How to Harness the Power of Nonperforming Notes

It’s no news to anyone that you can use your self-directed IRA to invest in real estate. Many investors use their IRA accounts to purchase real estate and to make private or hard money loans to other investors, but many forget they can use the power of their IRAs in the nonperforming note investing arena. And while you can’t directly “touch” the assets or work on the real estate in your IRA, you can “scratch that itch” through nonperforming notes.

I’ve been buying distressed notes on residential and commercial properties all across the country since 2008, and I’m a big believer in the power of using notes to turn IRAs into investment beasts that can really fatten your bottom line when it comes to your retirement. There are many different types of self-directed accounts available to real estate investors, and it’s important to your future self to start putting your dollars to work now! Roth, Traditional, SEP, Simple, Coverdale and HSAs all can be self-directed to help you put a chunk of money into your retirement and real estate investment strategies.

We work with a ton of investors, and over half of the assets that we have under management were funded with self-directed funds. Whether you are looking for steady growth or larger “chunks” to pad your IRA account, nonperforming notes are an amazing vehicle to do so without all the headaches of toilet and tenants. I’d much rather “rehab the borrower” instead of rehabbing the house! We like to focus on “taking problem properties and turning them into profitable solutions” for ourselves and our investors.

Steady growth is exactly what Poppy Friske was seeking with her self-directed IRA that funded a nonperforming note deal in Pensacola, Fla. The borrowers were interested in keeping the property even though they were way underwater and their original payments were way over market rents. Picking up the note on the house—now worth $47,000—at an investment of $25,000 and then getting the borrowers to modify their loan payment to $500 a month is a real win-win.

After 12 months of on-time payments, Poppy should be able to sell the now-performing asset at 85 percent or better of the now-appreciated value of $52,000. This will result in a very nice ROI for her self-directed IRA and her joint venture partner who brought her the deal. Poppy will end up seeing around a 40 percent ROI in 12 months.

While many investors are looking for steady cash flow, some investors want bigger chunks, and they want to avoid the tax consequences, if at all possible.

“Investing in real estate with your self-directed IRA is a no-brainer,” says Plano, Texas, investor Kimberly Banks Fawcett. “Many investors don’t consider the tax implications of their investments until they have the tax bill in hand. When you invest tax-free, that’s one surprise you can avoid. And it is a very easy account to set up and manage.”

Her favorite self-directed IRA deal was a nonperforming note in Lehigh Acres, Fla. She got a sweetheart deal on a foreclosure that was to be held only 12 days after funding. “I paid $49,000 on the 11th, and the home sold for $87,000 on the 23rd. Cash-on-cash return of 83.9 percent, tax-free,” Fawcett says with a big smile on her face. “Not every deal turns out like that, of course. But every self-directed IRA deal keeps more of your return in your pocket, making every deal pretty sweet. “

One of the beautiful things you can do with notes through your IRA portfolio is to grow cash flow and capital. Servicing companies, loss mitigation and foreclosure attorneys help streamline the workout and foreclosure time frames. The reduced investment amount allows investors to move REOs to local fix-and-flip rehabbers at a price that really creates a win-win scenario for all parties.

Let’s say I pick up a note at 50 percent or less of value, in decent but not perfect shape. After I foreclose or take a deed in lieu, I can often move it to someone in the local market without having to hire a crew to try to squeeze out every penny in the deal—like most rehabbers with higher margins do. I’m in the paper game. My goal is not to create more work for me, but to leverage my vendors and investors’ IRAs to achieve phenomenal returns that they wouldn’t be able to find on their own!

  • Scott Carson

    Scott Carson is founder and CEO of Inverse Investments, a Texas-based real estate investment company that focuses on buying pools of distressed assets on residential and commercial properties directly from banks and hedge funds. Carson also is a featured speaker and educator at dozens of investment clubs and real estate workshops across the country. 512-238-3018

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