USING IRA’S AND OTHER RETIREMENT ACCOUNTS TO BUY NOTES
The biggest hurdle to get over for note investors is the problem of the discount. For the most part, the note holder has done little or no due diligence before agreeing to carry the paper. Yet they expect the note buyer to ignore underwriting the risk by paying them “full price” for the note. I even had one seller who multiplied his payment ($475.57) times the number of remaining payments (113) and insisted he deserved $53,739.41 for his note. Obviously the concept of the Time Value of Money was simple beyond his understanding.
We have reasonable success in overcoming this objection by using the following in our marketing:
WE CAN PAY YOU FULL PRICE FOR YOUR NOTE, IF YOU WILL GIVE US A TIME CONSESSION ON SOME OF THE MONEY!
If I may digress for just a minute, we use a contract with local investors and or our IRA sources that do not require any personal liability on our part. The investor looks to the underlying collateral to make him/her whole in the event of default.
As you no doubt know, growth inside a retirement account is either tax deferred or if it is a ROTH, it is TAX FREE for ever. Since there is no tax, IRA owners will accept lower returns. Think of the low rates on TAX FREE municipal bonds. Look at the chart below:
Yield on the Note Tax Bracket Tax Bracket Tax Bracket
10.00% 28% = 13.89% 32% = 14.71% 35% = 15.38
In other words, if income taxes are involved, the yield has to be the greater amount in order to net 10%. One note of caution even though they might except less then 10%, never sell a note for a yield less then the note rate, as there could be a problem in the event of an early pay-off.
You find the following note:
16 payments have been made on time
After a long discussion with the note seller, he admits that $37,500 would solve his problem. You offer to buy ½ of the note for ½ of the remaining payments. “I know you only need $37,500, but I’ll pay you $39,102.55. Will that be OK?”
I = 19.96
You offer an IRA a yield = to the note rate of 10.00% and they agree. You now have several choices
Sell all the payments to the IRA and make $16,967.92
$56,070.47 – $39,102.55 = $16,967.92
Keep $150 per month and make $6,073.68 up front and get $16,800 in payments over time.
Remember if you buy the note inside your own IRA, and then sell it to an investor, the profit goes NOT TO YOU, BUT YOU’RE IRA. If you buy the note and then flip it to someone else’s IRA, you can keep the cash flow and profits for yourself.
There is literally over a TRILLION Dollars in IRA’s Using these funds will make you more competitive in the note and real estate game.