Investing in Trust Deeds with a Self-Directed IRA

Real estate investment provides an excellent way to build wealth and equity, but not every investor wants to go through the hassle of buying and managing investment properties. For those who are interested in real estate investing but don’t want to follow traditional real-estate purchasing routes, investing in trust deeds with a self-directed IRA can make a great deal of sense. Trust deed investing is a well-known, widely used form of real estate investment that are popular because trust deeds can offer some measure of security against losses.

Understanding Trust Deed Investing and Your IRA

As their name suggests, trust deeds are granted to investors who purchase all or some portion of an individual’s debt to a private lender in exchange for a promise to repay the loan plus interest. Trust deeds are offered for a variety of reasons, but in many cases borrowers find themselves unable to make mortgage payments and choose to work with private real estate investors instead of going through foreclosure. The value of the loan is backed by the property, so if the borrower fails to pay back the investor, some or all of the real estate investment may be recouped by selling the property.

Getting Started Investing In Trust Deeds With A Self-Directed IRA

Investors who are new to the real estate game or who want to invest only a limited amount of money are well served by considering trust deed investing. When you use trust deed investing income to build your IRA, you create a stream of tax-free, passive income designed to secure your future. Though the process might seem confusing at first, trust deed investing via your self-directed IRA is relatively simple:

  • A borrower or group of borrowers executes a note payable to a private real estate investor, which is backed by a deed of trust on a recorded, clear property.
  • The borrower promises to pay back the total amount of the loan plus interest in monthly payments over a set amount of time.
  • Monthly payments are directed to your IRA, which may result in a higher-yielding return for your IRA.

Choosing The Right Strategy For Investing In Trust Deeds

For many real estate investors, trust deed investing through a single borrower in one trust deed may seem too risky. While you might be able to recoup some or all of your investment if the borrower defaults, it’s important that you take time to thoroughly evaluate the security of your investment when investing in trust deeds using a self-directed IRA. Choosing an investment fund, which works much like a mutual fund, can help to lessen real estate investment risks and increase potential returns.

Simplified Real Estate Investing With Trust Deeds

Investment funds are group-driven funds that invest in a large group of trust deeds, which is another great option for investing in trust deeds with self-directed IRAs. In this system, the default of one borrower has a small overall effect on the investments of all fund participants. Consolidating the investment process into a fund can also make a great deal of sense for busy investors who want to use their self-directed IRAs to make the most of their trust deeds investments. After all, when a borrower defaults, you won’t be individually responsible for taking over and selling the property.

As with any investment, you should weigh the decision to use a self-directed IRA to purchase trust deeds carefully. Remember that it’s important to talk with financial, legal and tax advisors before investing.

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