Investing in Distressed Mortgage Notes with a Self-Directed IRA
We all remember the Great Recession, the housing market crash, and what that wrought for homeowners who could not afford to pay their mortgages. With COVID-19 bringing unemployment and financial hardship to many families, those with mortgages may be struggling to keep up with their payments. These distressed mortgages—also referred to as nonperforming mortgages—can be invested in through a self-directed IRA and create a win-win scenario for both investor and homeowner.
Distressed mortgage notes, like other private lending transactions, are among the alternative assets allowed in a self-directed retirement plan. These nonperforming mortgages are purchased at a discount—typically anywhere from 10 to 50 percent lower than the property’s value—with repayment terms negotiated by the retirement plan owner and the homeowner. This enables the homeowner—who is likely at risk of foreclosure and losing his/her home—to stay in the home and make payments to the self-directed IRA that now holds the note.
Meanwhile, the IRA generates passive income as the full value of the note is repaid, along with the interest agreed upon by both parties. Plus, the investor builds a more diverse retirement portfolio and a hedge against stock market volatility by including private alternate assets in the IRA.
Example of a distressed mortgage note investment:
- John and Lisa owe $250,000 on their home and their mortgage has an interest rate of 3%. However, John lost his job last year due to the pandemic and Lisa’s salary doesn’t cover all household expenses.
- They are unable to make their mortgage payments and are in danger of foreclosure.
- Sandra has a self-directed IRA and picks up that mortgage for $212,500 (a 15% discount) from the lender that is off-loading a “toxic” loan.
- Sandra works out new payment terms with John and Lisa for the full $250,000 mortgage amount but at a lower interest rate, for a longer term to spread out their payments.
- Sandra’s self-directed IRA makes the extra $37,5000 on that loan amount plus interest.
- John and Lisa get to stay in their home while they work out their finances.
Due diligence on distressed mortgages
Self-directed investors are accustomed to doing due diligence on their potential investments, and distressed mortgages should be no exception. Like any investment, these notes can carry risks, especially since the buyer (the self-directed IRA) becomes the creditor.
For example, what if the homeowner defaults? The self-directed investor would be wise to research foreclosure laws in that state to ensure they have a backup plan. In addition:
- Although the loan is secured by the real estate as collateral, it’s critical to know the property’s current value by hiring a professional appraiser.
- Know the original loan terms – it sounds elementary but be sure to have the interest rate, timeline, and amount borrowed documented so you can evaluate the value of the investment opportunity.
- Vet the borrower’s credit history and ability to repay the loan.
- Consult a trusted advisor about any tax liabilities the investment may incur.
If the investor decides not to work with the homeowners, the self-directed IRA can resell the property or retain it as a rental investment. Again, as with any self-directed investment, it is the responsibility of the account holder to ensure due diligence, full transparency, and a clear understanding of all tax and legal ramifications.
Where to find nonperforming mortgages for investment
Although lenders will typically sell these notes to get them off their books, there are also online marketplaces and trading platforms that sell notes. However, expect to pay more for these notes than buying direct, as these are retail resellers. You can also invest in a company that buys nonperforming mortgages from banks at steep discounts.
At Next Generation, many of our clients include real estate as well as secured and unsecured loans within their self-directed retirement portfolios. Adding distressed mortgage debt is another valuable way to build retirement savings through alternative assets—with the potential of helping homeowners stay in their homes. If you have questions about this or other alternative assets allowed through self-direction, feel free to schedule a complimentary education session with someone from our team. You can also email NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Amid Stock Market Downturn, Consider Self-Directed IRAs
Many investors are dealing with yet another stock market downturn, which is in reaction to current events such as global concerns about the Coronavirus and U.S. politics during an election year. These and other factors—from geopolitics to macroeconomics, trade issues to plant closings to a company’s profitability and earnings—can influence a stock market downturn.
Stocks by nature are volatile, which is why many investors look to alternative assets to build their retirement savings and avoid stock market downturns that are often hard to predict. That means looking at self-directed IRAs, which allow individuals to include a variety of nontraditional investments and build a more diverse retirement portfolio based on assets they already know and understand.
