Investing in Hard Money Loans with Your IRA: How it Works
It’s worth noting that for the purposes of this article, we’ll be referring to IRA as a catch-all term for any retirement account, even though technically, an IRA can specifically refer to a standard IRA, Roth, SEP-IRAs, 401(k)s and Defined Benefit Plans. Because each state varies in how they define security investments, we’ll be referring to “mortgages” or “notes” as terms that can include things like mortgages and promissory notes, but also lending contracts, trust deeds and so on.
This is to make things easier to understand, particularly when considering how to invest in a hard money loan using your IRA.
IRAs are Not Limited to Stocks and Bonds
Many people mistakenly believe that they can only invest in stocks and bonds with their IRAs, but you have many more investment options than you might think – including investing things like mortgages, limited partnerships and real estate to name a few.
To do this, you’ll need to work with someone who can properly manage your accounts for you – a special type of custodian who has experience in working with these various types of accounts.
One such investment strategy is to invest in a hard money loan. It’s very similar to originating a mortgage from your traditional bank checking account. Let’s take a closer look and how to do it:
How to Invest in a Hard Money Loan with an IRA
Step 1: Open a self-directed IRA account
Nearly everyone works with large brokerage firms to manage their retirement accounts, but these firms only permit their clients to invest in traded securities like stocks and bonds. You cannot invest in a personal loan.
In these cases, a smaller company, such as (Your Brand) may be better suited at helping you specialize in alternative investments through a self-directed IRA account. This gives you much more control over how the funds are used than pooling your money with a big firm and hoping for some kind of return.
Step 2: Vest the deed
This can be a confusing process if you’re not familiar with it. When you invest with a self-directed IRA account, the deed is vested on the name and number of your account. It should reference the custodian, such as: Example Custodian Company, FBO “Your Name IRA Account $123456”
This is a more detailed process than a traditional transaction and there’s more paperwork involved, so it may be worth working with a professional agency to have this paperwork completed to your satisfaction.
Step 3: Authorize your custodian to release funds
Here, you’ll need to sign an agreement with your custodian company to authorize the release of funds. We’d be happy to give you a checklist that you can use to ensure that all of the necessary agreements are signed and filed, and that the loan is originated.
Step 4: Close the deal
This is the step where your deal is finalized, usually with the help of a lawyer or escrow company.
Step 5: Set up a plan for payments
At this point, the most common step is to hire a loan officer who will collect payments from the borrower and send it to the custodian. A special agreement will need to be signed between the officer and the custodian specifying how the payments will be collected.
Of course, with all of these steps, the terminology and all the agreements needed, it’s understandable that you may have many questions or feel overwhelmed. Fortunately (Your company) has years of experience working as a custodial manager for account holders with IRAs who wish to invest in hard money loans. To learn more or get all of your questions answered, contact us at (818) 584-2424 or email us using contact form.
Related Information: 401(k) Investing | Foreign Investors