Private Lending Using Self-Directed IRA’s: Alternative Source of Capital for Real Estate Investing
According to the 2019 Investment Company Fact Book*, Americans have a little over 27 Trillion dollars stashed away in their retirement accounts. Did you know these people can lend those retirement funds to facilitate real estate transactions? Most people have no idea that their retirement funds can be invested in anything other than publicly traded securities and annuities. Having this knowledge could assist you in two ways. First, you may personally have retirement funds you would consider lending, and second, you may know someone who’s willing to lend their IRA funds if the loan is secured by real estate.
27 Trillion is a very big number, and to put that into perspective, total debt on ALL U.S. mortgages is 11.05 Trillion as of January 2020**. In short, there is more than enough money residing in individual retirement accounts to fund every single mortgage in the U.S two and a half times over!
Why would someone be interested in lending their retirement funds to a real estate investor? For starters, this offers the lender greater control over their retirement funds. They get to choose the borrower, determine the terms of the loan, and they decide how much risk they are willing to take. For instance, a “conservative” lender may only lend in the first position with a loan that is secured by a mortgage or deed of trust that has a 60% loan to value. A 60% loan to value means the borrower must come up with 40% of the purchase price in order to borrow the remaining balance. A lender willing to take on more risk may be comfortable lending rehab money to a fix and flipper with a mortgage or deed of trust in the second position. Either way, the lender is in control and gets to make all the decisions.
Why would someone consider borrowing private money for their real estate investments? In a word, flexibility. Many real estate investors will run into a situation where traditional lenders simply won’t work. Perhaps the investor needs funds quickly, and the traditional lenders cannot act quick enough to make a deal happen. It may be that the real estate investor does not meet the stringent guidelines imposed by traditional lenders, and therefore cannot qualify for a loan. Instead of dealing with a bank or lending institution, borrowers can work with an individual that may be more flexible. A private lender may provide more freedom when it comes to the terms and conditions of the loan. They may be able to fund a deal quicker and with less underwriting than a traditional lender.
There are a couple of caveats to remember when considering private loans. First, if someone is wanting to use retirement funds, they can only lend those funds using a self-directed IRA. Traditional retirement plans will not allow the account owner to lend their funds for any purpose. Secondly, private lending involves risk. It’s advisable to involve legal counsel and be sure to educate yourself on best practices when lending or borrowing retirement funds. If you’d like to learn more, feel free to contact New Direction Trust at (877) 742-1270, or visit us at www.ndtco.com.