As the stock market bounces around record highs, we’re starting to see more investor interest into diversifying into other kinds of investments that aren’t closely correlated to stock market risk. Among the alternative asset classes now gaining traction among owners of Self-Directed IRAs is private hard money lending to real estate developers and investors.
Hard money is different from the real estate mortgage lending most individuals are familiar with. Where mortgage lenders primarily underwrite based on personal credit history and the main source of security is the borrower’s expected future income, hard money lending is asset-based. Income is not material to the loan: The loan is secured with an underlying interest in the asset itself.
For this reason, underwriting is very fast, and investors are able to line up financing fast enough to give them an advantage in the market against buyers who are limited to more conventional mortgage lending that takes longer to close.
Loans are for relatively short time periods: Often for a few weeks or months, up to perhaps two or three years. The idea is typically to provide money for an investor or developer to purchase real estate, perform improvements and sell. If the investor wants a longer period, he or she will typically seek to refinance.
With a Self-Directed IRA, you, as the IRA owner, have complete control over what deals you finance, with what borrowers, and on what terms. If you need a specific minimum interest rate to make a loan work for you, it’s yours to set. If you only want to finance deals for less than 2 years, or for longer than one year, you have the freedom to set your own terms and criteria to reach any willing borrower.
To protect yourself, you may want to form a good relationship with a title research or title insurance company, as well as an escrow company. If you can’t see the property personally to make an assessment as to its value, you may also want to have a relationship with a trustworthy property valuation firm.
- You can handle the transactions personally, and oversee individual loans, or you can pool your money with a hedge fund or other finance company specializing in this strategy, as long as good records are kept.
- If your money is in an IRA or other retirement account, there are some things to bear in mind:
- You cannot be the borrower. Nor can any entity you control.
- You cannot lend to your children, grandchildren, spouse, parents, grandparents or any entity controlled by them.
- You cannot hold certain assets within your IRA, including life insurance, gems, jewelry, collectables or alcoholic beverages. Do not rely on these for collateralizing the loan.
- Generally speaking, you may not handle the money yourself, or mingle it with your own personal funds.
- You cannot vest the loan in your own name. It must be in the name of your IRA account.
[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#SelfDirectedIRA”]Asset class now gaining traction among Self-Directed IRAs is private hard money lending[/tweetthis]
American IRA, LLC is one of America’s premier experts on the use of IRAs, SEPs, Simple IRAs, self-directed 401(k)s, solo 401(k)s, Roth IRAs and other similar tax-advantaged accounts to fund hard money loans. As the owner, you fund the account, and provide us written instruction where to send how much money.
American IRA does not charge a percentage commission on these loans, in most cases. Since you’re the one taking all the risk, and you’re the one who found the deal in the first place, our flat fee per transaction is usually far more cost effective than percentage-based transaction fees.
To learn more, visit us online at www.americanira.com, or call us today at 866-7500-IRA(472). We will explain the simple procedures step-by-step. Funding an account and getting started is very easy.
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