Look at it this way: unless they work there, many people are not experts on what a Blue Chip or Fortune 500 company produces or sells, and they certainly cannot control what those companies do in the marketplace. However, many people know a lot about investing in real estate, precious metals, or private equity. Others like the idea of including secured or unsecured loans in their retirement plan, with terms they determine with the borrower. All of these investment types can be included in a self-directed IRA, where investors build retirement wealth with alternative assets—and have better control over their earnings.
A self-directed IRA has the same tax advantages as regular retirement plans with the added bonus of being a great hedge against stock market volatility. For those who are comfortable making their own investment decisions and conducting their due diligence, self-direction is a powerful retirement strategy.
Typical retirement plans offered by brokerage houses or banks limit investors to publicly traded stocks, bonds, certificates of deposit, and mutual or exchange-traded funds. But a self-directed IRA allows you to hold the alternative investments noted above plus notes, private placements, limited partnerships, tax lien certificates and more.
Our whitepaper library has a lot of great information about self-directed IRAs and our helpful team is here to answer your questions about self-direction. To find out more about self-direction, you may call us at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com. Alternatively, you can sign up for a complimentary educational session with one of our knowledgeable representatives.
Get a RISE Out of Your Retirement Savings
You’ve been contributing to your IRA or employer-sponsored retirement plan—but are you retirement-ready or on track to be? Many Americans are not saving enough, or quickly enough, to sail smoothly into a comfortable retirement. Moreover, they are not properly calculating their anticipated expenses during their later years.
The Retirement Income Security Evaluation (RISE) is an online tool that evaluates where individuals are along their path to retirement in terms of their savings and their necessary income needed for the future. Based on data you provide, RISE gives you a score that measures how well you’ll be able to live on what you have saved today. The tool was developed by a provider of actuarial products and services and is provided by the Alliance for Lifetime Income, a non-profit organization. It’s flexible, so users can adjust data to see how they’d fare based on different financial information.
Consumers are asked to input their expected Social Security income, pension income if relevant, current savings, and their monthly living and medical expenses. The tool then calculates a score that tells users how well they can expect to live based on today’s numbers. Many people may be surprised by the gap their score reveals, since health care expenses are often left out of the equation—and can run into the thousands annually in a person’s later years. Plus, depending on the source, financial institutions recommend having up to 10 times your pre-retirement annual income in your retirement plans as a savings benchmark.
Knowing your score and where you stand can help you gauge whether you may need to ramp up your savings or—in the case of self-directed investors—further diversify your retirement portfolio with alternative assets.
Self-direction empowers individuals to achieve their retirement goals in more unique ways, by including nontraditional investments in their plans. These investments—such as real estate, private equity, unsecured or secured loans, precious metals, and more—have the potential to return greater ROI than the stock market and provide a hedge against market volatility. Savvy investors who are comfortable making their own investment decisions can invest in what they already know and understand, and take advantage of certain market opportunities.
If you’re thinking about how to boost your retirement score through self-direction, you can learn more about this strategy in one of Next Generation’s complimentary educational sessions. Or, you can contact our team with any questions about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.
Next Generation Trust Company (“NGTC”) does not review the merits or legitimacy of any investment. NGTC does not endorse or recommend any companies, products, services or investments. NGTC does not provide any financial, legal or investment advice.
If the services of NGTC were recommended by any third party, such persons or entities are not in any way affiliated with NGTC. All information provided is for educational purposes only. All parties are encouraged to consult with their professional advisors prior to making any investments.
Next Generation Services (NGS) is a third-party administrator of self-directed retirement plans, located in Roseland, New Jersey. NGS handles all the back office administration, record keeping, mandatory reporting, and transaction support. Accounts are named with Next Generation Trust Company as the custodian and holder of assets, for benefit of the individual account.
NGS does not review the merits or legitimacy of any investment. NGS does not endorse or recommend any companies, products, services or investments. NGS does not provide any financial, legal or investment advice.
If the services of NGS were recommended by any third party, such persons or entities are not in any way affiliated with NGS. Next Generation Services is not a “fiduciary” as defined in the IRC, ERISA, and/or any applicable federal, state or local laws. All information provided is for educational purposes only. All parties are encouraged to consult with their professional advisors prior to making any investments.