How-to Invest in Hard Money Mortgages using a Self-Directed IRA

Self-Directed IRA‘s have been used to fund private businesses, buy investment property, purchase mortgage notes and many other investments not typically found through your local banker or financial advisor.  If …

Self-Directed IRA‘s have been used to fund private businesses, buy investment property, purchase mortgage notes and many other investments not typically found through your local banker or financial advisor.  If your IRA is with a conventional broker they may tell you they’re self-directed but unless you can buy investments such as what I previously listed, they’re not the self-directed IRA custodian I’ll be talking about.  By searching the internet under "self-directed IRA" you can find the type of custodian that will work with you for these investments. 

One investment not mentioned often enough are Notes, and I would suggest sticking with 1st Mortgage Notes secured by property.  Many Mortgage Note investors have been real estate investors in their past lives but are now looking for a more passive real estate investment.   Purchasing the right Mortgage Note is the trick.  Do you want high returns and low risk, well don’t we all?  Where you buy Notes and who you deal with will determine much of how your investment turns out but the amount of information on the borrower and property means everything. 

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I suggest receiving the following information before you buy:

  1. A current appraisal for the subject property (check the comps and other details).
  2. The title policy that insures you have 1st position, I hope you avoid 2nd Notes. 
  3. A recent credit report on the borrower with credit scores…do you really want to lend to this guy?
  4. Income documentation to prove your borrower has enough income.
  5. Now take the income and the credit report and figure out if the loan can be repaid.

The best you can do is put all of this together and weigh the positives against the negatives but the appraisal is the most important in my view.  Let’s face it, if the credit crisis and the sub-prime meltdown are not a perfect example of what not to do, I don’t know what is.  Don’t lend too much, with too little equity protection, without good credit and no proof of income, it’s as simple as that.

You can find short term Notes in 1st position that generate over 12% yearly returns and more.  Depending on the market you shouldn’t be higher than 55% loan to value.  If the borrower fails to pay on the loan you will have to foreclose, all costs must be paid through your IRA.  In the end, the worst situation would be that your IRA now owns a property the you can rent out or sell.  If you do your homework, 1st Mortgage Notes can be a lucrative investment to add to your self-directed IRA or your personal investment portfolio.  

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