Private Money Lending in a Self-Directed IRA

If you’re looking to generate passive income and steady returns from your retirement account, this is a strategy you need to understand.

Join Directed IRA’s VP of Sales, Nate Hare, along with co-host Daniel Tercey, for a live training on Private Lending in a Self-Directed IRA.

Private money lending has become one of the most popular strategies among self-directed investors, but it must be structured correctly to stay compliant.

We’ll cover:
- How to structure loans using promissory notes and trust deeds
- Which borrowers and assets your IRA can (and cannot) lend to
- The prohibited transaction rules that can disqualify your IRA
- How interest income flows back to your IRA tax-deferred or tax-free
- 10 key considerations before deploying retirement funds
- What happens in the event of foreclosure
- Real client case studies showing how note terms can be structured creatively and predictably
 
At Directed IRA, we’ve helped thousands of investors put over $3 billion into real estate, private funds, notes, and more, all inside tax-advantaged retirement accounts. Our team of experts and streamlined platform make it easy to invest with confidence.

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/

Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com

Transcript

SPEAKER_00 0:08

Hi, welcome to the Directed IRA webinar and podcast. Today's topic is private money lending in a self-directed IRA. I'm Nate Hare, joined by Daniel Terse.

SPEAKER_03 0:18

Everybody.

How To Engage: Chat vs Q&A

SPEAKER_01 0:18

We've got a great webinar for you guys today. We're going to be talking about one of my favorite topics to talk about, which is private lending inside your self-directed IRA, self-directed 401k. We've got some good case studies that we're going to go over just to give you guys a more general idea of how you can leverage your retirement accounts to invest in real estate, but not deal with renters, toilets, all the ownership headaches that come with real estate, you can learn how to be passive with your real estate investment and still make great returns secured by real estate. And we'll talk about some advantages on how you can even structure your node investments to compound interest and do all the crazy things that our self-directed IRA clients enjoy to do. So uh first, some quick announcements. If you guys have any questions during the entire webinar, we want you to type those questions into the uh QA box. That way, Daniel can moderate the questions. If they're a good question to answer live, we'll answer it live. But he'll also be fielding the questions and answering questions. But make sure the questions are in the QA box. If you guys want to chat and network and talk about where you're from, and if you've got, you know, maybe some investments you want to throw out there to people in your area, use the chat box for that. So conversations, great public forum, chat for that. Questions to us that you want to address either on the webinar or do them live, do that in the QA box.

SPEAKER_03 1:40

So and I see everybody in the chat, I see a couple people already talking in the chat. That's great, but remember just keep your questions in the QA box.

Events, Summit, And Client Perks

Why Alternatives In Retirement Accounts

SPEAKER_01 1:46

Yeah, and what one thing I'll add, I like to see how many people it's their new experience with directed IRA. So this is if this is your first webinar with directed IRA, put a one in the chat. If it's your second or third or four hundredth, put that number as well. It doesn't have to be exact. We just like to see how many new listeners or new viewers that we have. So um we want to make this entertaining for you guys and educational at the same time. So let's go over uh some other quick announcements. Angel, if you want to bring up the slide. We have our live events planned and scheduled, and most of you are familiar with these events, especially if you are a client. We do have some exciting changes this year, particularly with the self-directed IRA summit. Um, this is our one-day crash course event that we teach everything you need to know about investing with a self-directed account. So if you want a one-stop shop to kind of get from A to Z, listen to all the strategies that are available, all the account types that are available. We'll even have some clients and some investment sponsors come on on some exciting alternative asset panels. We're doing it a little bit differently this year. We're not doing it live, we're gonna do it virtually. Uh, this is gonna be on April 17th. Uh, it's gonna be virtual. You can purchase tickets. We do have super early bird tickets available right now for purchase. But if you are a client, you get free access to the to the whole show, plus access to the recordings for at least six months. So thank you for becoming a client. And if you're not already a client, you can become a client. Uh, we have a special offer right now for anybody that opens a new self-directed IRA between now and the end of the month. Uh, ask our account specialist for that promo. Um, but you can just scan that little QR code or go to directed IRA.com. We'll remind you guys of this promo at the end of the segment. But if you want to go ahead and get started now, I believe we've got Michelle Rodriguez in the chat. Michelle, are you in there? If she's not, she will be. And you can schedule a call directly with her or just scan that QR code. It'll take you right to the website where you can schedule a call, get your questions answered about how self-direction works, how the funding process works, and ultimately how to get it invested into an alternative investment or into a private money loan, which we're gonna talk about here today. So that's it for announcements. Let's kind of jump into the meat and potatoes of our presentation today, our educational webinar, private lending in a self-directed IRA. Here's basically what we're gonna cover today. First, we're gonna talk about the rules and regulations when it comes to retirement accounts, investing in alternatives. Now, real estate and promissory note investments, which we're gonna talk specifically about today, are considered alternative investments. Alternative investments is a very general term, and Dana will go over some of our most popular alternative investments that we see here at Directed IRA. But most people don't even realize you can invest in alternatives inside of a retirement account. So we'll talk about what you can invest in inside of a retirement account and what types of self-directed retirement accounts allow you to purchase alternative assets like real estate or notes secured by real estate. We'll talk about the different types of plans, like like Daniel will mention. But then we're gonna go over some rules of engagement with your self-directed IRA. Who can your IRA loan to and who can't it loan to? That's very important when we talk about self-directed IRA investing. And then we've got some exciting case studies that'll kind of pull everything together, excuse me, kind of pull everything together. Uh, I got two different case studies that'll really show you that you can get really creative with private lending. Um, and a lot of people think, well, it's not in owning real estate. Don't owners of real estate or real estate investors make more money? Uh-huh. Not essentially. Sometimes you can make a lot of money just by being passive with your retirement account investments and still be secured by real estate and have double-digit returns and less of the headaches and less of the work. So we'll talk about that toward the end here. So, Daniel, tell our audience since how many new people do we have? Yeah, we we had a ton.

