This article is about my most-used creative financing tool: self-directed retirement account loans. Using this tool, you can create your own network of individuals who can loan you money for your real estate investing deals, which is like creating your own “private bank.”
If you are looking for alternative sources to fund your real estate deals, IRAs (Individual Retirement Account) and 401ks are a virtually unlimited and seldom-used resource. Even in 2011, there were over 7 TRILLION dollars sitting in IRA and 401k accounts in the United States (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).
I’ll give you some examples of how to tap into this resource in the rest of this article.
My First Loan From a Self-Directed Retirement Account
My business partner and I started tapping into this large source of retirement account 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 (I use a custodian called American 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.
Where To Find Retirement Accounts to Borrow From
The first thing to know is that you can’t loan money to yourself or a close family member. See this Wikipedia article for some of the basic rules and regulations. You MUST adhere to these rules or face stiff penalties from the IRS.
But there are probably many non-disqualified 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 and 401k 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 retirement account lenders by networking and becoming friends with other real estate investors. Your local REIA club or the forums on BiggerPockets.com are great resources for these types of financial friendships.
How to Talk to Potential Lenders About Self-Directed Retirement Account Loans
Talking to potential lenders should not be a pitch (at least at first). You don’t have to be a salesman.
If someone I know is interested in real estate investing, 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 lenders for your self-directed retirement account loans.
I hope you found this information helpful and exciting. If you need money for your own real estate investing deals, self-directed retirement account loans are a great source to explore.
Good luck in your own search!
Thank you as always for choosing to read my articles. It’s a privilege to share with you.
Have you borrowed money from someone’s self-directed retirement account? Or have you made loans from your own self-directed retirement account? How did it work for you?