Can I take out a hard money loan for purchase and use IRA for renovation money?

3 Replies

Hi All,

I just put a house under contract that I'm going to flip. My partner and I plan to get a hard money loan for the purchase and then use my self-directed IRA for the renovation funds. My IRA is a "checkbook" IRA so I have an "IRA LLC" and I just take funds out of checking account and put them back in. Here are my questions:

1. In what name should we purchase the house - 1) my IRA LLC, 2) my non IRA entity or 3) my partner's LLC.

2. All the profits I make on this house are going back into my IRA LLC. Can I sign a hard money loan as myself or as manager of my IRA's LLC? Or should I just have my partner sign for the loan and be the only borrower?

Thanks for the help!

@Gail Greenberg

1. Talk with your attorney and tax professional.

2. Talk with your attorney and tax professional.

Here's my opinion from personal experience from every angle here. Most hard money lenders (HML) use an after repair valuation (ARV). Doing so means there is rehab, obviously. Since there is rehab to improve the property to the ARV valuation the rehab funds must be readily available. Most, if not all, hard money lenders you come across will require the rehab funds to be escrowed at closing for future draw release since the loan is being made off the ARV. The reason for this is if the borrower defaults, or the contractor gets hit by a bus, there are still rehab funds available for completing the project.

For example, a $60,000 purchase and $40,000 rehab where the ARV is $140,000. . . If a borrower borrows the PP of $60,000 and plans to fund the $40,000, a HML is going to want the $40,000 brought to closing and escrowed --- really meaning the HML controls the release. If you have the ability to do so in your IRA then great. If not, it will probably be an issue.

And most HMLs require personal guarantees and recourse so you would want to be really careful and plan ahead in proceeding with this scenario. 

Good luck in your real estate endeavors!

@Gail Greenberg

If you are personally buying the property you will not be able to use your IRA funds for the rehab (you are considered a disqualified person to your IRA and IRA is prohibited from conducting any business with disqualified person, in your case would be lending the funds). If you are in fact planning on buying the property in your IRA (not personally), you are not allowed to provide personal guarantee, the loan must be non-recourse. Non-recourse means that there is no recourse that lender has against you or your IRA, property is the only security for the loan. Those loans typically need 30%+ down-payment because of the higher risk for the lender.

It is not 100% clear to me from your description on how you wish to structure this transaction but remember, if you IRA is involved, all of its transactions must be 'arms length', which means no personal benefits to you and you are not allowed to provided any services.

Before engaging in a transaction like this speak with a company/professional who set this up for you, you do not want to make a mistake here, it will be very costly. 

Dmitriy Fomichenko, Broker
(949) 228-9393

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