Account Types: Traditional, Roth, Solo 401k

SPEAKER_03 6:04

There were a ton of ones, a ton of ones. We had a couple, we had a couple fives in here. So that was pretty interesting.

SPEAKER_01 6:10

We love the repeat uh viewers, but for you new people, we're gonna talk about just the general rules when it comes to what can you own inside of a retirement plan.

SPEAKER_03 6:18

Yeah, and just I already see some great questions. I just want to go over all this is gonna be for educational purposes, no tax advice, all right, no investment advice, nothing like that. I've already had a couple of questions that maybe are a little off topic. Uh I'm only gonna be answering topic questions that and asking questions that are on topic. So private money lending, what the do's and don'ts, and how it really works. And I've already got some great questions for you kind of queued up. Maybe as I'm going through, you could already kind of prep your answers. Yeah. So as Nate mentioned, since 19 since the 1970s, you've been able to invest in literally anything you want, except for two things. One is life insurance contracts, which let's be real, if you're investing in those, you're just setting yourself up for a true crime documentary. All right. You don't want to have those in your IRAs. And then the next thing is collectibles. So you guys can finally get rid of your beanie babies and Pokemon cards and tell your kids that the little boo-boos won't age tax-free, okay? But everything else is totally acceptable. Now, what we're used to and accustomed to is fidelity and what they brainwash us with stocks, bonds, mutual funds, ETFs, REITs. REITs are actually my favorite because they'll say, Hey, uh, you can invest in real estate with your IRA with us, and then they throw you into a REIT. It's like that's the same thing.

SPEAKER_01 7:37

Yeah, we've got this wonderful publicly traded REIT for you to invest in.

SPEAKER_03 7:40

We think it's gonna do the same thing that actual real estate's doing. So that's what Fidelity, Schwab, JP Morgan's, that's what they've been doing. What you can actually do, and what the very wealthy are doing, is everything you see on the right. And this is perfectly legal. And I would even say you could even get away with a little insider trading here, because if you understand the real estate market better than you understand the stock market, guess what you have a leg up on? Real estate, not stocks. So I always ask people when I'm doing my presentations, you know, how many of you guys are Warren Buffett? And not many people raise their hands. And then I say, well, then why would you want to invest in stocks, bonds, mutual funds if you don't understand them? And everybody's there is investing in real estate, but they don't use their retirement. So put your future into the something that you know best, okay? And while I'm talking about real estate, we still have land, precious metals. We have a great cryptocurrency account that I think we're the best in the market, personally. You can invest in private businesses. And what we're gonna be talking about, promissory notes. And Nate's gonna get into that. He's the expert. You don't want me talking about that stuff.

SPEAKER_01 8:50

Now, can the new people have multiple IRAs and do all of it?

SPEAKER_03 8:54

Yeah, yeah, totally. You can have, I I always tell people you can have a million IRAs. It doesn't make any sense to have that many, but you should definitely have at least one in the stock market and one with alternative assets. You're gonna hear us kind of beat up the stocks, bonds, and mutual funds a little bit. That doesn't mean they're bad by any means. Not at all. True diversification is stocks, bonds, and mutual funds and your alternative assets. Okay, you should have both.

SPEAKER_01 9:19

Can I share some statistics?

SPEAKER_03 9:21

Yeah. Okay.

Roth Conversions And Compounding

SPEAKER_01 9:22

Here's some statistics for you new people, too. So a lot of you might be new to this idea of holding an alternative investment in a retirement account. But there's been some interesting audits and reports from Fidelity, the IRS, and it shows that of the$45 trillion in US retirement accounts, only about 3.5% of 45 trillion, those people own an alternative asset of any kind. So very few people own any alternative assets in their retirement account. But when you take the ultra-wealthy, people that have a net worth of, let's say, a million dollars or above, when you look at those individuals' retirement accounts, they have nearly 22% of their assets diversified into alternatives. So that can be real estate, debt funds, land, cryptocurrency, all the things that Daniel mentioned on the right. And then when you click keep climbing up the up the ladder, people with$30 million net worth or more, they have 50% of their retirement accounts invested in alternatives. So what does this tell you? It tells you that the rich and the wealthy have found that self-directed IRAs and alternative investments either adds some safety and security to their overall portfolio, maybe it's just for diversification purposes, or maybe, as Daniel alluded to, they're just knowledgeable about an alternative investment and they can make the needle move bigger and faster than just having everything in a mutual fund or everything tied to the stock market. So, and you'll we'll talk about some advantages of promissory note investing here in a second. But just to let you know, this is not a new technique. This has been around since the 70s, and the rich and the wealthy have been leveraging these accounts for many decades.

