At IRA Innovations, we can help you with the set-up and administration of a Self-Directed IRA that you can then use to invest in a wide variety of options, such as real estate, private companies, and lending money. 

In this blog post, we will focus on lending money to an individual or business with your Self-Directed IRA, which is one of the most popular choices the investors we work with make. It can be a great option for investing in alternative assets with Self-Directed IRAs without directly owning the real estate, business, car, or whatever else the collateral may be.

Lending money with notes in a Self-Directed IRA

To lend money with your Self-Directed IRA, you will issue a secured or unsecured promissory note, mortgage or deed of trust.  

In order to complete the loan investment from your Self-Directed IRA, you will draft the promissory note, and the borrower will sign it, along with any related loan documents. The loan may be unsecured or secured by real estate or other assets.

It’s important to know that Self-Directed IRA lending gives you the ability to lend to others while keeping all tax benefits associated with IRA accounts. The IRA can receive principal and interest, and as the IRA holder, you choose the borrower, principal amount, interest rate, length of the term, payment frequency, and amount.

But it’s important to also remember that your IRA is the lender, not you, the IRA holder. This means that all income goes back into the IRA. All IRA loan documents must be in the name of the IRA, not your personal name.

As with any type of investment, it’s important to perform thorough due diligence. Here are some key questions to ask: 

• Who is the person, people, or company looking for a loan?
• What is the security? If it is a business, is there a proven track record?
• Are there any financials that can be reviewed before making a loan?
• What are the terms — how much money is needed, for what time period, and when can the IRA expect to be repaid?
• What happens in the event of a default? If the loan is secured by real estate, it is the promissory note and mortgage that secures the loan. If a default does occur, you would be able to foreclose and take the property back, which can be done in a Self-Directed IRA.

Lending money case study

Lending money with your Self-Directed IRA can prove to be very profitable and a good way to diversify your portfolio. There are many creditworthy people who are not bank financeable for one reason or another. 

Let’s look at a case study that involves providing a loan to a large, local builder. The builder is offering promissory notes to help fund the development of a new subdivision. Leigh Adams decides to lend $50,000 from her Self-Directed IRA to the builder. Leigh already has an account with IRA Innovations that has $75,000. 

Here is what the process of lending money to the builder from her Self-Directed IRA would look like:

• Leigh receives a promissory note from the builder. The lender is Leigh’s IRA, and the note should show: IRA Innovations, LLC FBO Leigh Adams IRA
• She completes a buy direction letter with all the information about the note, including the face value, the interest rate, frequency of payments, and duration of the loan. She then sends the buy direction letter with the promissory note to IRA Innovations for processing.
• We send the money to the builder.
• Each month the builder sends the loan payment to IRA Innovations to be deposited into Leigh’s Self-Directed IRA until the loan is paid off.

We do want to note a disclaimer that IRA Innovations does not give investment advice. It is up to you to invest in what you know best, what you feel most comfortable with, and what matches your financial needs. This freedom to choose is one of the aspects of a Self-Directed IRA that our clients love best, and we are happy to answer any questions you may have about the alternative investment option of lending money.

Learn more about the basics of Self-Directed IRAs from IRA Innovations in Birmingham, AL. 

IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA.