Rolling into Self Directed IRA to lend to flipper/builder

9 Replies

Hi, all. I'm a new investor and want to begin lending hard money. I'm really considering rolling over my IRA into a Self Directed IRA in order to work with a trusted partner who wants to build and flip homes in the area. I would be loaning up to 75% LTV on each project and of course have first position on the loans. I also know that he has the money to repay me.

But I'm not sure what to look out for in rolling my money from a traditional IRA into a Self Directed, and also what I should consider with finding a Self Directed IRA Custodian. COULD I set up a TD Account, etc and BE MY OWN CUSTODIAN, and just use an Accountant to prepare the materials I would need to transact and comply with the IRS, etc? Or am I LEGALLY required to have an "official" custodian for the Self Directed IRA? One who is not just a bank?

Thanks, all. 

Chris

@Christopher Salerno

All IRA accounts are held by a custodian by rule. TD is serving as custodian. Unfortunately, the Wall St Brokerage houses do not have the capacity to document IRA investment transactions outside of the publicly traded assets they sell (they could, but choose not to).

There are many self directed IRA custodians with the staff training and paperwork to process individualized transactions such as a note. All such firms will have the word Trust in their name as they are typically depository trust institutions. With such a custodian, they are the processing layer and document and fund your investment transactions - much like TD does in the stock market.

You can have what is referred to as checkbook control either with an IRA owned LLC setup by an advisory firm alongside the custodian managed IRA, or with a Solo 401k plan if you qualify. If you will be issuing a lot of short term notes, this may be the more efficient option for you.

There is lots of good information here on BP about these types of self directed plans.

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either "check-book control" or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with. This will help when determining which company best fits your investment scenario.

Thank you both so much! I suppose what I'm asking, too, is whether it's possible to NOT have to go with a Self Directed IRA company at all--to roll the money into something like a TD account, and not have to pay custodial fees as high as one would with a Self Directed IRA Specialist. Does this make sense? That I could sort of act as my own facilitator, if there's a very baseline kind of custodian scenario.

@Christopher Salerno

The simple answer is no. As I noted, the wall street brokerages firms sell one thing - Wall St. The choose not to delve into the realm of non-traditional assets because of the specialty services required that are much more human-intensive than exchange facilitated trading. If TD decided to hold non-traditional assets, they would charge significantly more than the self directed IRA firms that specialize in this type of service, believe me.

All IRA accounts must have a custodian, and you need the type of custodian that can process the type of investments you are looking to engage in.

If you are self employed and have no full time employees, you could look at an individual 401k plan, which does not require a custodian, but there is still a cost to create the necessary trust entity of the 401k plan.

There is no free ride.  Sorry.

Over the life of investing, however, I think you would find that a self-directed IRA will actually cost much, much less than investing in Wall St. In addition to commissions on trades, most managed assets carry significant fees either directly or indirectly through reduced ROI. An average 401k plan with a Wall St firm is costing you 1.5-3% of the account value each year.

Originally posted by @Christopher Salerno :

Thank you both so much! I suppose what I'm asking, too, is whether it's possible to NOT have to go with a Self Directed IRA company at all--to roll the money into something like a TD account, and not have to pay custodial fees as high as one would with a Self Directed IRA Specialist. Does this make sense? That I could sort of act as my own facilitator, if there's a very baseline kind of custodian scenario.

If you are eligible for a Solo 401k, you can have the ability to invest your retirement funds into real estate and other assets without the need for the expense of a custodian. An IRA will always have to have a custodian, however.

Christopher,

With an IRA you can not avoid the custodian, it is required by the IRS. You can however bypass the custodian and have direct access and control over your retirement funds by utilizing special-purpose single member LLC, which would be created specifically with the purpose to be owned by your IRA and you as designated manager have control it and can make investments without involvement of the custodian.

I cannot advise on roll overs, etc but just wanted to drop a quick note about hard money lending. IMO, it is an excellent way to make high returns with very little risk. I have been lending for about 3 years and my only regret is not learning sooner! I don't know your state laws so I would suggest you get good guidance on them as well as knowing the ins and outs of Dodd-Frank. 

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