle both types so that I could stay at the same company when the time comes. Do you agree with that logic?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Angela Russo
If you establish a Roth based SDIRA, then funds from any other Roth IRA in your name would be available to transfer in as needed. The IRA to IRA transfer process can take 2-3 weeks, however, so something to consider. You can think in terms of short term reserves (I need to hire an attorney to foreclose) and long term reserves (I need to pay the attorney in full and have funds to rehab a property the IRA foreclosed on), with the former being wise to have directly in the SDIRA and it being OK to have the latter in another IRA elsewhere. Contributions are also an option, assuming eligibility.
You are absolutely correct that you can start with a custodian-held IRA and then upgrade to the LLC. Kingdom Trust Co. is one of the best custodian options if you are considering this route. It does not take a whole lot of transacting or dollar value for the IRA LLC to start creating a cost benefit over working with a custodian. From day one, the IRA LLC will be more flexible, allow you to more easily reinvest your contingency capital/earnings, and come with quality advisory support not offered by custodians. If you really believe you will graduate to the IRA LLC level, you are probably best off starting there.
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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
8y
Well, if you are going to purchase a performing note directly from your self-directed IRA then yes you could pull money from other Assets in the ira to fund unexpected expenses.
Although the admin fees are one factor when purchasing directly out of your self-directed IRA, the time to deploy the capital to pay a vendor can be a bit challenging but not a show stopper. Although purchasing a non-performing note has more expenses, when you purchase a performing note you will still have to deploy payments for boarding fees, possibly force-placed insurance, BPO and O&E reports, so be sure to learn from your custodian as to how long they take to deploy a check once you complete a request with them.
Also since you are not using a bank account connected to an LLC you should keep a spreadsheet of your income and expenses for the asset so you can determine your return on investment. With a checkbook control Ira you can import your banking data into QuickBooks to run reports, but this will not be available if you are deploying your Capital directly from your self-directed IRA custodian.
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Angela Russo
Specialist · Milwaukee, WI · Member since 2018 · 87 posts · 22 votes
8y
@Brian Eastman Thanks for the input and recommendations. Good point on the transfer time, definitely something to keep in mind. Do you just add the reserves into your capital in a deal when you calculate the ROI? Obviously it's necessary to keep some powder dry for the unexpected, but I also hate seeing good money sitting in cash not earning anything. But if you consider it part of your total spend on the deal and the numbers still work then it's not as much of an issue.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
8y
@Angela Russo
Reserves can be placed into something semi-liquid like a savings account or mutual fund. There is no need to keep funds totally idle in cash.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Bob Malecki:

Well, if you are going to purchase a performing note directly from your self-directed IRA then yes you could pull money from other Assets in the ira to fund unexpected expenses.
Although the admin fees are one factor when purchasing directly out of your self-directed IRA, the time to deploy the capital to pay a vendor can be a bit challenging but not a show stopper. Although purchasing a non-performing note has more expenses, when you purchase a performing note you will still have to deploy payments for boarding fees, possibly force-placed insurance, BPO and O&E reports, so be sure to learn from your custodian as to how long they take to deploy a check once you complete a request with them.
Also since you are not using a bank account connected to an LLC you should keep a spreadsheet of your income and expenses for the asset so you can determine your return on investment. With a checkbook control Ira you can import your banking data into QuickBooks to run reports, but this will not be available if you are deploying your Capital directly from your self-directed IRA custodian.
As Brian mentions above this is why a solo K or check book IRA is by far the best way to do these.. you have one yearly fee to the custionian you can handle all your fee's yourself instead of fees PER NOTE that kill you. .. I had my ira at entrust for years and they for sure just killed you with their fee's per note.. Now i have one small fee a year and many notes that I handle through my check book IRA.. thats the way to go IMHO.. you pay some money to set up the solo K but its one time..
I think also for someone just starting in this.. seems to me buy NPN and owner occ notes with all the compliance issues is a pretty tall order I think to start those folks would be way ahead to just invest in your fund or Mike's fund and watch how its done.. I am sure when folks are now your clients they can learn from you for future deals..
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Mike Cleveland
Sequim, WA · Member since 2018 · 11 posts · 2 votes
8y
I'm very interested in this thread, because in my 401K I am completely limited to stocks and ETFs by those who administer our 401K. I literally cannot do anything toward my retirement in that 401K other than purchase stocks. I would love to use it to purchase notes or funds, but we're simply not allowed.

