As a private investor, you can act as a bank using your 401k funds alone to fund an investment in trust deed. Of course, the 401k alone that you have should be of the self-directed 401k type so that you can invest in any type of non-traditional investment options, including real estate, mortgage promissory notes, private businesses, and other types that are not related to stocks and hedge funds. investment. Like a bank, you can use your retirement money to lend an amount to the debtor in exchange for a promissory note that is backed by a deed of trust that allows the debtor’s real estate asset as collateral for the loan.
The promissory notes must contain important details of the payment schedule. The promissory note will serve as the legal bond between you and the borrower. Important details should include the amount of the promise to pay, the frequency of payment, the interest rate, and the maturity of the loan. The good thing about this type of investment is that you have the term of the loan due to the details stipulated in the promissory note issued by the borrower. You will learn how much you could earn and can plan ahead what to do next or where to invest your individual 401k funds after the loan is due or when it is fully repaid.
Typically 65% of the value of the real estate asset is the amount that you can lend to the borrower. Like a bank, you have the ability to earn on the interest rate charged on the loan. However, just like in other businesses and investments, risks are always involved. In investing in a trust deed, the risk that can arise is when the loan goes through foreclosure. This happens when the borrower does not make loan payments for several consecutive payment schedules.
Since the loan is backed by collateral, the risk may not be as disruptive as compared to the risks of investing in stocks. The chance of losing your initial investment in your autonomous 401k is extremely low. The title company that owns the trust deed has the authority to foreclose and put the borrower’s real estate up for auction to recover the amount invested. Since your investment is only 65% of the property, getting that amount back would not take as long, especially if the real estate asset is attractive. Investing in trust deed is a very promising source of passive income for your solo 401k.