Tips: Buying Real Estate Notes in a SDIRA


The past decade has seen an explosion of private investors moving from buying property to buying notes.  Tired of the headaches of being a landlord, they would rather be the bank.  After all, nobody calls the bank at 2 am for a lockout or stopped up toilet.

For years banks have been profiting from interest on home loans (earning back an average of 1.5 to 3 times the amount they lend over the course of a 30-year note), and private investors want their share.

Benefits of Owning Notes in A Self-Directed Retirement Account

Real estate notes can be great assets for self-directed retirement accounts.  The benefits include:

  • Generate interest income
  • Purchase at a discount for increased yield
  • Backed by real estate as security
  • Less hands-on than owning property
  • Licensed third party servicers can manage payments and collections
  • Ability to re-work the note, take a deed in lieu, or take the property back through    foreclosure in the event of non-payment
  • Profits are tax-deferred (or even tax-free with a Roth IRA).

Here’s an example of a seller-financed note purchased by my IRA a few years back in Sunrise FL.  The seller sold their small condo unit to a retiree wanting to enjoy the sun and sand of sunny Florida. The seller carried back a note and after receiving a year of payments decided to sell the note for a lump sum of cash.

Sale Price                           $25,500

Down Payment                   $ 3,000

Original Balance                 $22,500

Terms                                8.0% interest payable in180 payments of $215.02 per month

Payments Made                 15 months

Remaining Balance            $21,477.84

Remaining Term                165 months

My retirement account was able to purchase the unpaid balance on the note (including future interest and payments) for $15,800.  That resulted in a discount of $5,677 and a yield of 13.9% to the retirement account.

10 Tips For Buying Real Estate Notes in a Self-Directed Retirement Account

 If you are considering investing in mortgage notes for your IRA here are ten tips for getting started.

#1 – Know Your Note Type

What type of note investor are you? Can you afford to take significant risks or are you looking for a more conservative approach to note buying? Notes come in all shapes and sizes so weigh the pros and cons of:

  • First position vs. second liens 
  • Performing vs. Non-Performing
  • Owner Occupied vs. Rental
  • Loans to Investors vs. Seller Financed
  • Full or Partial Purchases
  • Single Family, Multi-Family, Land, Mobile & Land or Commercial

If you are new to note investing it is a good idea to get some performing first lien notes under your belt before considering non-performing notes, second liens and riskier deals.

#2 – Have a Playbook For Your Notes

Create a playbook outlining your plan of attack, processes, and approach to note buying. Set targets for Yields and Investment-To-Value (ITV) thresholds. Get to know the ABCs of note grading related to property type, occupancy, equity, seasoning, and credit rating. They’ll provide a guideline when performing your deal analysis.

#3 – Embrace the Boring

After the thrill of making the deal comes the reality of validating the facts.  Taking time to inventory a collateral file can be tedious, but it is also essential. In the words of one of the world’s most successful investors, Warrent Buffet, “The great moves are usually greeted by yawns."

Looking for a place to start? Here are some of the fundamental questions to get answered:

  1. How long has the buyer been making payments and are they current?
  2. Is there a servicer collecting and validating the payments?
  3. Do the documents match the terms presented for sale?
  4. Are the real estate taxes paid current?
  5. Is the Property insured for fire and other hazards?
  6. Is there an updated title report?
  7. What is the lien position and what else is owed on the property?
  8. Who is the current holder or seller of the note being purchased?
  9. Where is the original note and will it be delivered at closing?
  10. What is the current value of the property?
  11. How much equity does the buyer/payer have?
  12. What is the creditworthiness of the buyer and are there any bankruptcy filings?

Draw upon industry standard due diligence processes to help you establish a transaction checklist. Be consistent and use it on every single deal.

#4 – Seek Professional Help for Investing

No, I’m not suggesting you consult a therapist for your deals. I’m talking about the experts you can use to help avoid making mistakes in your transaction. There are lots of resources including:

  • Servicing agents to collect payments.
  • Attorneys to review documentation.
  • Title companies to check lien status, real estate taxes, ownership, and transfers on both the property and the note.
  • Mortgage Loan Originators (MLOs) to handle disclosures and compliance issues on newly created notes to buyers planning to live in the property.
  • Property Evaluation & Inspection providers to establish current value, condition, and occupancy of the property.

#5 – Spread the Risk of Your Portfolio

Keep your portfolio diverse. Spreading the risk out over several smaller notes instead of one large note will ward against that one deal souring your entire nest egg. I’d rather have four $50,000 notes than one $200,000 note.

#6 – Find Creative Solutions to Note Investing

Think outside the typical banker’s “box”. Look at other solutions to structure a deal creating a win-win for everyone.

Utilize the Partial Purchase, one of the most powerful wealth-building tools in the note industry. You don’t have to collect all of the payments on a note to still yield double digits. These unconventional approaches to note investing can provide strong returns while minimizing risk.

#7 – Master the Time Value of Money

Purchase a financial calculator or software and learn how to use it. It can be your best friend in harnessing the power in The Time Value Of Money. And don’t let all those buttons scare you. You only need to understand five sets of letters to solve most note investing calculations:

  • N (number of payments)
  • I (rate of interest/return)
  • PV (present value)
  • PMT (payment amount)
  • FV (future value)

#8 – Tap Into Deal Flow

How are you planning to find notes? They don’t just drop on your doorstep, so you’ll need to figure out how you’re going to bring those notes to you.

Look at networking and referrals through real estate clubs, educational events, and conferences. Direct mail still works for targeting sellers who have sold property with owner financing and are collecting payments. You can also find notes online through exchanges and listing platforms like NotesDirect.

#9 – Learn From Others Who Have Invested

Don’t try to reinvent the wheel. Learn from others who have been right where you are now. Gain knowledge from both their home runs and mistakes made on deals gone awry.

#10 – Use a Self-Directed IRA Custodian

Use the services of a self-directed retirement account custodian to buy notes tax-deferred or tax-free. The most common types of accounts are the Traditional IRA or the Roth IRA. Other options you may want to consider are the Solo 401k, SEP (Simplified Employee Pension), HSA (Health Savings Account), and ESA (Educational Savings Account.

Work closely with your Custodian to properly title the asset in the name of your IRA.  Be sure to avoid prohibited transactions with any disqualified persons and setup note collections through a third party servicing company.

Tracy Z Rewey is the author of How to Calculate Cash Flows and co-owner of Diversified Investment Services, Inc. She has handled millions of dollars in real estate notes since 1988, becoming a well-known industry expert. Visit her blog online at to read all 21 of her Note Investing Tips.


*Mainstar's role as custodian of self-directed accounts is nondiscretionary and/or administrative in nature. This information is for educational purposes only, and should not be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. Mainstar encourages individuals to consult a financial or legal professional when making investment decisions.