HSAs, ESAs, And Using Them To Lend

SPEAKER_03 11:03

And now the types of accounts that you guys are gonna be looking at in order to do this, they're all up on the screen. So every single one of these has their own benefit. So you can see we've already kind of categorized them personal plan, employer plan, and specialty plans. So for most of us, actually, really all of us, we all can have a traditional and a Roth account. And again, I'm not gonna go super deep into these because I think we want to get into the private money lending, but I'll touch on it a little bit. Each account is gonna have its own place and position. All right, and with traditional IRAs, these are gonna be great, especially for my private money lenders. These are gonna be great for when you have a friend who just recently lost the job. You can say, hey, what are you doing with that old 401k? I know a company that can allow you to roll it over into an account, more than likely a traditional, and you will be able to invest in these deals where I'm making all this money. You see me making all this money, you can use your retirement account to invest alongside of me, to invest in my deals. Okay? So traditional accounts are gonna be pre-taxed dollars, and they're typically gonna be rolled over from old 401ks. And I say typically because sometimes you have some geniuses out there who are doing Roth contributions into their 401ks. And if they were doing that, they would roll it over into the Roth IRA. And all Roth means in this case is after tax contributions, okay? So with the traditional IRA, you're putting in pre-tax dollars. So technically, it's a stronger dollar, it's a benefit, right? So you're putting a stronger dollar in to grow it over time, tax-free. You're growing it tax-free, and then in the end, you pull it out taxable, okay? And a Roth is going to be post-tax dollars that you grow tax free, and then in the end, you take it out tax-free.

Why Notes: Passive, Secured, Predictable

SPEAKER_01 13:01

Now, one thing I want to add to that most people have traditional pre-tax dollars when it comes to their IRAs. Because, like Daniel said, it came from their pre-tax 401k. Ever since 2010, anybody, regardless of your income, can pay taxes on your traditional pre-tax accounts and convert it to Roth. You could do small conversions, you could do large conversions. Now, a lot of CPAs will freak out if you go to them and say, Hey, I want to pay taxes on my traditional IRA and convert it to a Roth. Oftentimes they never ask you the question, well, what are you gonna invest in in the Roth? They just say, Do you really want to pay all those taxes today? You're gonna be in a lower tax bracket when you retire. A, no, you might not be in a lower tax bracket when you retire. But here's the thing when we're gonna talk about notes, I'm gonna show you different ways on how you can structure short-term notes that make double-digit returns and you can compound uh interest annually. If you've ever seen a chart on compounding interest and you take tax out of the equation, you could take a small IRA, and let's say you just invest at 12% compounded annually, you could take a hundred thousand dollar IRA and turn it into$1.5 million off the sweat equity of somebody else. Now you got to ask yourself the question before you do all that work do you want to pay taxes on$100,000 or do you want to pay taxes on$1.5 million? This is the conversation that you should be having with yourself before you enter into alternative investing because with note investing, it's a very predictable type of investment. We'll show you how. But if you can predict the return and you can keep your money working for you, compounding tax-free, I think it's way better done in a Roth IRA to where you've got that big bucket of money that you work hard to invest. Now you can start taking that money out tax-free and penalty-free once you hit 59 and a half. So these are the questions a tax strategist would tell you, not necessarily a CPA. No offense to CPAs out there. I know you guys do your job, but I'm talking about from the investor standpoint, you want to analyze whether or not it makes sense to pay taxes on your traditionals before you start growing a massive Roth IRA.

SPEAKER_03 15:10

So perfect. And uh, we have a lot of questions that I think I'm gonna be able to answer in this segment too. Like one of them uh specifically is can an LLC own an IRA? And that is yes. It's known as an IRA LLC or in common nomenclature, checkbook IRA. Um, Nate can talk about those when he goes into how um note buying is is done, but that's a that's a good one. Um now for the employer plans. We have SEP IRAs and solo 401ks. This is for my self-employed people, okay. And as Nate mentioned, uh CPAs are going to usually push you towards tax-free anything. They don't, I don't know if it's because they don't want to try and find write-offs, so they just push you into pre-tax things, but they're gonna push you probably to a CEP most of the time.

SPEAKER_01 15:57

For the tax deductions.

SPEAKER_03 15:58

Yeah, for the tax deductions. But we over here, I always say we're the church of Latter-day Roth. Uh, but I also would say that we're also the church of solo 401k as well. Because what you can do in a SEP, as long as you have zero employees and you're self-employed, you can do a traditional and a Roth account inside of a solo 401k. So if you want the write-offs, do a traditional. You want to do post-tax dollars and grow it all tax-free, do a Roth account. Do half and half. But you can do a ton of contributions into these sep and solo 401ks, and you can do it with the solo 401k as both a traditional and a Roth.

SPEAKER_01 16:37

And just to mention, all of these accounts can be used as a private capital source to lend out of. So we'll talk about how you can partner these accounts together. But Dani is doing a great job just telling you the tax benefits of these accounts. Then we're gonna position that into how do I lend this money out?

SPEAKER_03 16:53

Yeah, and I'm letting Nate take over on that one. You again, like I keep saying, you want Nate to talk to you guys about private money lending, not me. Um, and then our last accounts, which are actually my favorite accounts, they're specialty plans. These are the accounts that you're gonna use to pay for things today, okay? And those things have to be specific. HSA, as we all know, they're health savings accounts, okay? So these accounts, I actually talk to people and tell them they're more like an expense account. So with an HSA, you're gonna open one of these up. Let's say you open up in 2020 and you're gonna start contributing and you're gonna start investing it. And you're gonna grow it as big as you possibly can. And while you're doing that, you may have some medical expenses along the way. You're gonna save those receipts. And in the end, when you grow this thing to a million dollars and you have$60,000 worth of medical receipts saved up, you're gonna go to that CPA that loves to write things off, and you're gonna say, Hey, I took a distribution for my HSA to go buy a Cadillac, and uh I'm gonna hear all my receipts that show that I was able to take out those distributions because they're all of your health expenses.

SPEAKER_01 18:00

Basically, it's like a Roth IRA that you could take distributions before 59 and a half to pay for all your out-of-pocket medical expenses, or what Daniel's referring to, reimburse yourself for medical expenses that you paid. And again, this is a self-directed HSA. So we can predict how we invest it, we can predict the return in it, but the benefit is to take the distributions of the earnings to pay for healthcare.

