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How to Lend Hard Money Loans with a Self-Directed IRA

January 15, 2025

By: Dana Udumulla

Key Points 

  • Hard money loans are loans that are secured by the borrower’s real estate property they’re attempting to purchase.
  • Self-Directed IRA (SDIRA) holders can leverage their retirement savings to offer this loan to borrowers that cannot qualify for a loan at a standard banking institution.
  • One of the appealing factors of hard money loan investments is that there’s typically significant equity in the foregoing property.
A model house rests beside a question mark, signaling the importance of performing due diligence on any prospective borrower before issuing hard money loans.

Hard money loans seem to be gaining prime recognition in the investing realm. Some retirement account owners are intrigued by the concept of utilizing their Self-Directed IRA (SDIRA) funds to invest in hard money loans. If real estate ventures or promissory notes have captured your interest, then this alternative investment could equally be thread with lure. Let’s navigate through the basics of hard money loans, so that you can determine if this asset is right for your retirement.

The Cardinal Points of Hard Money Loans

A borrower could find themselves in a predicament – they may need funds for a time-sensitive real estate opportunity. For whatever reason, even though they have a solid track record of completing on-time payments, they may still fall short of eligibility for a loan at a banking institution. This is where your Self-Directed IRA and an accompanying hard money loan can come into the picture. 

A house with a loan in a cart, indicating that hard money loans can help deliver funds to those looking to buy a piece of real estate.

Hard money loans are generally used for real estate transactions, as they’re reliant on collateral. The collateral is typically the property that the borrower is placing the loan towards. Rather than combing through financial records, you – as the lender – would be reviewing their investment property. This indicates that if there’s substantial equity in the aforementioned property, you would still be in good standing in the event of default. Since an offering of this nature is rarely available at banks, borrowers can look to organizations or individuals like you to help facilitate their realty investment endeavor. 

The Varieties of Hard Money Loans

Usually, hard money lenders issue a loan ranging from 65% to 75% of the investment property’s value. Additionally, they generally have a shorter allotted time frame with a higher interest rate than a traditional mortgage. There’s no “one size fits all” regarding hard money loans. The entire plan of the loan can be customized to fit the borrower’s real estate circumstantially. Nevertheless, there are a few real estate undertakings where hard money loans work best. 

For instance, those who are engaging in fix-and-flips are acquiring a loan with the intention of renovating the property and reselling it for a profit. This means the loan will likely cover the purchase of said property alongside the renovation costs. Hard money loans can also be used for bridge loans and land loans. Bridge loans were established to bridge the gap between a property’s purchase and the sale of an existing investment property within the borrower’s portfolio. Land loans are hard money loans tailored for raw or undeveloped land and can be used to purchase land outright or to further develop a plot. 

A blue piggy bank sits beside handfuls of cash and a post-it is referencing hard money loans.

Hard money loans can also apply for commercial real estate, including office buildings, retail centers, warehouses, and other industrial properties. Many borrowers also choose to employ hard money loans for construction projects. In this case, money is typically disbursed during the progressive phases of the project’s rehabilitation process. 

The Sweetener

A coffee cup rests on its saucer complete with dollar sign coffee art, indicating that utilizing your Self-Directed IRA for investing in hard money loans can prove to be a sweet endeavor.

Employing your Self-Directed IRA as a resource for borrowers can not only sweeten their endeavor but can also honey your retirement savings. Since hard money loans tend to involve higher interest rates, you can potentially accumulate a higher return on investment. As the loans are fortified by the tangible asset of real estate, this can possibly equate to a greater safety net. Upon the agreement of the hard money loan, together, you and your borrower will create a payment schedule. In turn, your SDIRA will gain a relatively predictable and steady income. 

Self-Directed IRAs present their owners with tax advantages. In the initial stages of setting up your account, you can decide the way in which your potentially blooming retirement savings accrues these benefits. Self-Directed Traditional IRAs offer tax-deferred growth, while Self-Directed Roth IRAs let your potential earnings flourish in a tax-free environment. If you figure you’ll be participating in multiple or transaction-heavy investments, upgrading your account to a Self-Directed Checkbook IRA (a Self-Directed IRA LLC or Self-Directed IRA Trust) may be more suitable. A Checkbook IRA enables you to make your everyday investment transactions in real time. 

Furthermore, investing in a hard money loan with your SDIRA means you’re aiding in diversifying your retirement portfolio. Real estate is generally uncorrelated to Wall Street products, meaning that their value is not tied to the ebbs and flows of the stock market. Investing in a hard money loan promotes possible portfolio hedging and a reduction of your overall risk. 

The Surveying

Self-Directed IRAs permit you full and total control of your investments and retirement savings. Hence, your Self-Directed IRA custodian is legally unable to provide any financial advice. Be that as it may, performing due diligence on all prospective investments – including borrowers – is considered best practice. When assessing if a borrower is someone you should mingle with, you might want to consider a few factors. 

An SDIRA owner is pleased with the incoming revenue of her hard money loan investment.

Foremost, reviewing your borrower’s credit history and financial standing can give you an idea of their responsibility. Although this loan is purely asset-based, skimming through their credit reports, bank statements, and tax returns can touch on to how they’ve reimbursed past lenders. Secondly, evaluating their property is key to ensuring this entire investment is a successful enterprise. Your best bet might be consulting with an inspector and/or appraiser. 

If all is copasetic, before signing any papers, it’s generally recommended that you commence legal research. Consider certifying that everything is above board by verifying the legal ownership of the respective property. Running a title search is important, as prior to working with said borrower, you’d want to be aware of any burdens or existing liens. You want nothing to stand in your way of being considered a secured creditor. 

You’ll want to get an understanding of the borrower’s intentions for this loan so that you can construct a loan term with a structure that’s reasonable for their level of risk. Getting wind of their exit strategy can help minimize the odds of the borrower defaulting. Moreover, you’ll possibly feel more confident about the means in which the borrower repays your Self-Directed IRA. 

Madison Trust Tribune’s Investing in Hard Money Loans with a Self-Directed IRA infographic, explaining the basics of hard money loans.

Investing in Hard Money Loans Can Lead to Liberation

Using your Self-Directed IRA to invest in hard money loans helps those with the desire to expand their own investments while seemingly increasing your potential ROI. As real estate is illiquid, its chance of resorting to a zero-dollar value is highly unlikely. With generally expected income per your own arrangement, you can feel rest assured that your retirement savings are accumulating revenue while mitigating portfolio risk. 

Want to learn more about hard money loans and other asset classes? Our Self-Directed IRA Specialists want to jumpstart your self-education journey. Schedule a free discovery call today and get ready to feel self-empowered. 


Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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