How to Create a Private "IRA-Bank" For Your Deals
[This is part 4 of 7 in a series about creative financing]
This article is about my most-used creative financing tool: self-directed IRA loans.
If you want to review my three previous articles about creative financing, check them out here:
- 6 Reasons I Prefer Creative Financing to Bank Financing
- My Creative Financing Toolbox (And Why You Need It Too)
- How Seller Financing Really Works
IRA stands for Individual Retirement Account. It is an investment vehicle similar to a 401k plan (Wikipedia - IRA types).
If you are looking for alternative sources to fund your real estate deals, IRAs are a virtually unlimited and seldom-used resource.
There are almost 5 TRILLION dollars sitting in IRA accounts in the United State (source: ERBI). For comparison, the total of all US mortgages held by banks and major financial institutions was only $4.4 trillion dollars in 2014 (source: Federal Reserve).
My business partner and I started tapping into this large source of IRA money on one of our first fix-flip deals.
We had a local bank who was willing to loan us 80% of the purchase price on a good deal, but we still didn't have all the down payment and fix-up money.
So a mentor and private lender agreed to loan us the cash we needed using funds available in his IRA. He had to transfer his money from a traditional bank to a custodian who specialized in self-directed real estate loans (sample self-directed custodians: AmericanIRA, Equity Trust Company, and Quest IRA).
Just like a bank, at closing our private lender's IRA was secured by a note and a mortgage (2nd position), title insurance, and was named on our casualty insurance policy in case of a disaster.
For at least 4 years my friend kept his money busy doing deals with us at 10% interest. His account balance grew substantially and so did our own bank account as we bought, fixed, and sold many deals.
There are probably many people you know who have money that could be loaned for your deals. You just need to start talking about retirement and about real estate, then listen to people’s responses and stories.
Most IRA owners have money invested in stocks, bonds, CDs, and money market accounts, but some of them would love to invest some or all of it into real estate if they knew how.
I met my own small group of private IRA-lenders by networking and becoming friends with other real estate investors. Your local REIA club is a great resource for these types of financial friendships.
These types of conversations are not pitches. I am not a salesman.
If someone I know is interested in real estate, I just educate them about real estate, about typical deals, and about how private lenders can make interest just like a bank.
My educational talk with a potential lender looks a lot like my 6-minute YouTube Video that explains the basic mechanics of an IRA loan against real estate.
Watch it yourself and feel free to share it with potential IRA lenders.
Thank you as always for choosing to read my articles. It’s a privilege to share with you.