Hard Money Lending and Hard Money Borrowing
May 9, 2012
Today I want to talk about another way you can use a self
directed IRA to can get out of the stock market and make a nice return in a safe and secured way.
What I want to talk about is becoming a hard
money lender and or a hard money borrower.
First let us define a hard money
lender. A hard money loan is a specific type of asset-based loan financing
through which a borrower receives funds secured by the value of a parcel of
real estate. Hard money loans are typically issued at much higher interest
rates than conventional commercial or residential property loans and are almost
never issued by a commercial bank or other deposit institution. Hard money is
similar to a bridge loan, which usually has similar criteria for lending as
well as cost to the borrowers. The primary difference is that a bridge loan
often refers to a commercial property or investment property that may be in
transition and does not yet qualify for traditional financing, whereas hard
money often refers to not only an asset-based loan with a high interest rate.
Many hard money loans are made by private investors,
generally in their local areas. Usually the credit score of the borrower is not
important, as the loan is secured by the value of the collateral property.
Typically, the maximum loan to value ratio is 65–70%. That is, if the property
is worth $100,000, the lender would advance $65,000–70,000 against it. This low
LTV provides added security for the lender, in case the borrower does not pay
and they have to foreclose on the property.
Let us take a look at a case study of someone doing a hard
money loan in their self directed IRA.
John has $70k that he is willing to
Tom has a property that he is
closing on and needs cash. Tom is buying
the property for $100k but the property is valued at $135k. John requires Tom
to sign a deed in lieu of foreclosure. Tom borrows the $70k from John for 18%
annualized return for 90 days. That’s $3,106.84. If Tom does not pay by the 90th
day John is guaranteed another 90 days of interest. So Tom is motivated to get that loan paid
back before 90 days.
LETS LOOK AT IT FROM THE
John is a
passive investor no work for him.
John will be
first lien holder on a property that is valued at $135k for a loan of $70k.
John will have
in his possession a deed in lieu of foreclosure just in case Tom
fails to make payment.
guaranteed 18% every 90 days annualized. 18% X $70k=$12,600/365days =$34.52 X 90 days
LETS LOOK AT IT FROM THE
Tom is able to purchase an
investment property that is valued at $135k that he invested $30k of his own
If Tom is able to flip/sell this
property in 90 days, let us assume that it took Tom $15k to fix the property.
So out of pocket for Tom would be his original $30k as down payment and $15k to
fix the property for a total of
$45k. After the sale Tom would owe
$73,106.84 to John. Toms original
investment of $45k would be returned to him and his profit in 90 days is
$16,894.00. That’s just over 37% return
in 90 days.
We can use our self directed IRA
to be both the borrower or the lender in this case study. It really depends on you and how involved you
want to be. Both have a great return for
our IRA owned LLCs and our self directed IRA.
If you want more information on how you can take control of your
retirement account contact me at email@example.com
Timothy A Schubert CISP