SPEAKER_03 18:26

Yep. And then the covered LESA, the CISA, that's gonna be kind of like a 529. All right, except for in this case, you aren't just giving your money to the government and having them invest it for you. Okay, you're actually going out and you're investing this money to grow for your child's uh education, whether it be college or maybe trade school, pre-pre college, even high school, pre-college, elementary. I don't know how many of you guys have internet at your house. Uh everybody. But for those of you that are on here, they they probably have it. You you can pay for your internet as long as your child's using it for schoolwork, iPads, laptops, again, accounts that you can pay for items today as long as they qualify. Okay, and what Nate's about to go over in just a couple of slides here, these accounts you can actually use to invest in promissory notes and do private money lending. And with the CISA, you can only do about$2,000 a year.

Prohibited Transactions And Disqualified Parties

SPEAKER_01 19:23

Sure. Per child, per year. Per child per year. Right now is a good time to look at setting these accounts up. If you haven't set them up before, that's okay. We you could still make contributions to the personal plans, the traditional Roth, and the HSA and the Coverdale up until 20 or April 15th for last year. So if you're looking to get more money in these accounts and you haven't made contributions for 2025, you can still do that. And you can also make contributions for 2026. A little off topic, but it is important what he mentioned is because if you want to get more money in these accounts, if you want to get more of this money deployed into secured promissory notes, getting double-digit returns, um, that's an important thing. That's an important deadline to understand. So just book a call with our team, talk to our IRE specialists, they'll walk you through it. Tell them the accounts that you're interested in. But if you pull this screen back up real quick, um Angel, all of these accounts are by definition tax-exempt trusts. They can hold stocks, they can hold mutual funds, they can hold real estate, or they can own notes secured by real estate. You want as many accounts as you can qualify for to eliminate Uncle Sam from touching all the profit from these accounts. Um, if you talk about our favorite accounts, I love the Roth, I love the Roth solo K, I love the HSA, and I love the Coverdale. Why do I like those particular accounts when we talk about private money lending? Because those are all the accounts, if I play my cards right, then when I take the interest income out of the accounts that they've earned over however many years I've invested those four accounts, I pay no taxes on the distributions. So double-digit returns, compounded annually, secured by real estate, and no taxes on the interest income. If you invest in these same investments outside of an IRA, there is no tax benefit to being a private lender with money in your bank account. That's ordinary income to you as a taxpayer. All the interest income that we generate on private loans out of these accounts, there's no taxation to these accounts. There's no tax return these accounts have to file. None of the income hits your 1040. This is all tax-exempt trust vehicles that we can use to shelter the interest income away from Uncle Sam that he can never touch.

SPEAKER_03 21:39

And the one part that I was going to touch on, which I'm glad you actually didn't cover, was you can partner all of these accounts on your deals. Yep. And I know Nate's going to talk about it, so I don't want to steal his thunder, but that I was talking about with this with the Coverdale ESA is sure, you might only be able to get$2,000 in. You can double it up this year up until April 15th, but you can also partner it on Wikipedia. Your larger accounts.

