Investments in Private Notes and Mortgages

Your real estate IRA can invest in mortgages and loans to garner income on the interest and other terms—which flows into the account on a tax-free or tax-deferred basis.

The IRA plays the part a bank normally would in extending loans to individuals or entities seeking to borrow money.

How it works:

  • The IRA owner performs all due diligence and vets the borrower, decides interest rate, and negotiates a secured or non-secured loan
  • Secured loans use property as collateral in case of default
  • Unsecured loans typically carries higher interest rates as they are not backed by collateral

Advantages of private lending with a self-directed IRA:

  • For the IRA owner: earnings flow into the IRA tax-free or tax-deferred; potential of higher returns than traditional investments
  • For the borrower: receives cash faster than a typical lending institution may provide; avoids more stringent requirements of banks or mortgage companies

Different states may have varying rules that govern these types of investments structures. Be sure to consult with a trusted attorney or tax professional when using your self-directed IRA to invest in mortgages and notes.

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