Long Beach, CA · Member since 2013 · 134 posts · 5 votes
Hi,
I know someone who wants to lend me money from his retirement account.
I have suggested that he set up a self-directed IRA, which could then put his money into an escrow account, where he could basically act as a mortgage broker, using his self-directed IRA to invest in trust deeds.
Would someone with knowledge and experience please provide more insight into this? I want to be able to walk him through it step by step.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y
@Ky Sharp, assuming your friend is in CA, those annual state LLC fees of $800 or so are also very nasty for the IRA/LLC. The much better avenue is the SD401k, which has checkbook control but does NOT require an LLC. I used www.mysolo401k.net to establish mine and have been very pleased. They have all kinds of great info on their web site to guide you.
For a "sponsoring business" for the SD401k, your friend can simply sign up to be a distributor for a great product (such as a nutritional product, for example, there are thousands of possibilities). This typically costs little to sign up.
The benefits of the SD401k relative to an SDIRA are huge. Search other posts for SD401k or Solo 401k if interested.
There also remains a bit of taint surrounding the IRA/LLC in terms of potential future IRS action against these arrangements, that you do not have to worry about with the SD401K.
Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes
13y
I use Guidant Financial for my SD IRA. I like that you have a thorough training/education component to start. Plus they include a mandatory legal consultation as part of account setup. Their upfront account setup fee is higher but it's a fixed cost. Thereafter you have a low annual fee($150) that's not based on the value of your assets. I write a check at the moment I need funds from my SD IRA owned LLC's checking account - I don't have to fill out paperwork to ask somebody to please send me some money. It is definitely a "big boy" account and you have to know the rules. But I am confident that Guidant Financial did a great job setting me up for success!
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
I have an account set up by Guidant, too. But its truly overkill for what you want to do. There are any number of companies that will set up a much simpler (and safer) structure than an IRA LLC that will work very well for making loans. I've had experience with Sterling Trust Company and Equity Trust and can't really recommend either of those. My current custodian is IRAServices, and they seem pretty competent. Fees can be a killer with some of these guys, so tell your friend to research fees carefully.
The custodian he chooses is the one that does the paperwork to give you the loan. Again, there is absolutely no need to set up a complicated IRA LLC just to make loans.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y
@Ky Sharp, assuming your friend is in CA, those annual state LLC fees of $800 or so are also very nasty for the IRA/LLC. The much better avenue is the SD401k, which has checkbook control but does NOT require an LLC. I used www.mysolo401k.net to establish mine and have been very pleased. They have all kinds of great info on their web site to guide you.
For a "sponsoring business" for the SD401k, your friend can simply sign up to be a distributor for a great product (such as a nutritional product, for example, there are thousands of possibilities). This typically costs little to sign up.
The benefits of the SD401k relative to an SDIRA are huge. Search other posts for SD401k or Solo 401k if interested.
There also remains a bit of taint surrounding the IRA/LLC in terms of potential future IRS action against these arrangements, that you do not have to worry about with the SD401K.
Lender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
13y
Setting up an LLC is an unnecessary step. The self-directed IRA can lend directly. Personally, I use Equity Trust, however, there a several good administrators out there. Get your friend in front of an expert, or on the phone, and make sure you do it right.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y
The issue with a typical SDIRA (non-LLC) is that everything has to run through the custodian. This can take a lot of time, and sometimes speed is important on a deal. It's also just plain tedious to have to interface constantly with the custodian, and they can nickel and dime you to death on fees. They'll charge loan set up fees, loan payment processing fees, annual account maintenance fees, etc.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
13y
When you say "direct family member", what do you mean specifically?
If they are a disqualified party, stop, do not pass GO, nothing, nil, keep away. There is no way to "get around" the disqualified individual giving you a loan. You could partner with them but there are all kinds of things to remember with that as well. Again talk to the administrator to find out the ins and outs.
If they are not a disqualified party like say a sibling then there is no issue with what you would like to do any more so than any other person you could deal with.
Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes
13y
This is just another example of the "devil is in the details" Ky. There are two parts of your question that I'll address separately.
The first part is about your family member who has a "retirement account" who wants to lend to you. Is it a 401k, IRA (Roth, Traditional, SEP, etc.), 403b ... there are a lot of different kinds of retirement accounts and the best answer is going to be determined by which type of retirement plan they have?
How is this possible without going through an intermediate? Well, that's where the ways different custodians or trustees (that's the intermediate you're talking about) set up self directed IRAs. This is where you'll have to do some homework to find out which option is best for the type of plan you have and your investment objective(s). An SD-IRA service company, like ETC, sets up the account owner's account where they hold the funds and you submit requests for funds when you want to make a real estate investment. That's why I prefer the way Guidant Financial does it. They set up a custodial account, then my funds were transferred to an account (that I opened at a local bank) owned by my SD-IRA owned LLC. As the SD-IRA account owner, I manage my funds like any other LLC, but within the limitations of SD-IRA rules. I don't have any fees for every transaction I make.
This is an advanced investment strategy and if you found that difficult to follow, you may not be ready for this yet. To the novice, it sounds complex, but it just requires attention to detail and the ability understand and follow the rules. In LA, the annual fee is $30 for an LLC, so I'm not dealing with any outrageously high costs of maintaining an LLC. It's extremely efficient the way it works for me.
Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
12y
An LLC is not required to lend IRA funds to an unrelated third party in the form of a secured note (mortgage/trust deed). The loan docs are drawn up with the IRA as the lender, and all are signed off, on behalf of the IRA, by the IRA custodian. The IRA then holds that note as an asset. Most custodians will require an ammortization schedule be supplied and that a loan servicer be retained to keep track of the principal & interest payments, which are made payable directly to the IRA. Property tax payments in this structure would be the responsibility of the borrower/homeowner.