Lending Rules Of Thumb And Red Flags

Drafting Notes, Terms, And Payment Schedules

SPEAKER_01 22:01

Correct. And we'll talk about that on the very first case study. So why do we like prior, why do investors like promissory note investing? And when we talk about promissory note, what we're talking about is this is the agreement that you're going to have between your IRA and a borrower. Okay. So if anybody out there has a real estate investor friend, right, and you want to use your self-directed accounts as the bank, first, there's going to be a negotiation between you, the accounts fiduciary, okay, you the individual, and the borrower. So let's just assume Daniel is a real estate investor, and I've got some self-directed accounts set up at directed IRA. I meet Daniel, maybe I meet him at AREA, maybe I just meet him, maybe as a family friend of mine. And Daniel has some great real estate deals. I can say, hey, Daniel, I've got a sell a couple self-directed accounts at directed IRA. I would love to bring these accounts together and loan the money to you. Now there's a way to do it safely, securely, where we're still, you know, closing at a title company. Essentially, Daniel's just not going to Chase for a loan. He's coming to me with my self-directed IRA accounts. The agreement that we come to is going to be put on a document called the promissory note. Okay. We'll talk about the how you how we can structure these notes, but that's the note. So when we keep saying promissory note, that's just the agreement between Daniel, the borrower, and my self-directed accounts. The benefit to doing an investment like this is Daniel, thank you, buddy, does all the work, right? He's the one negotiating with the seller. He's the one dealing with the contractors. He's the one putting the white picket fence up and putting it back on the market as either a rental property or flipping it for a profit. My money is just used to help him buy it and maybe even rehab it. So for me, it's passive. He's doing all the sweat equity. I don't have to do any of that. So this is one of the reasons a lot of our W-2 workers that don't have time to find real estate deals, they know somebody that's working full-time in real estate. They just leverage the experience in sweat equity and time of somebody else. If you are on this line and you're on that side as the borrower, this is a good position for you to be in because you need to understand that retirement accounts make up most of where people's money is$45 trillion in retirement accounts. You need to start building relationships with people who have retirement accounts and understand how you can talk to them, you know, on a surface level about how they can use those retirement accounts to lend to you the experienced real estate investor. But ultimately, what people like about it is it's passive. Doesn't take them a lot of time, it just takes them to know the relationship. Now, a lot of people ask, Nate, can I call you and I'm a real estate investor? Can you tell me all the clients that want to loan money to people? No, that would put me in jail. Okay. But what you can do is you can come on webinars like this and say, hey, I'm so-and-so in Oklahoma. I've got some deals. If anybody's interested, here's my phone number. You can also go to your local real estate investor clubs or local anywhere, anywhere you go, church, the grocery store. As a borrower, you should be engaging people in what are they doing with their retirement account. If you've got investments to offer, you can offer them a passive investment using their retirement accounts, and that's going to be a conversation you just have to unlock. We can't give you the list of clients that want to do it. Now, another reason people like to get into lending, low barrier of entry, and it's another diversification tool to add to their overall retirement portfolio. Uh, if you look at family offices, for example, family offices are usually working with a group of sophisticated investors that have, let's say, north of$50 million or above. Notes secured by real estate, right? Or notes just earning interest income passively are one of the largest asset classes in a family office portfolio. Look at it. So this is this is a diversification tool, not only for people with retirement accounts, but it does bow very well for people with retirement accounts because of the next thing, which is the tax advantages that you get by loaning money out of a retirement account. And I kind of hinted to this. When I loan money out of my personal bank account, Nate Hare, and I loan that money to Daniel, we'll still structure the same agreement. I may even structure the same terms that Daniel's willing to pay me as the taxpaying individual. The problem with it is I keep less of the interest income because I have to report the payments that he makes, I have to report the interest on my tax return. There's really no tax benefit. I don't get the depreciation on the real estate. That's all the depreciation he gets. So for investing in promissory notes or lending, I like to do it out of specifically my retirement accounts because there's a huge pendulum shift. You if you want to bring the slide back up, uh Angel, there's a huge pendulum shift that you get massive tax savings where none of the interest income is reportable or taxable to any of your retirement accounts. Now, I also like to have the distributions tax-free. So that's why I talked about the Roth, the Roth 401k, the HSAs and the ESAs. But as far as the interest income that it's that any of those accounts is generating, it's all tax exempt. So I like to do specifically lending out of my retirement accounts, not out of my personal bank account. Here's the thing I really love about lending. You structure the terms. You, as the plan owner and the potential borrower, you're gonna try to create a win-win scenario between the two. Now I'm representing my retirement accounts. Ultimately, the lender on the promissory note is not going to be Nate Hare. It's going to be Nate Hare's IRA. But I get to negotiate the terms. I negotiate how much I'm going to loan out of my retirement accounts, when the loan starts, when payments have to be started, what interest Daniel's going to pay. Is he paying any points up front, which is just upfront interest? Are there late fees associated with Daniel paying after the fifth of the month? This is all the terms of the promissory note. And the note is secured by real estate if you close through a title company or an attorney's office. So not only is my money secured by the underlying asset. So if Daniel dies, my retirement accounts get a house. But at least I know at the end of the day, I know exactly what Daniel is supposed to pay, when he's supposed to pay, how much he's supposed to pay, because it's all spelled out in the note. So it's very predictable. So this is why I like promissory note investing, but it also lets you get into real estate investing. And I consider it still a tangible investment, which is different than a stock, which you know, you stocks go up, stocks go down, stocks disappear if you're in the wrong company. That to me is just less tangible. A note secured by real estate is very tangible, even though it's still a paper investment. So let's talk about. Well, do we have any questions that we want to address first? Yeah.

SPEAKER_03 29:25

Let's talk a few just because we're kind of building up. Uh, and I think you've answered quite a few of them. So, how protected are promissory notes if the individual or company files for bankruptcy?

Rehab Draws, Escrows, And Insurance

SPEAKER_01 29:35

So, okay, so here's where, and we're gonna talk about the specifics of how you want to structure these deals. Now, for me, I'm just gonna talk about my personal experience. I like to loan to real estate flippers on investment property, and my money is secured by the property. So, let me give you an example. I've done several loans in the state of Texas. Now, why do I loan in the state of Texas? Because as a lender, um, the rules of engagement are very protective to the lender. Okay, there's other states I just won't touch because they're very protective to the borrower. Now, I'm just thinking about my retirement accounts. I'm not gonna invest in those states that protect the borrower. I'm gonna invest in the states that protect the lender because that's what I am. In Texas, when you make a loan secured by real estate and the bar and all the closing is gone through a title company. Most of you guys are familiar with how a closing works, right? You go through a title Nescrow company or you go through an attorney, but there's something that's specific that happens in Texas and a lot of other states where I'm gonna have the promissory note recorded, but I'm also gonna have what's called the deed of trust recorded. The deed of trust is the document that allows me the lender, or in this case, my retirement accounts, allows me the lender, to circumvent the court system and file a foreclosure in the event Daniel doesn't pay my IRAs. Bankruptcy is not going to save him from me having to foreclose. I can foreclose through the deed of trust. Other states have the mortgage that allows you to do the same thing. This is how banks retain properties, especially investment properties, right, without having to go mess with the bankruptcy or anything like that. Now, this is also why I don't loan on owner-occupied property. I would never loan anybody money out of my retirement account to buy the house that they live in. Okay. A, I'm not looking to kick anybody out of the house that they live in if they're my IRA is the lender. Um, I know that most cases, if it's an investment property from a borrower, they might have renters in there. If I have to foreclose on that property, the investment property, I'm gonna take the property and then just immediately just keep the renters renting. Okay, I don't have to kick anybody out. But also, if I loan my retirement dollars or any dollars to an owner-occupied resident, I got to deal with a big headache because courts do not like to kick people out of houses either. So I'm gonna bankruptcy could be a challenge for me if I'm a lender on an owner-occupied property. Plus, the other thing is, why are they coming to me for an owner-occupied loan? I charge 10 to 12%. You can get a better loan, a much better loan from Chase or Wells Fargo, an FHA loan with minimum down payment and a low interest rate. We're talking more specifically about loaning money to somebody on an investment property. Now, there are some ways you can do it and not be secured. I have I have clients that I've seen do unsecured notes. That's not something I would do. I'm not talking you guys out of it, but I can loan Daniel money just uh the graciousness of my heart and just have a promissory note with the same terms and just say, Daniel, just pay me back whenever you want to pay me back. Or we I can say pay me back monthly, but we don't have to go through the process of the title company, the deed of trust. That's called an unsecured note. Am I allowed to own that in a retirement account? Sure, I am. But if Daniel doesn't pay me, guess what I got to do? I got to take Daniel to court. And there's no guarantee that I'm gonna get paid from that, and I do not have access to the underlying asset. So these are some of the things that we want to identify. How risky do we really want to be in our promissory note or our lending investments? I like to just stick with my wheelhouse. Investment properties, real estate flippers, secured by real estate, and we're done. So great question. Any other questions?

