Tapping into Trillions
Using self-directed IRAs for private funding
Whether you are a first-time homebuyer, an experienced fix-and-flipper or an expert in rentals, there is always a need for funds. Investors will always need money for deals, and sometimes traditional bank loans aren’t available to everyone. Or others just prefer the flexibility of setting their own terms on a deal.
Although there are plenty of options available for private financing, many investors prefer self-directed IRAs (SDIRAs) to fund their deals time and time again.
Did you know you can easily create your own private financing source when you establish a relationship with a private money lender that utilizes an SDIRA? The potential to have the funding within days is just one of the many exciting possibilities afforded by the money-borrowing aspect of self-directed IRAs. Best of all, SDIRA loaning allows the SDIRA lender and the borrower to decide on the terms of the investment together.
According to a recent study from Investment Company Institute, $28 trillion are in retirement assets. Of that, $9.2 trillion was reported to be in IRAs alone. With that much money available for use in IRAs, it’s nearly impossible not to be curious about how to use those funds for private funding.
For lenders and borrowers alike, private loans with SDIRAs have provided opportunities for successful deals and have given investors options outside traditional bank loans. So, whether you’re looking to borrow private funds or loan out your own, here is everything you need to consider.
Why Use a Self-Directed IRA for Private Funding?
As mentioned, sometimes a traditional loan from a bank or hard money lender just doesn’t work for unique funding situations. Especially in a market like real estate, in which investors seek creative strategies, having a private financing option is almost necessary.
With a self-directed IRA, investors can loan out their retirement funds on their terms, as decided and agreed upon with the borrower. These agreements are usually more customizable than regulated bank loans, and typically the interest rate works out in favor of both parties, making it a great investment for a lender and their SDIRA. Decisions about everything from the principal amount, interest rate, time period, collateral and frequency can be made together, between the lender and the borrower.
Flexibility is a huge benefit when using private funding from an SDIRA. The time frame to have a private loan funded is one of the many advantages that draws investors to this outlet of private financing. Whereas applying for a traditional loan can be a lengthy process, getting funds from an SDIRA lender can take less than a week, depending on the IRA custodian.
Another advantage is being able to pool IRAs and individuals together for a loan if one party does not have sufficient funds to meet the loan amount. The flexibility of a private agreement makes it possible for two or more IRAs or people to come together to supply the total amount to loan out. A benefit for lenders is they get a tax benefit and possibly higher returns than traditional investments when loaning with their SDIRAs. Due to the simplicity and ease of private loans, they have become one of the most common SDIRA investments. This means private funding is not projected to ever be in short supply.
Considerations When Private Lending and Borrowing With Self-Directed IRAs
Just as banks have a certain set of criteria when vetting someone for a loan, private lenders typically will as well, although the requirements are usually different and fewer.
Factors a private lender may consider are the borrower’s credit scores, the investment loan to value ratios, the amount of time the investment may last and, in the event the money is not paid back, whether the investment is something the lender would want to own.
These are just a few considerations a lender may have. As a borrower, it is wise to have a success book (if applicable) and be able to properly present your investment. Usually there is a higher approval rate for borrowers seeking a private loan versus a traditional loan.
How to Get Private Funding From a Self-Directed IRA
The first step is to find a lender that has an SDIRA established or is willing to go through the steps to establish a retirement account with an SDIRA custodian. Once the lender and borrower have agreed upon the terms of the investments, investment documents such as the promissory note are drafted and submitted to the IRA custodian.
Custodians will differ on their steps to fund the loan, but generally once the investment documents are reviewed and signed, the custodian will issue the funds to the borrower from the IRA. The borrower will then make payments, according to the frequency and amounts agreed upon in the loan, back to the IRA. It is important to remember that an SDIRA is its own legal financial entity, which makes the SDIRA the lender, not the account holder. All the income goes back into the SDIRA. Borrowing from a bank can be time-consuming and stressful, but private lending doesn’t have to be. Private loans with an SDIRA are great investments proven to benefit all parties, from those seeking private funds for their deals to the SDIRA lenders themselves. If you have questions about how SDIRAs can be a source of private financing, be sure to give an IRA specialist a call at an SDIRA custodian you trust.
