All Forum Posts by: Mitch Messer

Mitch, one important detail not mentioned is who the borrower is. If the borrower is a disqualified person to either IRA (like a child, parent, or a business they or the spouses own 50%+ of), then the rest of this discussion is a moot point - it would likely be a prohibited transaction from the start under IRC §4975.

Assuming, as I believe is intended, that the borrower is an unrelated third party, then I agree with the overall consensus in the thread and just wanted to recap and clarify for everyone’s benefit.

The safest path is a single promissory note with both IRAs listed as co-lenders, each owning a 50% interest. This keeps both accounts on equal footing with no conflicting terms, which helps avoid any risk of one IRA needing to "interact" with the other in the event of a default. A first-and-second lien structure, on the other hand, creates unequal rights and obligations that can cause one IRA to compromise or act in the interest of the other - which is exactly the kind of self-dealing the IRS looks to prevent. Pro-rata treatment and parallel terms are essential.

Make sure everything flows directly between the borrower (or servicer) and the IRAs - never between the IRAs themselves. You might also check with local counsel in PA just to confirm no state-level securities issues with fractional notes, though most states permit them.

@Mitch Messer,

If the borrower defaults on one of the loans, then one lender would have to step in and interact with the other lender, which would be problematic for an IRA. No such risk if there is a single loan.

Quote from @Dmitriy Fomichenko:

Quote from @Greg Scott:

With an SDIRA, you can buy a bond.  That is the same thing as making a loan.  Each account could go by some T-Bills.  That means both SDIRA holders would be lending to the same entity, the US Government.  I don't see how having both SDIRAs lend on the same project could be prohibited.

Regarding your second question, a shared co-loan seems a very bad idea and would likely be prohibited.  You have to treat the SDIRA like it is a separate, unrelated person.  Co-mingling the investments could create major problems.

Greg, the opposite of what you are saying is true. The only way to do this is to do a shared loan. Investing jointly with a disqualified person in and of itself is not considered comingling. It might lead to a prohibited transaction, but it is certainly possible if done correctly. 

I did this for a living when I had my HML company in Oakland.. Fractionalized Deed of Trust with each bene owning their % of the loan simple and done everyday by brokers who do these type of loans in CA.  Not every state allows multi bene loans though without a security offering like Oregon for instance its not legal like it is in CA..

Quote from @Mitch Messer:

We've got an interesting private lending situation:

- Husband and wife, each with their own checkbook SDIRAs, want to lend on the same real estate deal.

- Borrower needs $100K.

- Each spouse can lend $50K.

First question: Is this even allowed?

Second question: If allowed, what's the best structure? A first and a second lien? A single shared co-loan? Something else?

I'm asking because the guidance we're getting from their IRA custodian sounds questionable. We'd like a second opinion.

Has anyone here done something like this?

Any advice and/or insight would be greatly appreciated!

Thanks in advance!

There are a few ways to do this. 1: create a multi-member LLC, both IRA's are the members and the LLC holds all the assets. 2: each have their own LLC that invests into one asset as "co-investors" so to speak. Option 2 is much better typically because you won't be restricted to that one LLC having to do the same investments at the same time with the same original 50/50%. Option 1 is not ideal unless both spouses or other people are only going to do one investment together like a $10 million apartment building or something. In the thousands of checkbook IRA's we've set up we've done less than 10 multi-member LLC's.On the other hand if they qualify for a Solo 401k now the 401k is the investor and much easier to "combine" both spouses funds without the restrictions that come with the multi-member LLC.In either case, all expenses and income related to a combined investment must be shared pro-rata throughout the life of that investment.

@Mitch Messer,

Yes, this is possible, but it must be structured correctly to comply with the IRS rules.

A first and a second lien? ABSOLUTELY NOT! This will create a conflict of interest and will be considered a prohibited transaction. The only way to accommodate this is to have two lenders on a single loan. 

With an SDIRA, you can buy a bond.  That is the same thing as making a loan.  Each account could go by some T-Bills.  That means both SDIRA holders would be lending to the same entity, the US Government.  I don't see how having both SDIRAs lend on the same project could be prohibited.

Regarding your second question, a shared co-loan seems a very bad idea and would likely be prohibited.  You have to treat the SDIRA like it is a separate, unrelated person.  Co-mingling the investments could create major problems.

Not really.  I've dealt with many private lenders.  They have their process.  It's not like, "You need 100k?  Tell me where to send it."  There's still due diligence to be done on the part of the lender.  Are they not looking into the property or borrower?

Everyone advertises the 7 day close and then the fine print it reads a ton of disclaimers on title, insurance, what have you.

Quick closings is usually a trait of the PML.  But again, it really depends on the definition of Private Money.  All the Hard Money Outfits are individuals who raised capital to lend it out.  Private Money?  Hard Money?  Someone cashes out of their 401k and lends the money to a RE investor, insanity, but let's say they do.  I guess that's more along the lines of what people are thinking of in terms of Private Money.

But, if you are dealing with a Private Money individual.  Do they know RE?  Do they know if your plan with this house is even feasible?  Do they know you're good for it?  Do they know the rates for Private Money?

People get too caught up with Coke or Pepsi.  They're very close no matter which one you prefer.

If you are someone building a team, you're in a market and been there for a few years making connections, watching the market, following deals, you now have your contractor, your agent, your wholesaler, your designer, having a private money guy in this scenario makes sense.  Someone you can build a relationship and grow with.

For any one-off deal, it really does not matter.