Using Your Self-Directed IRA to Invest in Hard-Money Lending – Part 1Posted on September 6, 2013 by
When a real estate developer runs into a snag, and needs additional money to complete a project, or he wants a shorter-term loan of, say, six months to six years, he frequently turns to the “hard-money” market. In a nutshell, these are lenders who are looking to get a decent return on their money, with a margin of safety. They usually do this by holding a lien on the property, or on another property the borrower owns, in a practice called “cross-collateralization.”
If you’ve got a lot of money in your self-directed IRA, and it’s been earning relatively weak returns, hard money lending provides a potentially lucrative way for you to “take charge” of your assets. With hard-money lending, you aren’t depending on the skills of a mutual fund manager you’ve never met, nor do you need to settle for the lackluster interest rates currently available from investment-grade bonds and treasuries.
Instead, you’re free to seek your own deals with any number of private real estate developers. Here are the advantages to hard-money lending in your self-directed IRA:
- Hard money lending is not highly correlated with returns in the stock or bond market.
- Interest rates are generally higher than you can get from investing in traditional debt instruments like bonds and CDs.
- Flexible payment terms – you can arrive at any payment schedule that suits you and the borrower. You aren’t stuck with a bi-annual interest payment, like you would be with treasuries.
- Balloon payments and “zero coupon” bonds are possible. With these deals, you lend the money for the agreed-upon length of time, and receive a single lump payment, including all or a substantial part of the interest and/or principal, at the end of the payment term. This may be desirable if you have a ways to go before you turn 59 ½, and you want to defer receiving your interest until then.
- Security. You can secure these loans by claiming an interest in the property itself or other suitable collateral. Pay attention to seniority, though. If you don’t hold the “first-position” lien on a property, and the deal goes sour, you will be second or third in line or worse when the creditors line up in bankruptcy court to receive payment from the trustees.
How do you use your self-directed IRA or other retirement account to do this? Simple:
Call American IRA at 866-7500-IRA (472), and open an account with us. We are a third-party administrator specializing in self-directed IRAs and other retirement accounts. Whether you have an IRA, Roth IRA, SEP-IRA, SIMPLE IRA, 401(k), Coverdell or health savings account, we can help you take direct control of your IRA to invest in hard money lending, traditional mortgage lending, private business and personal loans, private bond placements, convertible securities, or nearly any other investment you can think of: The only restrictions on IRA money are prohibitions on investing in life insurance, certain forms of precious metals, gems, jewelry, collectibles and alcoholic beverages. You also cannot invest in property you intend to use yourself, nor can you use your IRA for the purposes of enriching your children, grandchildren, parents, grandparents, spouses or in-laws.