It pays to lend money. Over time, private IRA lending business has been consistently profitable for millions of entrepreneurs of all sizes, throughout history.
After all, the banks don’t own some of the biggest and grandest buildings downtown in every city for nothing.
Private lending scales well, is low cost, is normally fairly-low on the risk curve (depending on how you structure your lending business), but also allows for greater potential profits for those willing to take on risk by lending on less predictable ventures.
And it’s becoming increasingly popular among owners of IRAs, 401(k)s, SEP IRAs and other accounts that allow for self-direction. That is, accounts that let you as the account owner bypass the money manager hired by an investment company, and instead direct the funds yourself, personally.
Why It Makes Sense
With a Dow Jones already at a record high 17,000 – plus, while yields on Treasuries are around 2 percent, a lot of good news has already been ‘baked in’ to both stock and bond markets. Which means many forward-thinking investors are on the lookout for new ways to diversify their retirement accounts.
Starting a private lending practice using retirement funds has never been easier.
- By picking and choosing your own borrowers, you can build a portfolio of opportunities where you have particular expertise.
- You can find niche markets underserved by traditional lenders – and charge more interest for a given level of risk.
- You can personally manage the average duration and maturity of your lending portfolio to suit your own personal liquidity needs.
- Unlike taxable accounts, balances in self-directed IRAs receive substantial creditor protection under bankruptcy laws.
- You have tremendous flexibility in choosing security and collateral for your loan.
When considering a private IRA lending business, you must abide by a few rules on prohibited transactions and counterparties. Specifically:
- You cannot use your IRA to lend to yourself.
- You cannot use your IRA to lend to a spouse, descendant or ascendant, nor to a spouse’s descendant or ascendant.
- You cannot use your IRA to lend to a financial advisor who advises you on the use and handling of your IRA
- You cannot lend to corporations or other entities that are owned or controlled by any individuals listed above.
Your market niche is up to you. Only you can determine your own interest needs and appetite for risk. We have seen people get involved in markets like these, though, with great success:
- Small-business lending
- Real estate “hard money” or bridge loans
- Mezzanine financing
- Private debt placements
- Convertible debt (bonds convertible to stock at a pre-arranged price)
- Transactional loans (i.e., very short-term loans to house flippers and other speculators)
- Debt consolidation loans
- Private mortgage lending
- ‘Factoring’ loans against accounts receivable or credit card receipts
Any given loan, of course, will be risky in any of these categories. But a portfolio of individually risky loans typically has lower volatility than any of its component parts. Moreover, such a portfolio of private loans is not likely to be closely correlated with the broader stock market or bond market. Including a private lending portfolio as part of a larger portfolio can boost diversification and lower volatility.
Meanwhile, lenders have historically been able to hedge their bets thanks to careful underwriting and adequate collateral.
Proven for Income Streams
Historically, lending has been the go-to vehicle of choice for financial experts seeking to create a stream of income with a minimum of maintenance. While rental real estate also provides a stream of income, time and expense devoted to maintenance, upkeep, marketing and renovation can also be substantial. A portfolio of private loans can be structured to provide monthly, bi-annual, quarterly or annual income, as desired.
Are you interested in learning more? Contact American IRA today at 866-7500-IRA(472), or visit www.americanira.com, where we have made available a more extensive and exclusive guide to private lending within a self-directed IRA. We will be happy to provide it for you, free of charge, with no obligation. Naturally, we are also happy to walk you through the process of deciding whether self-direction is right for you.
We look forward to hearing from you.
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