My first private money loan through an SDIRA

5 Replies

I currently have five properties in my portfolio and I'm looking scale. I landed my first private money lender - a friend that I grew up with. He is setting up an SDIRA to invest 25k with me at 10% APR. he wants to allocate his money to me over five years and let it compound. I have a BRRRR deal in the works that I am planning on using the money for up front and then put that cash back to work afterwards. I did have a few questions that I wanted to get some advice on.

1. Collateral- he isn't asking me for anything other than a promissory note. I would lean towards recording against the property with someone I didn't know. If I opt to record, the property I'm working on has a seller financed note that I will be refinancing after the BRRRR is complete.

- if I add the note to title, I would assume this puts the private lender in second position? If that is the case, when I go to refinance and pay off the original seller, will he default to first position? Not sure how the refi bank would feel about this.

Main question would be pros and cons of recording the promissory note with title against the property if I’m not required to do so. I do however want to protect my lender and give them peace of mind for for future business and referrals.

2. Self directed IRA distributions. Since we are looking at a five year cycle, are there any requirements to disburse annually - ie interest payment back to his SDIRA custodian or can I just disburse his compounded interest and capital at the end of 5 years?

Thanks in advance for feedback

@Marsay Winder Congrats for taking action to make this happen! Many folks just talk about doing it! Obtw, I just did this exact deal with a rehabber in Roanoke VA last week. I am the Private money lender using a SD-IRA, and Jack, a rehabber friend of a BP connection, found the property to BRRRR. The way our deal is structured: my SD-IRA is the first lein holder and Jack is paying back my IRA directly.

Rather than circumventing the BP servers by cryptically writing your email address, @Greg Moran , why don’t you publish your process here, where it can be reviewed publicly and critically?

I strongly suggest, @Marsay Winder , your friend sits down with a knowledgeable lending lawyer in the state the loan will be made. Though he, really his IRA, is now the lender, you might want to join in as well. Note, that lending lawyers are not the same as real estate lawyers. Get an attorney recommendation from a local HML.

The topics of the conversation should include a discussion of usury, licensing, lenders title/fire/liability insurance, required paperwork, the very real risks of loaning in second position, foreclosure, and several others that a competent lending attorney should educate and inform about.

I also recommend that he use a larger, local, experienced private/hard money lender to work with his SDIRA provider to originate this loan. HML's are knowledgeable about private loans like this. They will have vetted paperwork and will be able to provide an independent evaluation of the area, the property, and you. Unfortunately, this is such a small loan you might have a hard time finding someone to do this without paying a relative fortune.

While a 5-year loan would be completely ill-advised in my view, your friend might want to sell his loan at some point. Or, sadly, he might have to foreclose. This could even mean going after your personal assets. (All reasons never to do business with friends or family, but that’s a topic for another thread.). For these reasons, his loan must be properly originated, recorded, and with all the necessary documentation. That is, bulletproof.

Best of luck to the two of you, Marsay.

Originally posted by @Marie Grabo :

Is there a glossary somewhere explaining all the abbreviations?

 BP - Bigger Pockets

HML - hard money loan/lender

IRA - individual retirement account

SDIRA - self-directed IRA