YES, you will simply need to open a Self Directed IRA.
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.
No, you would use a low cost simple to maintain Self Directed Custodial IRA.
The is no restriction on the location of the borrower.
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)
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.
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?
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.
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)
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).
Your IRA may loan to individuals, partnerships, LLCs, anything you like.
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.
Ask everything you want. Remember the last time you borrowed money from a bank? They asked you everything. Don’t be shy.
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.
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.
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.
For more information on Self Directed IRAs call The IRA Club 888-795-7950