Expected returns are hard to come by. Stocks are at elevated P/Es on a historical basis, and yields are near all time lows. With economic growth sluggish, at 2-3 percent per year, any major gains will have to come from multiple expansion – and who can count on that? Earnings multiples can fall as easily as rise. This is what caused many of us to gravitate to self-directed IRA strategies in the first place!
Bonds aren’t much better, in the publicly traded market. There’s some downside protection, in theory.
Fortunately, electing to use self-directed IRA strategies allows you to transcend the limited publicly-traded stock and bond world, and explore hidden opportunities that are invisible to most investors – but which still offer reasonable yields – at acceptable risk levels, or at least with some security.
One such opportunity for self-directed IRA investors: Discounted Owner-Financed Real Estate Notes.
Here’s how it works:
Every day across America, owners sell houses to buyers under ‘owner financing’ terms. That is, in lieu of a cash payment for total outright ownership of the property, the owner may take a series of payments directly from the buyer.
So the seller winds up with a promissory note, and a series of payments, secured by the home he sold.
But if interest rates change, or the seller decides he would rather have a lump sum rather than a series of payments, there’s a ready-made opportunity for the self-directed IRA investor: Buy the note.
It’s usually a simple matter to come up with a discounted present value for the note based on prevailing interest rates. But here are a few things to be aware of before you close the deal:
Is the home adequate collateral for the promissory note? You should be in a good position if the loan has been in place for several years: The buyer will have paid down the balance some, and the home has hopefully appreciated in value. But have a good idea about the loan to value ratio of the home by doing an appraisal of the home.
Have the property taxes been paid? You may be in an adequate position on the loan, but if the property taxes have gone unpaid, you may find yourself with an additional liability.
Has the buyer made any changes to the property that change its value?
Have you taken potential costs of foreclosure into account? Are the laws in your jurisdiction friendly to creditors? You don’t want the costs of foreclosure to result in a loss on the deal.
Does the buyer have good credit? You may not be able to run an inquiry directly, though a note broker might be able to help you.
You can go through a note broker (who will charge a commission, of course) or you can advertise and market yourself to find these deals directly. You’ll need an attorney in your court to review the promissory notes and foreclosure prospects. And, of course, if you use a self-directed IRA for the capital, you’ll need a third party administrator or custodian to handle the transaction and hold the asset on your behalf. That’s where American IRA, LLC comes in.
Since discounted owner-finance promissory notes are generally longer-term, buy and hold investments that usually have years or even decades to maturity, our flat fee pricing structure makes American IRA, LLC a much more efficient choice for these kinds of assets than investment firms that charge a percentage-based AUM fee.