Flat annual custodian fee or a percent of assets, when the first thing I fund is one 40k note

Read the fee schedule attachment, not the summary page. The flat quotes I've seen carry separate charges that don't 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 some will charge you to process it. Ask them 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.

I'd add a third question to the two you're weighing, 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 you a deal, and no fee schedule captures that.

@anchor 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 you pick. Estimate loans funded per year, payoffs per year, wires, and one valuation per asset. Multiply. On a note book that turns twice a year the transaction charges under the flat plan were the larger number for me until the account crossed about 180k. Your numbers will land somewhere else because your loan count is different, but do the arithmetic rather than the vibe.

Dumb question from someone still learning what a note even is: does the custodian collect the monthly payments from the borrower, or does that go somewhere else? Because that sounds like it would also carry a fee and I don't see it in either model you described.

@vellum it's usually a separate servicer, and yes, 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 for the phone 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 I'd hunt for is the termination and transfer-out fee. Both models can hide a few hundred dollars there, and if @meridian's plan is to switch once you know your activity level, that fee is the actual price of the experiment. Also check 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.

@pike that's true right up until the transaction charges are 90 a wire and you're funding eight loans a year plus payoffs. That's 1,400 before you've counted anything else, on 60k. Not nothing. Percentage at 0.5 would be 300. The crossover point is real and it's worth finding.

Notes and lending inside one of these accounts is the cleanest fit I've found, since interest is passive income and doesn't drag the UBIT machinery in the way a leveraged property does. Which means your 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.

Coming at it from running a small business, I'd take the predictable bill. I can plan around a flat number and a known per-wire cost. A percentage that grows with the account is a bill I can't forecast without also forecasting my returns, and I'd rather not tie those two together.

@thatch 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.