SPEAKER_03 33:29

So I have two. I'm gonna ask this one, and then the second one I think is gonna lead us right into our next slide. But I think this first one's really quick, really easy. Does it make sense for me to become a private lender with as little or with as low as$30,000?

Judicial vs Non-Judicial Foreclosure

SPEAKER_01 33:43

Yes. I mean, I I've I've done I've done a loan with$500. I can talk about that case study. Um, but there's really no a minimum amount. Now you might have to structure the deal where, you know, let's say that you're gonna the the deal requires$100,000 for of private money. You've got$30,000 in one account. This is where the multiple accounts come in. Now, can we get to$100,000 of just our money in maybe a group of people's retirement accounts? First question I would ask you is Does your wife or husband have an account? Do you have kids? Do you have some brothers or sisters that maybe have some retirement accounts? Can we bring some other accounts together, partner them together through what's called a fractionalized note, which I'll talk about here shortly? All it is, it's just one promissory note, one lien, but they have multiple lenders on one note, and we can have as many lenders as we want. I did a deal one time where we had 14 IRAs listed on one promissory note to get us to a whopping$55,000. Now, it was kind of a case study, we wanted to do it for fun, but ultimately we're just talking about individual accounts. Now, if you only have$30,000 combined, there's some other avenues. There's bridge loans, there's rehab loans, there's other types of loans, second lien position loans. We're not gonna talk specifically about those today, but any 30,000 is is uh I would say enough for other types of loans, but you just have to get creative with what you're gonna do or be okay with doing some sort of like bridge loan or rehab loan in maybe a second or third position.

SPEAKER_03 35:22

All right, perfect. And then last, which I think is gonna take us right into the the next slide, is is it possible to transfer ownership of raw land that I own to my self-directed IRA?

SPEAKER_01 35:34

Okay, a little off topic, but it does bring us to what you cannot do in a self-directed IRA.

SPEAKER_03 35:40

So for prohibited transactions, which is exactly what that example was, there are a few rules you have to follow. Okay. The first and the easiest one I would say is do not transact with yourself. That's the big no-no.

SPEAKER_01 35:58

That's really the the biggest no no.

The Three-Step Process To Fund A Note

SPEAKER_03 36:00

Yeah, that's the biggest one. And it's also the easiest one to avoid. Listen, if you're trying to snake taxes to get it into your IRA, the IRS has already thought about it. All right. They're going to say that's a no. Okay. So rule number one is do not transact with yourself. Now, you cannot loan money from your retirement account to yourself or other disqualified parties. I'll get to disqualified parties in a second, but I want to emphasize you cannot loan to yourself either because I had another question that I think they were confusing solo 401ks with IRAs. Your IRA cannot loan to yourself. Okay. If you need to take out some money to do something, that's a solo 401k thing. You can take out 50% of that up to$50,000. Okay, but your IRA cannot loan you money. It can loan money to your brother, your sister, your aunt, your uncle, your niece, your nephew, your friends, your enemies, whoever you want to loan it to, as long as it's not yourself, your grandparents, your parents, your spouse, your kids, your grandkids, or their spouses. I only listed off seven people. When I list it off the people you can invest with, it's almost ten. Okay. It's a huge pool to invest with and transact with. Just choose them.

SPEAKER_01 37:28

Yeah.

SPEAKER_03 37:28

And don't try and be sneaky and be like, well, it's my son's LLC and uh doesn't work. It doesn't work. Yeah. Okay. It's still your son at the end of the day benefiting from your tax-free dollars.

