A solid private lending strategy can persevere through any market. The United States economy has been chugging along and the stock market has sustained an all-time bull run, but volatility reared its ugly head in early 2018. The markets have since recovered, but geopolitical circumstances and notions of “all good things must come to an end” continue to fuel speculation about what tomorrow may bring. Meanwhile, if you’re a private lender, you may have managed to avoid the noise and carry on with business as usual.
The dichotomy between the earning potential available through the private lending space and the Wall Street roller coaster may explain the rising number of self-directed retirement investors who supplement their day-to-day origination activities with private notes in their IRAs or 401(k)s. Real estate investors have begun to discover the same thing: They can take back control of their financial futures by incorporating the alternative investment strategy they’ve come to know and trust into their self-directed retirement plans. In doing so, private lenders and real estate investors alike have discovered a compelling way to hedge their retirements against the ups and downs of the stock ticker.
Can two market-beating entrepreneurs—a private lender and a real estate investor—work together? They certainly can, and they needn’t limit themselves to one pool of money or another. A private lender can issue personal money or retirement money just as a real estate investor can purchase property with personal money or retirement money, and the two can interact with one another in any combination they see fit.
Issuing debt to someone else’s self-directed IRA doesn’t mean you have to use the money in your pocket. Retirement plans may conduct business with one another in the same manner as their holders. If a non-disqualified friend or business partner needs money for an IRA-owned property, your IRA may fulfill that loan. Your account can earn tax-advantaged income through loan repayments, your friend or business partner can tap the real estate market in ways that he or she couldn’t have without debt leverage, and you both can reclaim control of your retirement strategies through tried and true alternative methods.
Real estate investors (even those well-versed in IRA investments) may not realize that a retirement plan can take out a loan to purchase property. An IRA can indeed pursue financing, though the IRA holder may have a hard time securing financing through a major institution. This is where private lenders can satisfy a growing demand. A retirement plan may only take out a loan on a non-recourse basis, meaning the investment property itself is the only possible collateral; the personal money or assets of the plan holder may not be offered as security. Big banks aren’t particularly keen to take on such notes, giving private originators (and their self-directed IRAs) an opportunity to capitalize.
The only real limitations that exist are those that surround all self-directed investments. You may not conduct IRA business with disqualified persons, which include, among others, the account holder (yourself), linear members of your family tree (children, parents, grandchildren, grandparents, etc.), the spouses of the aforementioned individuals, and any fiduciaries to the account (i.e. your IRA custodian). We previously mentioned friends and business partners, who are 100% fair game as long as they don’t also fall under one of the disqualified categories. Non-lineal family members like siblings or cousins are also non-disqualified, so you can still run a family business to a degree if you so choose.
Lending money from your IRA to the IRA of a real estate investor presents a unique possibility for mutual benefit. Your IRA can earn tax-advantaged income through the methods you’re already familiar with, while your borrower can acquire lucrative a property without having to come up with the full purchase price. Understanding your options is half the battle when it comes to finding your next financial edge, so don’t hesitate to explore every possible avenue.