When I grew up I loved playing monopoly. It was always fun to choose the piece I was going to be and to see which piece everyone else chose. I think by far one of the greatest things about monopoly was the bank. Every time I played I wanted to be the bank. I didn't want anyone else doing it, it had to be me. I wanted to be the person in charge of handing out all the money to the other players. I don’t know if it was because I liked holding the money or if it was the power of deciding where the money went. I believe it was the later because it meant that I had control over my funds rather than relying on others to invest my funds. When I think back at those times I feel like I really was on to something. Isn't that how we should be acting today towards our retirement? Do you want someone else telling you what you should do with your retirement? Maybe you do but I know one thing is for sure, you should be in control of what happens with your retirement accounts and money. Nobody is going to care about your money and retirement as much as you. In fact others might push retirement investment options to you that benefit them more than you or that really aren't your best option because it is a better money maker for that person. Regardless, you need to be in charge of your funds and you can be. Don't let other financial professionals or even custodians tell you that you can't invest in what you want. You can, as long as you follow the IRS guidelines and use a custodian that will allow you to invest how you want.
If you, like me, have ever really wanted to be the bank, lending others your money you can! Most people don’t know that investing in a Self Directed IRA can enable them to literally be the bank with their IRA funds. Your IRA funds can be used as a vehicle to lend to other investors who are seeking cash, similar to what a bank does with its funds that it is holding. The following are just a few of the benefits that can come by being the "bank" with your IRA.
Benefits of Lending through an IRA
- You have a specific return that you are guaranteed to make as long as the lender makes his payments.
- An income stream in generated similar to investing in real estate that is rented out.
- Avoid the hassles of ownership in real estate (repairs and maintenance, liability, bad tenants, no tenants).
- You can pick the lending terms that fit your needs to best
- You can choose who you want to lend to and decide if you want to collaterize the loan or not.
Common Pitfalls To IRA Lending
- Collateral. Hard money loans are great when they are backed by collateral. If the lender defaults you are guaranteed the asset that is being backed by note
- Loan to value. The hard money loan should not be for more than the asset being backed is worth. If you were forced to take over the asset you want to make sure that you can at least get the value asset you took over
- Personal guarantee. If possible make the lender sign a personal guarantee that allows you to go after other assets in the event the lender stops making payments
- Due Diligence. Make sure that the person you are loaning funds to is able to make the loan payments. Get references; check their credit score, or another other necessary steps to ensure the person can make their payments.
Lending money can be a very solid investment option through an IRA. As with all investments there is risk involved. You have to be the one to make sure that you do enough due diligence and research to know if you should be lending the money to whomever you were planning on lending to through your IRA. In ordre to get the full benefit of leding through your IRA it is very smart and wise to learn procedures that go along with IRA lending. Check out, Self Directed IRA Lending for more insight to IRA lending.
If you have any more questions about lending your Self Directed IRA funds feel free to call or email me.
Author: Ben Barker, Self Directed IRA Professional