Case Study 1: 12% Balloon, Fractional Note

SPEAKER_01 37:39

And let me back up in just one sec. Let me remind people: you this is your relationship to your retirement plan. You are technically the fiduciary to your plan. As a fiduciary, your job to your retirement account, whether it's an IRA or a 401k, is to put contributions in as the fiduciary, put some investment capital in it. You direct the custodian to buy investments, you direct Fidelity to buy stocks or mutual funds, you direct directed IRA to buy real estate or lend on real estate. All of your decisions, though, as the fiduciary must only benefit your IRA. As a fiduciary, it's illegal to do investments that benefit you, the individual. Okay. You get your benefit from the distributions you take from your IRA and your 401k for that matter. So it's prohibited for you to tell your IRA to make a loan to you. Because essentially, it's a conflict of interest. You make the decisions for your IRA, you make the decisions for yourself. You cannot tell your IRA to make a loan to you. The 401k, that is just a provision in 401k rules that allow you to take a participant loan. You're still not doing an investment to yourself. It's still prohibited. You're just taking a participant loan and taking money out that you have to pay back with interest. So any investment, there's no self-dealing and no making loans to yourself. The reason why they add spouse, parents, grandparents, or lineal ascendants, and they add kids and grandkids is when you die, your IRA turns into an inherited IRA. Inherited IRAs, 99.9% of the time, are passed on to the spouse, the living spouse, or down to the kids or the grandkids. So the IRS sees, well, if they're going to inherit the IRA, they're also fiduciaries to the account. So I can't take my Roth IRA and make a loan to my son and then die. And my son's got an inherited Roth IRA with a loan to himself. So this is why they disqualify those specific family members and not family to the side. It's not like the IRS likes your brother and your sister and your aunt and your uncle better. It's because most of the time they're not going to inherit your IRA. So they're not considered fiduciaries or disqualified people. Now, there's something to be said is maybe you don't want to loan to family, but that's a whole nother topic that we'll get to here in a second. So, but just remember the benefit to you and your fiduciaries is the distributions that you take. We want to loan money out of our retirement accounts to non-disqualified people. And let's talk about some of the considerations we want to make before we loan our money out or deploy our money out. Now, these are just rules that I've come along with in my career as a lender. I started out as a residential loan officer back in the early 2000s. So I've always liked the numbers game and the passiveness of investing in promissory notes. But here's some of the things I would just say are just things to think about before you take money out of your retirement account and loan it to an individual. So, first, make sure you'd be excited to own the underlying asset if the loan goes into default. So we're going to talk about the cool ways we can create the note and all that and how we can secure it. But at the end of the day, is the asset something that you can deal with if your IRAs have to take that asset when, let's say, Daniel fails to make payments or when your borrower fails to make payments? I'll give you a couple examples of where this went wrong for some of my past clients. I had one client that was doing really well, loaning money out to a local real estate investor that was just buying three-bedroom, two-bath house rentals, fix and flips. And that was pretty easy because at the end of the day, he knew that if this borrower didn't pay his IRAs, well, he could go through the foreclosure process. The IRAs could retain the property. And most everybody on this program probably knows what to do with a three-bedroom, two-bath rental. You rent it out, throw it on the market, get a realtor involved, easy peasy. Well, he had a deal come through another real estate pipeline where somebody was doing a commercial property. So the deal sounded good, the numbers sounded good, the numbers were even a little bit better than some of the deals he structured on his uh residential um loans. But when the borrower foreclosed on the property, he thought, oh crap, I don't know what to do with this commercial property. I've never dealt with a commercial property. So going into the deal, make sure that you understand what the underlying asset is. And at the end of the day, if you have to take it back into foreclosure, you know what to do with it. With that being said, understand the foreclosure laws in the state in which the underlying asset resides. Okay. We'll talk a little bit about foreclosure laws here in a second. But that's going to be our worst case scenario. And I would even be, I don't even want to say worst case scenario. We just want to plan in the event foreclosure happens. We want, we hope it doesn't happen, but we want to understand the process. But the process is going to be different in each state. Okay. So make sure you understand the state of the, not where you live, the state where the underlying asset is. Here's one thing I would mention. Don't loan to people you would feel uncomfortable foreclosing on. Okay. Even if they're not on the prohibited transaction list or prohibited party list. Okay. Remember as the fiduciary to your retirement account, you have an obligation to act in the best interest of interest of your retirement account. If my brother is a real estate investor and he's a great real estate investor, and I decide to make a loan out of my retirement account to my brother, that's perfectly within the rules. If my brother doesn't pay my IRA, what am I going to do? Am I going to act in the best interest of my IRA and foreclose on my brother and make uh Thanksgiving really awkward? Or am I just going to say, well, it's my brother, I'm just going to let it slide. Well, in the eyes of the IRS, that could still be deemed a prohibited transaction because you did not act in the best interest of your retirement plan. My rule of thumb is if you're going to loan it to an investor, okay, that investor should know that you're gonna treat this like a like any bank would, that if they fail to make payments, you're gonna send a notice of default, which we'll talk about, you're gonna start the foreclosure process. But don't lend money to people you would feel uncomfortable foreclosing on. I've seen this with boyfriends, girlfriends. Okay. Boyfriends, girlfriends, and then they're no longer boyfriends, girlfriends. And then what happens to the money? You feel uncomfortable foreclosing on those people. So just make sure. And this sounds funny, but I've seen so many relationships go down the pipes because somebody loaned money to family, that family didn't pay them, and they're like, well, what do I do now? Okay. So again, you're in control here. So you tell us who you're loaning money to. We're not going to stop you unless it's clearly prohibited. Uh, number three, if you need help, leverage professionals that understand real estate. Now, can you call me on the phone or call Daniel and tell and ask us questions on who the loan to? Unfortunately, not. We we can't give you tax legal investment advice. We can't tell you who you should loan to. Um, I would probably say leverage the experience of your network. Um, this is where networking is key. Self-directed IRA investments is a real relationship business. You got to get out there and network. I love local RIAs. We've got, if you're in the state of Arizona, ASRIA is a great RIA. The Texas RIAs are probably one of the best RIAs out there if you're in the state of Texas. These are great communities of investors that not only will provide you good education, but if you need help evaluating deals, they've got a big community of people that will help you analyze your deals.

SPEAKER_03 45:21

And I can I can tell you right now, there's a lot of real estate investors out there who have borrowed lots of other people's money, and they're very happy to educate you and get themselves a little bit lower of an interest rate because they're helping educate you. So it's very easy to find these people.

