Real Estate Loans
If you are considering loaning money for real estate transactions, you will also want to consider what you will accept as collateral and what terms you will accept involving the possible transfer of ownership should the borrower default. Loaning money can be trickier than buying outright but it also has some advantages. If you are not the owner of the property, you are not required to pay the expenses associated with the property.
Even more so than with buying real estate, you may want to obtain the services of a lawyer to go over the details of a loan to make certain you are in an advantageous position. Depending on who your IRA advisors are, you may be able to have them look over any promising deals. They may also have some template documents that will shorten your preparation time and save you some of the legal fees.
Assuming your lending funds are coming from your IRA, you may not be able to make such a deal if your IRA is in the care of a traditional custodian. Many traditional custodians refuse the lending of IRA funds in their care because of the complexity and uncertainty of such deals. If you have a self-directed IRA LLC, however, you can do pretty much as you please as long as you do not step outside of the confines of the law.
Lending Responsibly
Lending money is somewhat complex. You do not own the property involved, only the pieces of paper that entitle you to be repaid. You are not an owner but a creditor and bad debts often go unpaid. In the worst case scenario, you may only receive a fraction of the principal balance and have little recourse. The best way to lend money is to lend only to those individuals or entities that are extremely concerned about their credit ratings and are most likely to make good on the loan.
Written By Scott Janko, The National Association of Financial and Estate Planning (NAFEP)
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