You Can Loan Your Retirement Dollars??

This picture is just a fun one of Veronica picking up a whole kitchen in our horse trailer.  And yes, she can back that thing into a narrow driveway like a pro!  I can’t wait to write about the details of this project in the future but for now, on to this week’s post:

Loan Your Retirement

Did you know that you can lend money from your IRA?  That’s right.  We borrow from people’s IRA regularly.  And we pay well!  So if you have an IRA and want to get involved in real estate, you could be more passive getting started by lending money from your IRA.  In fact, we are about to start lending money from our IRA to other investors because we have seen the benefit that our lenders are getting from these solid returns with houses as collateral (worth more than they are loaning).  This means that if the borrower fails to perform, the lender can take back the house.  And the IRA can own property too!  I can’t loan money to myself so I will loan it to friends in the business and continue to borrow from other people’s IRA.

Why would I risk my retirement?

You may think, why would I give my hard-earned retirement to someone to handle?  The answer, for me, is that I wouldn’t just give it to anyone.  I’d only give it to someone with a track record of success or with plenty of money set aside for overages or unexpected expenses, and only on properties I wouldn’t mind owning in a worst case scenario.  We never borrow the full value of the home.  We borrow (and will lend) a portion of the value.  Maybe 65-70 percent of the ARV (after repaired value) is the max loan to value.  This means that if we had to take it back, it would be worth more than the amount loaned and we would have the option of doing any needed renovations and selling it or keeping it as a rental inside the IRA.  These are some of the ways to mitigate our risks; and our lenders risks.

Returns and Collateral

The benefits are numerous using this method to get started.  One benefit is the obvious high rate of return on your investment dollars (often double digits).  The other is the loan being tied to real property instead of stocks and bonds etc. that you have no control over.  You also could work out an agreement with the borrower to allow you to shadow them on the project to learn a ton.  Then do it all over again.  If you have retirement funds sitting with a traditional brokerage, you’ll just transfer them to a self-directed custodian such as Quest Trust company, or any of the other companies doing this.  They will help you make the transaction and the borrower can pay all the fees.  

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No taxes or fees

It is important to understand that this is not a dispersement or early withdrawal and does not carry any penalties or taxes when done correctly.  This is a totally legit option that most people don’t even know exists.  The returns will go back into the account just as dividends from a stock would.  They won’t be liquid cash but this is a great long-term wealth-building strategy.  In fact, the IRA, as I mentioned earlier, can even own property.  There are some restrictions on how much direct involvement the IRA owner can have in the property rehab and management.  I know of individuals who own rental property in IRAs and a great strategy can also be owning property and owner-financing it from your IRA.  Again, all returns will be deposited to the retirement account.

While this strategy involves having some capital to start with, you may be able to get going with a relatively modest initial balance and make it grow tax free or tax deferred depending on the type of account.  If it’s a self-directed Roth account, you can literally earn tax-free returns to build that account for your retirement use.  

This can help you even if you don’t have retirement funds

If this doesn’t fit your situation just yet, put it away as one of the many arrows in your real estate investing quiver.  It opens up options for many that they didn’t even know existed.  Knowing this option exists and learning more about it can help you to educate potential private lenders that may later fund your deals.  I bet you know someone who has retirement dollars sitting around that would love to increase their returns with a loan like this; tied to real property.  I know I have seen the opportunity that exists and plan to do the same.  This strategy can help you whether you want to be the borrower and teach potential lenders about this option or if you want to be the lender.  I hope you found this article helpful and that you learned something new.  Please give me your feedback and ask any questions I can help you with.  We’ll soon be transitioning out of the “getting started” series and be talking about lots of other real estate investing topics.  I hope you’ll stick around and share this with those who could use it.  And as always, “keep the main thing the main thing.”

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