Why Are Self-Directed IRAs a Great Way to Make Hard Money Loans?
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Many people think that they can only use traditional investments like stocks or bank CDs in their IRA accounts. The IRS allows people to make plenty of alternative investments, and some of these include precious metals, livestock, and of course, real estate.
The problem with most IRA real estate investments is that real estate usually takes a lot of maintenance, and this all has to be funded out of the IRA. Plus, there are a lot of rules about which property that you can invest in and who you are allowed to invest with. However, hard money loans and self-directed IRAs work together so smoothly that it almost seems like they were made for each other!
If you were, for example, to buy and maintain your own rental properties out of your self-directed IRA, you would have a constant stream of transactions moving in and out of your account.Also, you are not allowed to buy your own properties out of your IRA, buy yourself a vacation home that you rent back to yourself, or do anything that might be regarded as using your money for your own self interest. Except, of course, you are allowed to act in your own interest by making a profit that can go back to your IRA account, and that is why we believe this is the best IRA real estate investment opportunity.
With a hard money loan to an individual or business, you typically have a very neat transaction:
- Your IRA custodian sends money to fund a real estate loan
- Your IRA custodian collects your payments.
What Do You Need to Use a Self-Directed IRA for Hard Money Loans?
To own a self-directed IRA, you do need to have a custodian. This is true of any type of alternative or physical assets that you plan to hold in an individual retirement account. For example, people who set up a gold IRA have to have a custodian safely store their gold. The custodian’s job is not to suggest investments or manage investments, but it is simply to ensure that you conform with IRS rules.
As always, it is up to you to figure out how to put your money to good use.You are also always free to select your own IRA custodian. In some cases, these custodians might be tied to specific investments, but you are still free to select your own investments if you choose. Your self-directed IRA custodian’s main task should be to make sure that the paperwork gets filled out and your money is where you say it is.
This is basically how a simple hard money loan out of your self-directed IRA works:
- We find you a great opportunity to fund a hard money loan to a property buyer.
- You approve the deal and get your custodian to send us the funds.
- We send your monthly payments back to your custodian to deposit in your IRA cash account.
Since these deals typically only last for one to three years, you do not have to tie up your money for decades either, and this is very different from the amount of time you really need to profit from most real estate transactions. Of course, once a deal ends, you are free to use your funds to invest in another hard money loan. You can even invest in multiple properties at the same time if you have the funds.
After you reach retirement age, you might still find hard money loans an attractive way to provide yourself with a better retirement income than you can get from traditional investments. They are also a much easier way to invest in real estate than by having to manage your own own rental or investment properties.