And a personal IRA seems unlikely since the max I can put in it is $6500.00/year. That doesn't help much.
So I'm stuck with buying notes in my retail account. I have, however, taken a loan out on my 401K and purchased notes with it, but the max I'm allowed to take in a loan is 50K.
Does anyone else have this problem? Is there any other way to get around this so as to use retirement funds to purchase notes in a retirement account? And trust me, our administrators refuse to listen to us as to why we should be able to invest in notes, believing the stock market (that lost 50% in 2008) is a much safer investment than real estate. No use trying to talk sense into them when they've come to forgone conclusions before including pesky things like facts!
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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
8y
Hi @Jay Hinrichs I agree with your perspective on setting up a checkbook IRA to save on fees and expediting transactions. I don't think someone's desire to open one at the starting gate and buy notes is over ambitious, as most people learn by doing. Many folks just want a decent return on their money with very passive activity and they invest in our fund, but others want to learn and have more control.
Bob
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Dan MahoneyPro Member
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
8y
@Jeffrey Radcliffe I have purchased a few individual notes from PPR Note Co ( @Dave Van Horn's company) in retirement accounts with great results. PPR hasn't released any new inventory in a while but I'd recommend them highly. They deliver complete collateral packages and have good customer service. Their loans are already in servicing with FCI which I think is a plus.
@Angela Russo There really isn't much cost to forming the IRA-owned LLC before starting investing. Here in Georgia it's $100 to register with the secretary of state. I just googled the fee for Wisconsin and it appears to be $130. Why wait?
@Mike Cleveland It's likely that the only way to remove the restrictions on your 401(k) retirement savings is to leave your current employer. Then you can roll over the funds into a solo 401(k) plan or IRA that allows "alternative" investments. Your current plan administrators are not going to change their mind.
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Angela Russo
Specialist · Milwaukee, WI · Member since 2018 · 87 posts · 22 votes
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@Dan Mahoney From what I've seen, you're looking at anywhere from $1500 to $2000 for the attorney fees and everything to set up an LLC for the IRA- there's more than just the filing fee to make sure it's done correctly.
Have you bought reperformers or NPN from PPR? I'm keeping an eye on the vault to get practice running my numbers while I get everything set up.
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Dan MahoneyPro Member
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
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@Angela Russo Yes if you use an attorney you will pay attorney's fees. They are not required for forming an LLC but I can see hiring one if you are unfamiliar with LLCs.
Regarding PPR, I have only bought NP from them. And only a few.
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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
8y
OMG both @Dan Mahoney & @Angela Russo DO NOT try to set up a checkbook IRA LLC without a knowledgeable attny. There is specific language in the operating agreement that needs to be there for IRS compliance, else your IRA could be dissolved by IRS if audited. The attny should have specific knowledge on setting up this type of LLC.
Bob
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Angela Russo
Specialist · Milwaukee, WI · Member since 2018 · 87 posts · 22 votes
8y
@Bob Malecki I would definitely will use an attorney- not going to risk my Roth's tax preference by pretending I know anything about how to do it myself!
Also, going back to your earlier comments about partnering with your wife's IRA, do you each have a separate LLC for each IRA that then partner, or do the IRA accounts both fund the same LLC? Could you work in a similar fashion with your own Traditional and Roth accounts?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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Originally posted by @Angela Russo:

@Dan Mahoney From what I've seen, you're looking at anywhere from $1500 to $2000 for the attorney fees and everything to set up an LLC for the IRA- there's more than just the filing fee to make sure it's done correctly.
Have you bought reperformers or NPN from PPR? I'm keeping an eye on the vault to get practice running my numbers while I get everything set up.
I can give you a referral to someone who will do the check book IRA for half of that .. i have one its the best .. and once its set up its just a small annual fee.. Entrust was killing me on all my notes.. KIlling me :) I will more than save in ONE year the cost of setting up my check book IRA than what i was paying entrust or any other custodian that charges by the note.
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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
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Originally posted by @Angela Russo:

@Bob Malecki I would definitely will use an attorney- not going to risk my Roth's tax preference by pretending I know anything about how to do it myself!
Also, going back to your earlier comments about partnering with your wife's IRA, do you each have a separate LLC for each IRA that then partner, or do the IRA accounts both fund the same LLC? Could you work in a similar fashion with your own Traditional and Roth accounts?
Hi Angela, our Roth SDIRA's are members in the checkbook LLC, funded directly from out SDIRA accounts. Yes you can use traditional or Roth
Bob
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Steve H.
West Chester, PA · Member since 2018 · 20 posts · 7 votes
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@Brian Eastman and others: For someone investing between $50-100k from an SDIRA to purchase notes, does it still make sense from a cost perspective to set up an LLC for the IRA right from the start vs a custodian-held IRA?
I am looking at the fee schedule for a custodian-held IRA and I see a annual fee and a percentage holding fee. But for a LLC you would have to pay annual LLC tax plus attorney fees to establish the LLC. Where is the breakeven point when it makes sense to go from one structure to the other?
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