As most regular readers know, it’s quite easy to engage in private lending within a Self-Directed IRA. All you need to do is open an account with American IRA, fund it, find people who need to borrow money, agree on a reasonable rate of interest, and let us know who they are and how much you want to send them.
Then have them pay your Self-Directed IRA directly, rather than yourself, and you’re in business as a Self-Directed IRA lender.
Your opportunities are nearly limitless: You can provide the following kinds of loans:
- Mortgage lending
- Small business lending
- Personal loans
- Construction loans and bridge financing
- Refinancing loans
- Farm loans
- Hard money loans
- Convertible securities
- Home equity loans
- Accounts receivable factoring
- Auto loans
- Secured loans
- Unsecured loans
- Preferred stock
- Equipment loans
- Title loans
- Private placements
…And nearly anything else.
As long as your IRA doesn’t take up direct ownership of life insurance policies, alcoholic beverages, gems, jewelry, art, collectibles or certain kinds of gold bullion and coins, it is quite legal to engage in private lending of all kinds, using a Self-Directed IRA.
This is not normally a problem – as long as you don’t list prohibited items as collateral for a loan held directly by your Self-Directed IRA.
So how do these kinds of loans perform? This data is quite fragmented. Obviously, millions of small private loans take place that are never reported to any kind of data clearing house. But we do have a couple of prominent Peer-to-Peer lenders that we can look at as a rough proxy. But many people go about it the wrong way.
For example, lets look at some recently published average interest rates from a prominent lender:
A paper: 7.34 percent
B paper: 10.95 percent
C paper: 14.16 percent
D grade: 17.27 percent
E grade: 20.07 percent
F grade: 23.64 percent
G grade: 25.54 percent
The temptation, of course, is to chase yield. But none of these interest rates are net of actual defaults. If you actually net out defaults and account for actual defaults, you come up with some very different numbers:
A paper: 5.21 percent
B paper: 7.34 percent
C paper: 8.74 percent
D paper: 8.92 percent
E paper: 9.55 percent
F paper: 8.99 percent
Not too shabby. If your Self-Directed IRA lending profile is diverse enough, you can still get a solid rate of return compared to other market alternatives. We looked around at several vendors who keep these kinds of stats and they were generally in the same ballpark.
Note: Even in a relatively strong economy in recent years, it does not appear to benefit investors to chase the higher yields on F-grade borrowers. Self-Directed IRA investors should also be aware of how economic downturns affect lower-grade borrowers. Those with higher credit scores – the A and B rated borrowers – tend to have more stable cash flows and higher reserves. They are generally able to weather economic swings. People in lower tranches don’t have those stable cash flows, and they don’t have the reserves. That’s why they are in the lower credit tranches.
Most loans on the P2P Web platforms are between 3 and 5 years’ duration. We haven’t had a recession since the last one ended in 2009. So any recent statistics would not include the effects of the 2008-2010 mortgage crisis. A sharp recession could blow out many of these higher-risk borrowers, and your higher-yield loans would start hemorrhaging red ink.
Naturally, you don’t have to use the P2P platforms. You can find your own opportunities through your own networking and advertising – and save yourself all their fees, while enabling yourself to do a lot more due diligence. You can also require appropriate collateral for your loans – something the Web P2P sites don’t allow you to do. So your returns could well be higher, net of fees, with less downside risk if you are a skilled and prudent lender.
And if you aren’t, why would you consider lending on a giant website at all?
American IRA, LLC is an expert in working with private lenders of all sorts who want to combine the benefits of current income, diversification and attractive yields with the tax advantages of Self-Directed IRAs and other retirement accounts.
For more information on how it works, or to open an account, call us today at 866-7500-IRA(472), or visit us at www.americanira.com.