Entrust Learning Center > 8. Newsletter Archive > Hard Money Loans

Hard Money Loans

By: Monte Smith

IRA Insights Newsletter

The Wall Street Journal recently reported that stocks on the NYSE have lost an average of 0.5% per year over the last decade. This statistic makes you think that you might have been better off hiding your cash under the mattress. If the stock market has been your only vehicle for retirement, it’s time to take control and diversify your portfolio.
Determining which areas to explore can be tough in an even tougher economic climate. Clients of Entrust Georgia, LLC, have been investing in different forms of real estate, foreign exchange markets, annuity settlements, and even within the filmmaking industry. Another investment vehicle that is gaining popularity is hard money lending from an IRA.

In general terms, a hard money loan involves real estate, is not dependant on the borrower’s credit score (because the collateral is the real estate itself), and typically draws a higher interest rate (10%–21%) than a conventional loan. The loan is often structured with a low loan-to-value amount to protect the lender in the case of default and could include costly fees to the borrower for doing so.

Many hard money loans are desired by investors who are purchasing houses in need of repair. They purchase the properties, make the repairs, and turn around and sell the houses for a profit. If these investors lack the capital to do so on their own, they find a hard money lender they can borrow from. The loan amount is based on the quick-sale value of the property and includes the amount needed for repairs, but that overage is held in escrow and withdrawn only as repairs are made. For example, an investor has found a $40,000 house that needs $15,000 in repairs, but he has no money. He approaches you, and you look at the property and decide it is a good investment for your IRA. You negotiate the terms of the loan and move forward. Your IRA transfers $55,000 to the closing attorney, who handles the purchase of the house and holds $15,000 in escrow for repairs. The attorney will disburse the funds from that escrow account as the repairs are completed.

If you decide that becoming a hard money lender is for you, there are a few key rules to follow when determining which loans to make. First, make sure that the property collateralizing the loan is one that you want your IRA to own if there is a foreclosure. Ask yourself, “Does this property have the potential to repay my IRA after it’s sold?” Also, remember that secured loans are permissible within an IRA as long as they are not made to a disqualified person or entity. Disqualified persons include the IRA owner and his or her spouse, lineal ascendants (parents, grandparents, and so on), and lineal descendants (children and spouses of children, grandchildren, and so on). A disqualified entity includes a business that you or a disqualified person has more than 50% ownership of, is manager or owner of, or has a controlling interest in. The best way to ensure that your borrower is qualified is to consult a tax attorney or ask your local Entrust office to explain the guidelines.

You can negotiate the terms of hard money loans in many ways, which largely depends on the comfort not only of yourself but also of the borrower. Remember that Entrust does not dictate the terms or conditions of the loan. A good person to consult in this matter is a reputable real estate attorney who can help you navigate property values, fair interest rates, and terms that might be regulated by laws within your state. Use this attorney, or a broker, to transfer the funds and complete the loan process. This is much safer than simply writing a check from your IRA to the borrower, because the attorney will make sure that your IRA is in the first mortgage position. Also, the attorney holds any excess funds that are to be used for repairs in escrow until such time as the repairs are made.

Hard money loans can be an easy way to diversify your portfolio during a time that real estate costs are relatively low compared to years ago. However, with that low cost comes a risk because properties aren’t moving as quickly as they used to. Minimize your risk by studying your market and becoming familiar with the ebb and flow of sales in your area. There are brokers out there that can help you find borrowers, or you can find them on your own. But remember: When using your IRA to work better for you, you are taking control of your own retirement. You can’t do that without performing quite a bit of due diligence and becoming somewhat of an expert in the field in which you choose to branch out.

The Entrust Group is a unique administrator that can facilitate this type of investment. We have offices across the United States and offer free educational events to help increase your knowledge in diversifying your IRA. To learn more about educational opportunities in your area, visit www.TheEntrustGroup.com and click on Locations.

Monte Smith is the Director of Education & Marketing for Entrust Georgia, LLC. You can reach him at MSmith@TheEntrustGroup.com or 800-425-0653 ext 1133.