Your IRA Can Be the Bank in Private Lending Investments

The main reason people self-direct retirement plans is to gain access to the large pool of alternative investments permissible in these accounts. One such asset that is gaining popularity is in the realm of private notes and mortgages. Read on to learn how your IRA can be the bank in private lending investments.

What are Private Lending Investments?

Private lending occurs when an individual or entity (such as your self-directed IRA) lends funds to people seeking to borrow money outside of the typical institution (like a bank or mortgage financing company). Borrowers these days are still facing stringent financing terms from traditional outlets; some may not meet the requirements thanks to the past tanking of the housing industry, which, yes, we are all still recovering from. Others may simply know someone who is in a position to lend money. These private lenders seek to earn income primarily through interest on the loans, creating a win-win situation for all involved.

This is where investing in private notes and mortgages can be advantageous for your self-directed retirement plan. As the title of this blog indicates, your IRA plays the part a bank would in lending transactions. Your plan can extend notes for real estate, homes, businesses, cars, start-ups, and more.

How Your IRA Can be the Bank in Private Lending Investments

  • The amount of interest charged on the loan.
  • If property is being financed, such as a single-family residence, it is generally held as collateral. In the event of default, your IRA takes possession and can earn income by selling or leasing it.
  • If there is any equity in the property, the loan can be secured by that equity, as well.
  • Income flows directly into your retirement account on a tax-free or tax-deferred basis.

Private mortgages and loans can be extended to anyone, not simply to a friend or someone else you know. Many investors seek private funds themselves. They use the borrowed capital to score their own assets for investment purposes such as rehab-and-flips, commercial or rental property.

Regardless of how well you know someone you decide to lend to, there are a few crucial points to know and fully understand.

  • Your IRA is unable to participate in private lending investments with disqualified persons. These individuals include your spouse, child, parents or grandparents, a business partner or other persons affiliated with your IRA. Doing so is considered a prohibited transaction, which can incur penalties, taxation, and disqualification of your IRA. Read (maybe even memorize) IRC Section 4975 to learn more.
  • As a self-directed retirement plan owner, you have the freedom to choose your own assets to earn income. However, that freedom comes with a great responsibility in that you are required to perform your own due diligence to ensure the investments you choose are solid. Doing so helps to avoid fraud, as well, so do not take this responsibility lightly or (trust us here)—you’ll regret it.
  • Just as all income reverts directly into the IRA, expenses must be paid by the IRA and not by you personally.

How Can You Get Started Investing in Private Mortgages and Notes?

Advanta IRA makes it quick and easy for you to roll over an existing traditional or Roth IRA, SEP or SIMPLE IRA, or an individual 401(k) into a self-directed plan. Once you have your plan in place, you can begin investing. Contact us today to learn more.

We offer different seminars and webinars every week for individuals and investors to learn how alternative investments work in self-directed accounts. Local classes are held in the Tampa, Florida and Atlanta, Georgia areas, but our webinars are attended by people across the nation. Find our event calendar here.

If you have questions about how your IRA can be the bank in private lending transactions or wish to learn more about self-direction, please contact us.

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.