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If you don’t want to be burdened with maintenance costs or rental vacancies, you can invest in mortgage notes in your self-directed IRA. You can also be a real estate lender with your IRA funds and help others purchase new properties. You set the terms of the loan, including time frames and interest rates. The payments will go to your retirement account.

There are two types of notes:

  1. Secured trust deeds, deeds of trust, and mortgage notes are basically the same thing, depending on the state that you reside in.

  2. Unsecured notes are not backed by collateral and thus often pose a higher risk than a secured note. Because of this increased risk, unsecured notes are generally structured at a higher interest rate.

Unsecured Note (Promissory Note)

A promissory note is a legal agreement between a buyer and a lender. The note contains the promise to repay a loan, along with the terms for the repayment. The note is not recorded in county land records. The lender holds the promissory note. When the note is paid off, the note is marked paid in full and returned to the borrower.

Secured Note

A Real Estate Note is secured by real property. The documents required by Entrust for notes secured by real estate vary by the type of note you are requesting:

  • If you are issuing a new note or seller carry back note, simply submit a copy of the original note, deed of trust or mortgage, and a copy of the lender’s title report.

  • If you are buying an existing note, you will need to submit a copy of the original note, recorded deed of trust or mortgage, title policy, deed of trust or mortgage assignment, note endorsement, and note purchase agreement, if applicable.

  • If a borrower cannot pay the balance on a note, the property can be sold to satisfy the debt.

Deeds of Trust

Trust deeds, deeds of trust, and mortgage notes are basically the same thing, depending on the state that you reside in. In a trust deed, the investor loans money to a borrower using real estate as collateral. The loan is secured with a Trust Deed, which is recorded in county land records against the collateral. The terms of the loan are detailed in the Promissory Note.

You will want to define the type of real estate you feel comfortable lending against. Working with a local real estate broker who specializes in trust deed investments is a good start. Perform your due diligence by asking for references, requesting a schedule of loans that have funded, and confirm the status of the broker’s license.

It is advisable to order a third-party appraisal or valuation of the property you intend to invest in. You will want to verify that the value of the collateral is sufficient to return the principal on your loan. Additionally, obtain a Title Policy from a reputable title insurer that insures your trust deed on the property. Lastly, verify that the borrower has property insurance on the property and request verification that it names you as a "Mortgagee.” Seek legal and financial advice from trusted representatives.

How to Invest with Notes

Sellers looking to offer financing to potential buyers can have a real estate note created for the transaction. It is important to have your note drawn up by a real estate attorney and that you understand the terms of the note. Read further for an example of the process used to create a real estate note. For specific account questions, please contact an Entrust representative.

Related Articles and Links


A Guide to Trust Deeds

Learn about Trust Deeds in this report from the California Bureau of Real Estate!

Trust Deed Investments