Notes Outpace Direct Property in SDIRA Real Estate Investing — What the 2025 Data Reveals
A new market intelligence report from IRAR Trust Company, published in June 2026 and covering 1,997 self-directed IRA real estate transactions completed in 2025, produced a finding that deserves attention: real estate notes — promissory notes secured by real property — accounted for 56 percent of SDIRA real estate purchase activity, while direct property purchases made up the remaining 44 percent.
That marks a meaningful shift in how self-directed investors are deploying real estate capital inside their retirement accounts, and the reasoning behind it is straightforward once you understand what private lending in an SDIRA actually looks like.
How Private Lending Works Inside an SDIRA
When a self-directed IRA makes a private loan, the account itself becomes the lender of record on all documents. The IRA custodian, not the account holder personally, is named on the promissory note, the deed of trust or mortgage, and any related closing documents. Loan proceeds are wired from the IRA at closing, and all payments — principal and interest — flow directly back into the IRA account throughout the loan term.
The account holder directs the investment: choosing the borrower, setting the terms, and conducting due diligence. But the account holder is not a party to the loan itself. Any attempt to co-sign the note, personally guarantee the loan, or receive payments outside the IRA would constitute a prohibited transaction under Internal Revenue Code Section 4975.
The IRA's interest income from a compliant private loan is generally not subject to Unrelated Business Taxable Income tax, because the IRA is acting as the lender rather than borrowing money to acquire assets. In a Traditional SDIRA, that income grows tax-deferred. In a Roth SDIRA, it accumulates tax-free — a particularly powerful combination for a consistently income-producing asset class.
Why Notes Are Attracting More SDIRA Capital
Several factors are driving the shift toward notes over direct property ownership.
Interest rates remain elevated. Mortgage rates have remained substantially above the ultra-low environment of 2020 through 2022. Higher borrowing costs have increased borrower demand for private and alternative financing, creating a larger pool of lending opportunities for SDIRA investors. Private credit has emerged as one of the fastest-growing investment sectors globally as institutional and individual investors alike pursue yield beyond traditional bonds.
First-position mortgage notes typically offer 8 to 12 percent interest, depending on property type, loan-to-value ratio, and borrower profile, according to industry data. For an IRA that might otherwise hold fixed-income alternatives at significantly lower rates, the yield differential is meaningful — particularly when the income is sheltered from annual taxation.
Operational simplicity. Holding a mortgage note inside an SDIRA is administratively less complex than owning real property directly. There are no property taxes to pay through the IRA, no maintenance or repair decisions, no property manager to engage, and no Unrelated Debt-Financed Income exposure if the IRA is not using leverage. For investors who want real estate income without the operational responsibilities of property ownership, notes are an attractive middle path.
Rising delinquencies have expanded the market. Certain mortgage segments have experienced increased delinquency rates, creating opportunities for SDIRA investors interested in both performing notes — loans where the borrower is current — and non-performing notes purchased at a discount. Among direct property purchases in the IRAR data, single-family homes represented 66 percent of activity.
Critical Compliance Requirements
Private lending through an SDIRA requires careful attention to several compliance rules that have no counterpart in personal investing.
Disqualified person restrictions. The IRA cannot lend money to, or purchase notes from, disqualified persons. That category includes the account holder, their spouse, parents, grandparents, children, grandchildren, and their spouses, as well as entities those individuals control at 50 percent or more. Loans to siblings, cousins, aunts, uncles, and unrelated parties generally do not implicate the disqualified person rules, but the specific facts of any transaction should be reviewed by a qualified advisor.
Proper titling is mandatory. The promissory note must name the custodian on behalf of the IRA as the lender — not the account holder individually. The deed of trust or mortgage securing the loan must be recorded with the custodian identified as the beneficiary. Any deviation from this structure can create prohibited transaction exposure.
All payments must return to the IRA. Borrower payments may not be redirected to the account holder's personal bank account for any reason. Instructions to the borrower should specify the correct IRA account information, and many investors use a loan servicer to manage payment collection and tracking for longer-term notes.
Processing timelines matter. Most SDIRA custodians require 5 to 15 business days to process a direction of investment for a new private loan, according to industry benchmarks. For transactions with firm closing deadlines, custodian processing speed is a material selection criterion when choosing an SDIRA administrator.
Due Diligence Remains the Investor's Responsibility
SDIRA custodians administer the account and process transactions. They do not evaluate the creditworthiness of borrowers, appraise collateral, or advise on loan terms. That due diligence responsibility falls entirely on the account holder.
Industry practitioners generally recommend verifying borrower credit history and financial stability, obtaining an independent appraisal or broker price opinion on collateral, limiting exposure per loan to manage concentration risk, structuring with a loan-to-value ratio that provides a reasonable equity cushion in a default scenario, and working with qualified legal counsel to prepare note and security instrument documentation.
Private lending is not a passive strategy in the same way a publicly traded bond fund is passive. But for investors willing to conduct that due diligence, the SDIRA structure converts what would otherwise be fully taxable interest income into tax-deferred or tax-free retirement growth — a structural advantage that is difficult to replicate in any non-IRA format.
This article is for informational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional regarding your specific situation.
