Ask David

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David, can you explain how I can use my Roth IRA to purchase the back-end of a note at a large discount and grow my small balance Roth account faster?

Anonymous question from dentist at Note Expo conference where David spoke recently.

David’s Answer:

This is a great question around a technique that can super-leverage a Roth, Health Savings Account, or Coverdell Education Savings Account which are, for most people, relatively small-balance (often under $10,000) accounts. This technique can grow these small accounts very quickly.

You contract through your retirement account to purchase a real-estate secured note at a discount with a yield return of 10% plus. The term (number of years) on the note is not significant but will play into the yield return that you are able to negotiate – longer term = larger discount.

You find another investor who has money inside or outside of a retirement account that he/she would be happy to have a very secure 5-6% interest rate return secured by real estate.

You sell the number of front end cash flow payments of this note to your investor at his desired yield (5-6%) to provide the total capital necessary to purchase the entire note at your yield (10% plus) less $1,000 give or take.

To close, your retirement account sends in your $1,000 and your investor friend sends in the remainder of the money to the attorney escrow title company to fund the note acquisition.

The note servicing is set up with a licensed note servicer. The servicer will manage the payments and send the appropriate number to the investor after which time the remainder (back end) payments of the note will be sent to your retirement account. Should the note pay off early (they often do), your retirement account yield will only be greater than the original yield discount at which the note was obtained.

What you need to do this:

• A small balance retirement account that you want to grow significantly (tip: anyone can have one or more of these accounts)

• The retirement account must be held (administered) by a self-directed custodian (there are many licensed and approved by the IRS)

• Access to note-receivables secured by real estate (Freedom Founders)

• A financial friends community (Freedom Founders)

• A basic knowledge of present value concepts (Freedom Founders)

• A note servicing company (there are multiple available to do this)

Only through real estate investment assets is this possible.

This is a somewhat complex transaction to explain in a Q/A format. Simply know that it is a very doable concept that can provide returns to the self-directed IRA account in the high double digits.

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