Self Directed IRA Investing

When I am investing my Self Directed IRA money I make extra sure I know what the Face Value is of the Note I’m interested in buying.  

Face Value of a Note is a pretty simple idea.  It’s basically the value of the Note when it was originated or in very simple terms the amount printed on it.  On the Top of the Note it will say FOR VALUE RECIEVED _________.  It’s the Number printed in the line that is the Face Value. 

However if the Note has been paid for a while the Face Value and the Actual Value can be way different.   You certianly want to know the amount of money you are buying the Note for, and generally it won’t be for Face Value.  This is where you can lose serious money if your not sure of what you are buying.  Here’s an example:

I sell you a car for $10,000 at 6% interest and payments of $200.00 a month for 58 months.  I keep the Note for my Self Directed IRA.  In the very beginning (month 1) the Face Value is $10,000 because you haven’t paid 1 month yet.  

After paying for 55 months the balance or Actual Value of the Note is $531.13.  That’s how much there is  left to pay to the Note Holder but the Face Value on the Note still says $10,000.

Using your Financial Calculator  you can figure out what the difference is between the Face Value and the Actual Value of any Note you are considering buying for your Self Directed IRA.

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Loan to Value or LTV is very important to understand when buying Notes for or loaning money out of your Self Directed IRA.  Simply put LTV is the % debt to value for a specific property. 

The reason it’s important is you want to make sure your total cash investment is less than what the property will sell for at the Foreclosure auction.   A good figure of thumb for that is around 70% or less.  So in the case of a SFR property valued at 100,000 you want to make sure you are into it less than 70,000.   So the lower the LTV the safer your investment is.

Loan Position also needs to be taken into account as well in this equation.   In the above example if  the house was free and clear, meaning that there was no mortgages on it.  You could loan up to 70,000 and feel safe if the borrower didn’t pay, you could foreclose and get your money back at the auction.  

However if you did the same thing and there was a first mortgage already for 30,000 then your combined LTV would be at 100% in second position and you would be really risking 30,000 of your money if the borrower defaults.  Not a good investment in my mind. 

For different types of property the LTV is different. 

1. For example on Raw Land, meaning not improved, I will not go any higher than 50%. 
2. For a mobile home in a park I feel most comfortable no more than 60% LTV. 
3. For Single Family homes I’ll go as high as 70% and in the rare case depending on the borrower, location, age of home, I’ll go as high as 80%.

My best investments so far have been really low LTV, like less than 20% in first position on SFR.  I’ll buy notes like this all day and I have several in my Self Directed IRA.  I sleep just fine even though the property and borrowers are a few thousand miles away from my home, because the LTV is so low.

Lastly LTV is one of those things that will help you determine if your make a safe or risky investment.

There are a 2 basic types of IRA accounts and both are complicated enough in their restrictions and benefits. They are the Standard or Traditional and the ROTH IRA.  There are plenty of other retirement accounts like the 401K, Solo401K, Roth401k, SEP, Simple IRA, Keough, but to make this a little easier to understand and to make my point I’m just illustrating the scenario with the Traditional and ROTH IRA’s.

The Traditional IRA is nice because you can take deductions on your taxes when you contribute as long as you qualify with the rules.  You then invest the money and because of the compound interest effect you can amass great sums of money.  The problem with the Traditional IRA that hardly anyone focuses on is that on withdrawal at retirement you will PAY TAXES on any GAINS you have made!  In effect reducing the size of your golden egg significantly.  To me that is defeating the purpose.

Now don’t get me wrong I have a Self Directed Traditional IRA account.  I even invest it’s money into Notes.  The difference for me is that is not my Main Retirement account.

 My Main Self Directed Retirement account is a ROTH IRA, for 1 reason and 1 reason only and that is GAINS and WITHDRAWLS at retirement are TAX FREE.  Of course that is unless Congress decides to amend the rules someday, but if that happens there will be so many folks complaining and making a fuss so I don’t think that will happen. 

The benefit of the ROTH IRA is that you pay taxes on the money you put in first, then invest it and compounding will create that large Golden Egg for retirement.  I would rather pay taxes up front and then be able to use that money tax free for 30 years to invest at 15% interest or better than do the reverse.

I think unless you are real close to retirement right now there is only 1 account to use and that is a ROTH IRA. 

You can of course invest in Notes in a Taxabale account but that defeats the purpose for retirement funds.  What I do is keep my IRA money working first and if I still find good Note opportunities I use my cash or borrow money to invest.