Blog with MAE Capital

Self-Directing IRAs and Savings Accounts

May 27th, 2015 3:18 PM by Gregg Mower

Self-Directing your investments either from your IRA or your savings in Notes and Deeds of Trusts is a little known activity that can dramatically increase your returns on your investments.  Most folks just listen to their Stock Broker when it comes to their IRA or retirement funds as to the investment they should be in according to their age.  This has traditionally been a good practice, but have you really studied your investment statements to see how much of your money is being spent on this service?  That’s right your retirement funds are being skimmed off for brokerage fees and management fees and those fees add up.  Those fees come directly out of your funds and you have no control over it.  Did you know that you, by law, have the ability to self-direct your IRA?  The fact is that you can choose the investments like Real Estate and Notes and Deeds to hold in your IRA account.  You may have heard about this and asked your Stock Broker about this and they discouraged you from doing this as you would need a custodian to take care of the accounting and most stock brokers do not undertake this as they don’t get paid to do so.  A Stock Broker makes money every time you invest in a stock either buying or selling, they also can charge a management fee.  A Stock Broker will not be able to collect those fees if you are self-directing your funds into Real Estate or Notes so they will tend to discourage you from taking control of your funds as they will lose out on money.

*Self-Directing your IRA or Retirement funds has to be done with the use of custodian that can do the accounting for you.  If you look at the costs you will find them significantly less than brokerage fees.  If you have followed Real Estate and the laws that have changed over the last several years you will see that the laws have opened up and area within the Real Estate Lending industry for private investors.  With tightening of credit in the primary lending markets such as owner occupied loans and Conventional, FHA, VA, and Jumbo loans you will see that there is a need for loans to investors to flip homes,  commercial loans, land loans, and construction loans.  These loans come with a higher perceived risk, thus they have higher interest rates which equates to higher returns to those who lend in this arena (generally 8-12%). With the perceived risk being higher to the borrower the actual risk to the investor is really quite low done properly.  This is done by restricting the lending to a lower loan–to-value (LTV).  What a low LTV does is twofold; one it makes a borrower put down a large down payment or have significant equity in a property and that will generally insure that they will not want to default and lose the property and do everything in their power pay monthly; and two the investor who is invested in the Note holds the property as security for the loan so if the borrower defaults the investor gets to sell the property and they get their money back and sometimes can finish the project and make a large return on the equity in the property.   If you are using your IRA funds all returns are non-taxable until you use them at retirement time which means you can grow your money even faster by using un- taxed dollars to churn you investments.  By acting as a lender with your own funds you will act like a bank and you will be privy to the high returns, but how do you get started in investing in Notes and Deeds or Real Estate? 

Here at MAE Capital Real Estate and Loan we can help you with picking the right custodian to use as we have used them for our own funds.  As a Broker we can help you with your interments either into Notes and Deeds or Real Estate directly.  We work directly with the custodian so your funds are directed property and will keep you legal.  The law states you can lend your money to others for Real Estate up to 8 times a year without the services of a Licensed Broker.  However most would choose to use the services of a Broker as they will be more protected by using a Broker, as the Broker must adhere to a strict set of rules when handling other people’s money.  The system is easy with no costs to the lender to use a broker and the yields are far greater than that of a Bank.

What you need to know when deciding to invest in Notes and Deeds?  First is the terminology, there are many new words that you should get comfortable with.  The first of which is what is a Note and a Deed of Trust.  The Note, or Promissory Note, is the written paper or contract between the Lender and a Borrower stating the terms of the loan and how it will be paid back.  The Deed of Trust, in California, assigns a trustee, or a Third party to be in charge of foreclosure proceedings and as is the document that is recorded at the county that secures the Note legally.  Sounds like a mouthful, but to keep it simple the Deed of Trust secures the Note and are the legal instruments that bind the Borrower and lender together until the loan is paid in full.  A Real Estate Broker like MAE Capital Mortgage can prepare these documents and make sure they are legal binding instruments and that they are handled correctly.

The next thing you need to know is how the system works.  The system is generally pretty easy.  Once you have decided to invest some of your money, you need to know who to give your money to and how it will be handled.  The very first thing I would suggest is that you do not give your money directly to a Broker and ask them to invest it.  This is very important, as you should be advised of the investment you are making before giving any money.  At MAE Capital Real Estate and Loan we furnish you with the RE 35 (Investor Booklet) and RE 870 (Investor Questionnaire), to determine your financial situation as an investor. Then when MAE Capital presents you with an investment opportunity we provide you the RE 851 (Individual loan information form) that spells out the qualifications of the Borrower and the terms of the transaction.  At MAE Capital Real estate and Loan we provide you with the loan application, appraisal, and preliminary title report, and credit report and the purpose of the loan.  The risks of the transaction are outlined and detailed so you can make the decision to invest or not, such as the Loan-to-value, credit, ability to repay, and exit strategy.  Generally, the higher the risk to the Lender the higher rate of return the Lender will have.  Conversely, the lower the risk the lower the return, and as an investor your risk assessment will become obvious.  So once you have determined that this is an investment for you, and the terms of the transaction are acceptable for your return objectives, we will draw up the legal documents for you and the borrower to sign.  At MAE Capital Real Estate and Loan we will insist on using an Escrow company that will issue title insurance, to protect you, as well as act as a disinterested third party that will bring Buyer, Seller, and Lender together in a neutral setting at different times.  Once the buyer has signed all the legal documents you, as the Lender, will be instructed by us, the Broker, to wire funds directly to the Escrow Company, as your Broker we do not have direct contact with your money.  Before we allow you to fund the transaction we have made sure the Title Insurance is correct, and that there is a hazard insurance policy in place in case of a catastrophe.  Before the loan has funded we have set up the servicing of the loan for you.  Servicing the loan means the collection of payments and the dealing with the borrower throughout the term of the loan.  There will generally be a nominal fee to do so in addition to a “servicing spread” that is built in the loan paid by the borrower.  For example; a servicing spread is the difference between the interest rate collected from the borrower and the rate of interest paid to the Investor/Lender.  If the Note was written at 11% and the Lender (you) was promised to receive 10% the 1% difference is the servicing spread paid to broker every month. 

The Self-Direct IRA can also be used to buy and hold Real Estate as well.  So if you are into investing into rental property and receiving rent every month as return on investment you can do this as well.  The returns would be deposited to your custodial account every month tax free.  You could also buy and sell real estate in your IRA.  So if you already have a rental in your IRA you can sell it and invest into another piece or pieces of property all tax free.  At MAE Capital Real Estate Loan we can show you how this is done for you and help you set up your custodial account to manage it. 

I sincerely hope this has helped you with information to make decision on.  We at MAE Capital Real Estate and Loan are here to help with your Self-Directing funding needs.  If you would like more information or to talk with a Broker to go over your needs please click here and complete the quick information or give us a call at 916-672-6130.


*Click the link will take you to MAE Capital Mortgage’s Self-Directed IRA pages



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