Using a private investor IRA to flip a house
Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votesHey friends!
My partner and I want to flip a house and we have someone who wants to fund us, but they want to explore the option of using an IRA to do so. From what I understand this is possible if it's set up as a self-directed IRA?
Can someone explain to me in a little more detail how I facilitate this process? Is this a scenario where my business can use the money at will and just pay her back (plus interest) at the end? As I read more it seems that isn't as simple as I would like.
Thanks in advance!
Very do-able. Best to do it as a loan secured against a specific property.
The lender needs to get their IRA set up with a true self direct IRA company. I've been through a couple and currently have IRAServices as my custodian. The lender would then get their money from their current custodian to the new one. Then the IRA makes a loan to you. The IRA is the lender. The name of the lender is actually something like "IRAServices for benefit of IRA" or some such. There is usually paperwork that has to be submitted to the custodian with information about the loan. Once approved, the custodian will wire money or send a check to the title company. Payments (doesn't sound like you're doing these) would go back to the custodian. As would the pay off at the end.
Another alternative is an IRA LLC. That's what I ended up doing because my old custodian (Sterling Trust Company) was just too slow in dealing with the paperwork. That setup has the IRA holder set up as the manager of an LLC that is owned by the IRA. The IRA's money goes into the LLC and then the manager can just write checks. However, the IRA owner has to be intimately familiar with the rules for IRAs. If you do it with a custodian, they will make sure the rules are followed.
Using the money at will would mean the IRA is loaning you or your entity money. Or investing in your entity. Also possible. But more complex for you as the borrower. It could be an unsecured loan just to you. The custodian may have issues with that. As a lender, I certainly would. Or it could be an investment in your entity. But that gets you into "selling securities". I have made some investments like that. But the person running the entity went through the SEC filing and paperwork process to properly set up a "private placement". That's a time consuming and expensive (tens of thousands) process. If you're raising enough money, its worthwhile. If you're talking about $100K, its probably not.
Very do-able. Best to do it as a loan secured against a specific property.
The lender needs to get their IRA set up with a true self direct IRA company. I've been through a couple and currently have IRAServices as my custodian. The lender would then get their money from their current custodian to the new one. Then the IRA makes a loan to you. The IRA is the lender. The name of the lender is actually something like "IRAServices for benefit of IRA" or some such. There is usually paperwork that has to be submitted to the custodian with information about the loan. Once approved, the custodian will wire money or send a check to the title company. Payments (doesn't sound like you're doing these) would go back to the custodian. As would the pay off at the end.
Another alternative is an IRA LLC. That's what I ended up doing because my old custodian (Sterling Trust Company) was just too slow in dealing with the paperwork. That setup has the IRA holder set up as the manager of an LLC that is owned by the IRA. The IRA's money goes into the LLC and then the manager can just write checks. However, the IRA owner has to be intimately familiar with the rules for IRAs. If you do it with a custodian, they will make sure the rules are followed.
Using the money at will would mean the IRA is loaning you or your entity money. Or investing in your entity. Also possible. But more complex for you as the borrower. It could be an unsecured loan just to you. The custodian may have issues with that. As a lender, I certainly would. Or it could be an investment in your entity. But that gets you into "selling securities". I have made some investments like that. But the person running the entity went through the SEC filing and paperwork process to properly set up a "private placement". That's a time consuming and expensive (tens of thousands) process. If you're raising enough money, its worthwhile. If you're talking about $100K, its probably not.
Ok that's a very detailed response and i'm grateful!
The amount is actually really small <$100,000. From the way you explained it I think maybe option 1 or 2 would work, the problem I run into however is doing it against a specific property. This seems like a problematic step because ideally I would like access to the money so when I find the right deal I can just go write a check.
What it really sounds like I need though is a knowledgeable local CPA to handle all of this for me. At least I have some ammo for the investor now though
Thanks @Jon Holdman Great information. I was actually wondering the same thing. I don't have a specific property lined up but have a few friends who are looking to make more than their current IRAs are making and I now feel confident in suggesting this as an option. Thanks again!
John covered things very good above.
I have bought a rental with my own SDIRA and have the 'LLC Check Book Control' option John mentioned and would highly recommend it. I am also working on lining up potential lenders to lend TO me from THEIR (yet to be set up) SDIRAs for future projects that I plan on doing (no definite properties yet). The way we are leaning is for them to have the 'check book control' at a local bank, and when we find a property, we will simply have a lawyer draw up the papers and they will transfer money for the loan..... seems like it should be very simple. One key would be for them to do all the setting up BEFORE you are ready to find a specific property so things can flow quickly. I our case, we bought at auction so had to have 5K down the day of and close in 30 days.... this could NOT have happened if things were not set up ahead of time.
Dan Dietz
In large part your ability to just get the cash is going to depend on the lender. If they trust you enough, and the custodian doesn't have a problem with it, it could be done as an unsecured loan. AFAIK that doesn't violate the rules for IRAs.
However, you also write:
If I was going to just loan you a chunk of money to use indefinitely I would certainly want monthly interest payments based on the full amount of my money you have. I would only consider deferring payments until the sale if I had a security interest in a specific property. I'd give you the money at closing (by wiring to the title company) and expect a check from the title company when you sell. In reality, when I've done this I got monthly payments even with a security interest in a property.
When I've done this I also don't hand over the full amount up front. If some of the is for rehab, I would hold at least some portion of that back at closing and only distribute it to you as the work progressed and I was able to inspect it. I would also want to see permits and the use of licensed contractors. The default I had was, in part, caused by the failure to fully permit the work.
As a lender, I MUST assume you will default and protect myself against that. I have had it happen. If I have a security interest in the property then I would expect you to just hand over the property. That's what my defaulting borrower did. If you force my IRA to foreclose I'm going to come after anything I can to make myself whole. The lender needs to have enough cash in their IRA to deal with the possibility of a default. That IRA would be the one to foreclose or take other action. And, if the IRA takes the property, its the one that has to buy insurance and finish up whatever needs doing. If the IRA doesn't have the cash, the IRA owner CANNOT just kick in their own cash.
If the loan was unsecured and you defaulted, I would be screwed. The IRA would have to sue you to try to get paid back.
Also, I wouldn't do this if this was a significant chunk of the lender's net worth. My rule of thumb is no more than 10% of my assets in any particular deal. If the lender has just the one IRA and limited other assets and you're going to borrow a large chunk of it, I'd think twice. If things go bad that would really put a hurt on the lender.