First note inside the Roth is paying, after the form nearly went out in my name

A year of reading about paper and I still understand maybe a third of it. Bought a small performing first position note inside a Roth SDIRA last month and it's now made two payments, so I'll call it a win with a small w.

The numbers, since that's what's useful. Face $28,500, remaining balance $27,140, 8.5 percent, 14 years left, payment $246 a month principal and interest. Bought at 89 for $24,155. Borrower has 31 months of clean pay history and the property is a modest single family in a small southern market, tax assessed around $61,000, so the loan to value is comfortable even if the assessment is soft.

Why inside the IRA: interest income is exempt from UBIT, I didn't borrow anything to buy it, so there's no debt-financed piece and nothing to file. It just accrues in the account. That was the appeal, no property to maintain and no contractor to not-be-allowed-to-hire.

What nearly broke it: I filled out the direction of investment form and put myself on the payee and assignment lines, because that's who I think of as the buyer. The custodian's processor caught it and sent it back. If she hadn't, I'd have had a note assigned to me personally that my IRA had paid for, which as I understand it is roughly the worst version of this.

Second thing: I hadn't set up servicing before I bought. Payments were going to a servicer the seller used and I had to file a transfer of servicing plus a hello/goodbye letter to the borrower. That took three weeks and I got the first payment late as a result.

Still mostly confused about a lot of this, but the mechanics of one small note I now understand.

Answer

2renee_dubois Get yours

@compass the original note should be endorsed to the custodian FBO the IRA and held by the custodian or their designated document holder, not by you. Most custodians will take physical custody of the original and record the assignment of mortgage or deed of trust in the county. Recording practice differs by state, so confirm with your custodian which of them is responsible for getting the assignment recorded, because I've seen it fall between the two and sit unrecorded for months.

@vellum on the servicing: don't self-service. Ever. You collecting the payment, even to forward it, is you providing a service to the asset, and the borrower's check made out to you personally is a mess you don't want to explain. A licensed third party servicer costs somewhere around $20 to $30 a month per loan and remits directly to the custodian. It's the cheapest compliance you'll ever buy.

The reserve point @verity raised is the one I'd act on this week. If that borrower goes 90 days down, you need the IRA to be able to pay a foreclosure attorney, the property taxes to protect your position, and possibly insurance. On a note that size I'd want $8,000 to $10,000 of cash sitting in the account and never touched. Your contribution limit won't refill that fast if it drains.

Also get the loan servicing history and the original title policy from the seller if you didn't. Two years from now you'll need them and the seller won't answer the phone.

9 replies

1tylerbrooks9PassivePRO5

This is the boring kind of thing I keep looking for. No tenants, no roof, no forms except once a year. What's your plan if the borrower stops paying, though? Foreclosure costs money and the money has to come out of the IRA, and $24,000 of purchase price doesn't leave much room for a $6,000 legal bill.

3jessreyes12AU1APRO8

Asking the thing I'd have been embarrassed to ask: who physically holds the original note? Is the paper sitting in a file at the custodian, or does the servicer have it, or is it in your desk drawer? Because if it's in your desk drawer that sounds like it might be a problem and I genuinely don't know.

1paulgrant17PassivePRO5

The payee line thing is going to happen to me, I can already feel it.

2tonyv88SO4CPRO6

Three weeks for a servicing transfer sounds fast to me honestly. I've seen six.

3chriswalton8CC1CPRO8

Buying at 89 on a 31 month clean pay history is a reasonable price. What I'd want to know is whether the borrower's payment history predates the current servicer, because a lot of "31 months clean" turns out to be 31 months of a servicer who never reported anything.

Also, what's the escrow situation? If taxes and insurance aren't escrowed, you're relying on the borrower to pay a tax bill you can't see, and the first you'll hear about it is a certificate sale notice.

1stephen_ok9CO2CPRO6

Running your yield: $246 a month on $24,155 in is $2,952 a year, about 12.2 percent current yield, plus the pull to par over 14 years. Minus servicing at say $300 a year and a share of the custodian fee, call it $2,300 net, so around 9.5 percent tax free if it pays to term.

That's a real number. It's also one borrower. The thing I'd think about is what happens when it pays off in year four because they refinance, and you've got $26,000 of cash sitting in a Roth with nothing to buy.

1joe_delgado5AP4CPRO6

Assessed value isn't value. Get a drive-by BPO for two hundred bucks and know what you actually have.

3carlos_nunezActive

@flint is right and I'd add: check whether property taxes are current, right now, today. County site, ten minutes. I bought a note once where the borrower had been paying me perfectly for a year while three years of taxes went delinquent behind me.