Flat annual custodian fee or a percent of assets, when funding one 40k note first?

Read the fee schedule attachment, not the summary page. Flat fee quotes often carry separate charges that do not appear in the headline: wire out, paper check, document review, expedited funding, annual valuation for any asset without a market price. That last one is the one people miss on a note book, because some custodians want a year end value statement on every private asset and will charge to process it. Ask in writing which of those apply to a mortgage note held direct.

At 60k the percentage model is almost always cheaper in year one and almost always worse by year six. That's the whole trade.

Worth adding a third question to the two being weighed, which is funding speed. Ask how long from signed direction letter to wire sent, and get the answer in writing. A custodian that takes five business days can cost an investor a deal, and no fee schedule captures that.

@ehernandez74 is right about speed and I'd push it further. Ask them what happens when the direction letter has an error. Some kick it back and restart the clock, some call you. That difference has mattered more to me than a couple hundred dollars a year.

Run it as a table before picking. Estimate loans funded per year, payoffs per year, wires, and one valuation per asset, then multiply. On a note book that turns twice a year, take an example account funding one 40k note first: the transaction charges under the flat plan are typically the larger number until the account crosses roughly 180k. The exact crossover moves with the loan count, but do the arithmetic rather than the vibe.

Worth asking directly for anyone new to notes: does the custodian collect the monthly payments from the borrower, or does that route somewhere else? That step tends to carry its own fee and doesn't always show up in either fee model on offer.

@raj_mehta14 it's usually a separate servicer, and yes, a separate cost. Some custodians will accept payments directly into the account and some will insist on a third-party servicer for anything with an amortization schedule. That's another question worth putting to the custodian directly on the call.

I went percentage because I didn't know my transaction count yet, and after a year I did know and switched. Transfers between custodians are annoying but not impossible. Picking wrong isn't permanent.

The clause worth hunting for is the termination and transfer-out fee. Both models can hide a few hundred dollars there, and if @stephen_ok9's plan is to switch once activity level is known, that fee is the actual price of the experiment. Also worth checking whether they charge per asset to transfer out or per account.

Flat, and I'd stop overthinking it. On a small account the dollars either way are smaller than one bad month of vacancy on a rental, and the thing that will actually cost you is a paperwork mistake.

@jordan_ellis2 that's true right up until the transaction charges are 90 a wire and someone is funding eight loans a year plus payoffs. That's 1,400 before anything else is counted, on a 60k account. Not nothing. Percentage at 0.5 would run about 300. The crossover point is real and worth finding before choosing a custodian.

Notes and lending inside one of these accounts tend to be the cleanest fit, since interest is passive income and does not drag the UBIT machinery in the way a leveraged property does. Which means the fee question is basically the whole cost side. Worth getting right.

Ask both custodians how many self-directed accounts holding private mortgage notes they administer. Not total accounts. The one that mostly holds precious metals will treat your loan file like an exception every single time.

From a small business owner's perspective, the predictable bill tends to win out. A flat number plus a known per-wire cost is easy to plan around. A percentage that grows with the account is a bill that can't be forecast without also forecasting returns, and tying those two together rarely serves the account holder well.

@monica_tran3 that's the argument that moved me. Predictable beats slightly cheaper when you're new and still learning where the other costs are hiding.

One more thing to ask about, from the trades side of my brain: who signs what. If a borrower needs a subordination or a partial release signed, does the custodian sign it, how long does it take, and do they charge for document review? That's the moment the cheap custodian gets expensive.