PENSION PLAN NOTE INVESTMENTS
Investors, I have good news for you. Did you know you could use your self-directed IRA’s, SEP’s and Qualified Plan including the ROTH IRA, to invest in Real Estate Notes Mortgages and Trust Deeds? It’s a creative way to put your own retirement funds to work and it can be done providing you establish a self-directed account with an Administrator whose plans allow these types of investments.
These accounts allow you to direct your money into investments YOU choose. The administrator doesn’t decide for you! The administrator simply carries out your instructions while handling all the administrative details.
With corporate downsizing and vanishing returns in your stock portfolio many are discovering they can “take charge” and control over their retirement funds through the power of a self-directed retirement account.
Although there are several non-traditional alternatives to investment in stocks available today, they are virtually unknown because they are not included in the products offered by brokerage firms. The reason could very well be due to the fact Wall Street Brokerage Houses typically do not make money selling them. It could also be due to the fact that brokerage firms and their respective representatives are unaware, unfamiliar and untrained in the benefits of investing in notes and other debt instruments. As you will soon see, the returns can be significantly higher than other investments while maintaining a lower than average risk factor as it relates to the metric of risk and reward. Profits on these investments are returned to your self-directed retirement account to accrue tax deferred until you begin to take distribution.
Some define investing in private notes secured by real state as “The Bankers’ Secret”. A logical, historic and proven axiom is to “find someone successful and copy what they do”. Relative to making money with money, there is no better way to do this, than to copy the model of a bank. Think about it, banks make millions in profit by making loans and they don’t even use their own money! They use depositors’ money, pay them 2.5% – 5.5%, and then loan it out to them.
Banks sometimes retain a portion of the loans in their portfolio, others “package and sell” the loans upstream to Wall Street where investors purchase them as securities. This is defined as the “secondary money mortgage market”. Sure, banks have to discount the loans, but guess who pays the discount? You’re right – the borrowers who need the money. In fact, many banks also “broker” Government Insured Loans.
Loans like this are originated locally, then “warehoused” and sold in the Institutional secondary mortgage money market.
However, a non-institutional secondary money market has been in existence since people owned real estate. Until recently very few individuals or small companies have participated due to a lack of knowledge. The investor clients of the Note Servicing Center have been purchasing notes and note portfolios at a discount as part of their business plan for many years. To make life easy the Note Servicing Center provides the management, collection and distribution of the income since 1984.
The private secondary mortgage market is huge with plenty to go around. According to web based Financial Services Guide, one out of five homes sold in the United States have some kind of owner financing. Additionally there are several billion in private notes secured by vacant land and commercial real estate with many million more new notes created annually.
Most often, the investor either uses the services of a Mortgage or Loan Broker by calling and asking if they deal in private notes. Typically the due diligence is taken care of by the broker. The broker takes a spread for his efforts which is a negotiable situation or you can locate the notes yourself through referral to someone holding a note that needs cash now. Professional sources to locate notes include; Attorneys with clients who have notes; Real Estate Brokers who know of sellers who have taken back part of the sale price with a note; Financial Planners and Banks servicing notes for customers holding notes they would like to sell for cash.
Once you decide to fund a loan with the creation of a new note or you locate an existing note for purchase with your IRA funds and complete the “due diligence; the retirement Plan Administrator will require completion of their “Direction of Investment Form” to initiate the investment. You will then direct the Plan Administrator to forward funds by cashiers check from the retirement plan to a title company to hold the funds in trust and disburse upon receipt of the executed and insurable title and necessary documentation.
When using your retirement funds to purchase notes, the income from the note purchase cannot be made payable to you as an individual. All income including note payments collected must be made payable to the Plan and deposited into the retirement accounts. All expenses related to the investment are paid out of the plan. Strict compliance will avoid problems relating to excess contributions or personal use and therefore be disallowed as prohibited transactions. All profit earned on these investments are returned to your self-directed retirement account to accrue tax deferred, until you begin to take distributions.
More and more Pension Plan Administrators require you to provide your own Note Servicing Provider such as Note Servicing Center to handle the record keeping and processing for the mortgages and notes you direct them to invest in. They have found it is not a cost effective method for either the investor or the Administrator to have this task handled “in house”.
Unless exempt, the Investor holding a Note or payments in their self directed IRA cannot have constructive receipt of the cash flow. The Servicer therefore, acts as the accommodator for you and the IRA Custodian/Administrator by receiving the payments and disbursing into the Investors IRA Account. Additionally, the Servicer provides the necessary “third party authority” for enforcement of the terms of the note and satisfies the beneficiaries (investors) mandatory obligations to the Payor. Risk management is also provided through impounding for taxes and insurance.