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Hard Money Lending IRAs

 

  1. Can I make loans using the funds in my IRA account?

    YES, you will simply need to open a Self Directed IRA.

  2. What is the advantage of using IRA funds as compared to making the same loan using my Personal Funds?

    When using personal funds, the interest income is taxable at your ordinary income tax rate in the current period, this gets very costly.

    However, if your IRA (not you) makes the loan; all interest income is tax deferred till you take a distribution (with a ROTH IRA there may never be an income tax). The Income tax free status of IRA earnings allows more money to stay in the IRA account and can dramatically increase the speed of compounding.

  3. Is it expensive to set up the IRA account to make loans?

    No, you would use a low cost simple to maintain Self Directed Custodial IRA.

  4. If my IRA loans funds, must the loan be to a borrower only in my State?

    The is no restriction on the location of the borrower.

  5. How much interest will my IRA earn?

    This is completely up to you and the borrower. We are seeing 10%, 12% and more. Plus, on top of the interest your IRA can charge the borrower a “Loan Origination Fee” (sometime called “Points”). Two points [2% of the value of the loan] is not uncommon (that’s extra income for your IRA)

  6. Points sound like a good way to earn more money inside my IRA; how often can my IRA charge “points”?

    When the loan is originated and at every renewal. For example, if the term of the loan was six months and the borrower needs to renew their loan, you get to treat the renewal like a new loan.

    So, your IRA would earn another two points. This really adds up.

  7. For how long can the loan be made? What is the right “term” for the loan?

    This is up to you, there is no required term “long or short” however, we suggest you consider keeping IRA loans relatively short. Such as three months, six months a year or maybe 5 years. Remember you want your IRA to be paid back so it can make the next loan (and earn more points).

    If someone wants to buy their primary residence and offers to borrow money with a 30 year pay back schedule, we suggest you send them to a Bank. I.e. Do you really want to live with that borrower for the next 30 years?

  8. Can my IRA earn more than the stated Interest rate?

    Yes, this is called Bonus Interest, or a kicker. Example: The loan agreement may read that the borrower will pay X% plus 20% of profits.

  9. Can the loan be Secured or Unsecured?

    This is up to you however; we do suggest that your IRA get “security”.

    If the loan has adequate security you do not care as much about the borrower’s credit rating. Making a fully secured loan is called “Asset Backed Lending” (sometimes called a Hard Money Loan because there is a hard asset backing up the repayments)

  10. What happens if the borrower secured the loan with an asset (such as property) and then defaults on the loan?

    The asset goes to the lender. In this case, your IRA will now own the property. (see note below about “recording the lien” at the county courthouse).

  11. Must the loan be to an individual?

    Your IRA may loan to individuals, partnerships, LLCs, anything you like.

  12. How do I find borrowers?

    They are everywhere however; you do have to let it be known. Let people know you have short term funds available for borrowers who have collateral.

  13. What can I ask the borrower?

    Ask everything you want. Remember the last time you borrowed money from a bank? They asked you everything. Don’t be shy.

  14. Should I have an attorney?

    Again it is up to you however: attorneys are not expensive and will be helpful especially if you have collateral. They can help make sure your IRA’s lien on the property is properly recorded with the county.

  15. Can I go to the County court house and file the lien myself?

    Yes

  16. Can you suggest an attorney?

    We suggest you consider an attorney who is in the county where the property (or asset) is located. Perfecting loans is a simple procedure and most attorneys don’t charge much to do this.

    Plus, if the borrower should default on their loan you will already have a local representative to secure the collateral for your IRA.

  17. Can I loan money from my IRA to my son or daughter?

    No, your IRA account may not make a loan to you, your spouse, your children, grandchildren or your parents. Making loans to anyone else is fine.

 

Bonus Notes:

 

  1. The Promissory Note must be in writing

  2. The Promissory Note must Identify the name and address of the borrower

  3. The Promissory Note must Identify the name of lender (Example)

    IRA Club F/B/O [name of IRA owner], IRA [your account number]
  4. The Promissory Note must Identify where are payments to be made:

    (Enter the address of the IRA Account) (Example)
    IRA Club
    79 W. Monroe St
    Suite 1208
    Chicago, IL 60601
  5. The Promissory note must include an unconditional promise to pay.

    (If there are conditions such as "if the house doesn't sell then nothing is due" it is not a promissory note)
  6. The Promissory Note must clearly state the Terms

  • Amount of the loan
  • A stated rate of interest
  • (There are no 0% interest loans from an IRA)
  • State the payment sequence (i.e. monthly, quarterly, etc.)
  • State if loan payments represent interest only or interest and principle
  • Start the maturity date of the loan
    (The maturity date must be “date certain”. I.e. Will repay the loan when the Bears win a Super Bowl is not a “date certain”.)

For more information

For more information on Self Directed IRAs call The IRA Club 888-795-7950