Georgia Investor Nets 10-Percent Return with Hands-Off Notes

For a recent investment, Guy purchased a real estate fix-and-flip promissory note with 12 monthly interest-only payments and a balloon payment at the end. Guy directed Equity Trust to send his broker $109,800 for the purchase of the note.

With Equity Trust’s account management system myEQUITY, this step can be completed online. myEQUITY’s Private Debt Wizard walks the investor through the process of initiating the investment, eliminating the confusion that might arise for those unfamiliar with the self-directed investing process.

Guy received monthly interest payments deposited directly into his Equity Trust Roth IRA via ACH. Those deposits, as well as the 10-percent profit, are not taxed.

Investing inside vs. outside an IRA

Because all income must go back to the IRA, Guy works with Equity Trust to make sure his payments are directed to the proper account.

“I’ve got to send in a deposit coupon to Equity Trust when the direct deposit goes into my account each month, but that’s easy,” he says. “I can email that or mail it in, however I want.”

[Note: It’s now possible for borrowers to submit their payments online, to be deposited directly into the appropriate Equity Trust account.]

Even though he’s working with a broker, Guy carries the ultimate responsibility of vetting out prospective investments. There have been a couple of investments offered to him that he declined after doing his own property and market research.

Guy has found that the notes don’t always carry to the full 12-month term. One borrower sold the property early, so the note was paid back to Guy early. In another situation, the repayment period went into the 13th month.

These factors can affect the return on investment (ROI), but in general Guy receives a 10-percent ROI on his notes. He almost always has at least one active note in his IRA.

“I don’t know where else I can get 10-percent ROI with the level of risk I’m getting,” Guy says.

Video: Investing in Promissory Notes with Your Retirement Account

Finding funding when the IRA comes up short

One of the first times Guy’s broker approached him with an attractive investment, Guy didn’t have the funding in his Roth IRA for the opportunity. Not wanting to lose the opportunity, he found a solution.

By co-investing his Roth IRA money with money from outside of his retirement account, Guy could put together enough money for the investment. He would invest with the proportions of 28 percent of his IRA money and 72 percent of his personal money.

When co-investing an IRA with another IRA or any other funding source, it’s important that all expenses and revenues remain in the same proportions as the initial investment. Thus, any revenue that would come from Guy’s note investment would be split, and 28 percent of it goes back into his IRA.

Due to the rules involved with co-investing, Guy’s broker resisted proposal at first, fearing the process would become too complicated or an administrative burden.

It was easier than Guy thought to change the broker’s mind.

“I mentioned I was using Equity Trust as my IRA custodian, and he said, ‘Oh, co-investing is not a problem then. We work with them all the time and we’ve never had a problem.’ It was like night and day when I mentioned Equity Trust,” Guy says. “[My broker] has a lot of investors who invest through Equity Trust.”

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Considering his family’s future

Guy, who is married with two children, plans to use his self-directed investing to build a legacy. He lives off his pension earned from 24 years serving in the Army. If he does need to draw from his Roth IRA in retirement, withdrawals are tax-free.

Barring any unexpected circumstances, his Roth IRA will be left to future generations, who will be able to take tax-free withdrawals from the account.

Guy plans to continue investing in notes while receiving 10-percent interest as long as he can – he hopes he’ll be able to use this strategy until he’s 70. He knows the real estate market might not continue to provide these opportunities, so he’s researching other hands-off strategies for diversifying his portfolio.

Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.