Compounding Through Short-Term Deals

Usury Limits, Points, And Rates

SPEAKER_01 45:38

Yeah, but don't be scared to leverage the experience of others, especially if you're new. But I will tell you this being a lender also gives you some free coaching along the way. What better way to learn real estate than being a passive participant in a real estate investment? So when you're the where the we you're when you're the lender on a real estate deal, you'd be shocked how willing the real estate investor on the other end of that transaction is willing to share what's going on in that investment. So it's a great way, but don't be scared to leverage professionals or a community that can help you structure your deals or analyze them. Okay, so let's get into some specifics about the note. Okay. So first of all, who drafts your note? Does directed IRA draft it? Unfortunately not. What I would probably look for is before you get into a deal, make sure you find a lender, uh, a real estate lender note or real estate attorney that is familiar with lenders. Okay. Um, I used to I use a real estate attorney out of Texas. He's lender friendly. Um, you probably want to get at least a uh a document or a template of your first promissory note, but have a professional draft it. Some title companies will draft notes, um, but just beware, this is something that you're gonna have to find outside of directed IRA is who's going to draft your promissory note. Now, once you get that person or attorney that's gonna draft the note, when you're negotiating the terms with your borrower, okay, on how they're gonna pay back your IRA, here's some things to consider. Okay. You're gonna first talk about what's the maturity date of the loan. The maturity date is when is the loan supposed to be paid back? Okay, we're gonna loan the money on this date. When does the borrower have to pay the note back in full? Interest and principal. Then you're gonna list something to the effect of what interest rate is the borrower going to pay. And very important, it's gonna say in there the payment terms. When is the borrower supposed to make payments? Again, these are all just commonalities in a in a just traditional promissory note. You can dictate when the borrower is supposed to make payments. You can make the borrower pay monthly payments, you can make them pay quarterly payments, you can you can ask that they pay biannual payments, or in some cases where I've seen it gone wrong, you can just say, Hey Daniel, I really like you. I like the terms of the note, I'll lend you a hundred grand for two years and just pay the interest back at the end of the at the maturity date of the loan, which is two years from now.

SPEAKER_03 48:05

We'll also do it unsecured too.

Small Accounts, Templates, And Attorneys

Case Study 2: Shared Appreciation Structure

SPEAKER_01 48:07

Not do it unsecured, but but let's just say we do it secured, okay? So my money's secured by the property. What's the problem of not arranging a payment schedule in the note? Well, there's no way for me, the lender, or my or representing my retirement accounts, to tell whether or not Daniel is a performing borrower or not. You see, this is why banks put pro put notes that have to be paid annually or not annually, monthly. This is a way to gauge whether or not the borrower is performing. If I request uh monthly payments from Daniel, I know immediately from month to month whether or not he's performing because he has to make a payment monthly. If I have no payments being required of Daniel, I just say, just pay all the interest and principal back at the end of the term of the note, which could be two years from now, I could hear on the streets, maybe in my local community, local RIA, that Daniel skipped town on me. Well, can I take the property? Daniel hasn't communicated with me and I haven't heard from Daniel, and I hear that he's off running around in Brazil somewhere. The loan is not in default if Daniel hasn't missed the payment. So it sounds very simple, but if I do not have a payment schedule included in the note until the note is paid off at the maturity date of the loan, he can just get scot-free with taking my money for two years. And I have to wait and let the note expire before I can start a foreclosure process. So if you want to use your IRA like a bank, think like a bank. If you're loaning to a real estate flipper, and let's say there's a large rehab, okay, there's different ways that you can structure how we're going to deploy funds to the borrower to buy the property, and how we're going to deploy funds to the borrower to fix the property up. I'll give you just a quick example. Let's say, and I'm sorry to use you, it's just yours right here. So it's easy to use Daniel. Okay, he hasn't put he hasn't defaulted on any loans to him yet. So that he knows of that I know of. So let's say that um we've got a borrower and they need$100,000 to fix a property up and flip it. They need$70,000 to buy it, they need$30,000 to rehab it. Now, essentially, I can go through to directed IRA and I can draft a promissory note for$100,000 and I can loan the borrower all$100,000, the$70 to buy it, and front them the$30,000 to fix the property up. Now, what happens if the borrower dies? This happens. You got to prepare for this. What happens if the borrower that I just loan money to gets in a car accident and they die two weeks later? Well, I if I did it right, I'm still secured by the property. I closed at a title company, directed IRA has the note and the deed of trust. So I foreclose on the property, my borrower dies. I take the property back. Guess what hasn't been started? The rehab. But I fronted all the money for the rehab. So my money was already deployed, 100 grand, that's gone. I can foreclose on the property, but in order to get it sold, I got to put 30 grand more of IRA funds to fix it up and then get it sold on the market. And I'm probably paying realtor costs and holding costs along the way. So if that property only has an after-repair value of, say, 130, 140, well, now I'm at risk of losing money because I fronted too much of the rehab up front. Okay. Here's some smarter ways to help your borrower out, but still keeping yourself safe. Here's what I like to do. I'll loan you the 70 grand, but I'm going to hold back 30 grand uh in either an escrow account or I'm just gonna hold it back in my directed IRA account. Okay. I want you to have skin in the game, borrower. So I you can pay for the rehab, you can start the rehab, you can pay your contractors. And then when you get to, let's say,$10,000 of expenses, send me the invoices, send me pictures, I'll look at it. And if I'm satisfied with how the project's going, I'll reimburse you out of my IRA for that 10 grand. And then you send me the next photos and the next set of repairs or the next invoices. But I'm paying as the work is already completed. This will save me a lot of headaches in the event my borrower dies or can't finish the product because I haven't paid any money on work that hasn't been done yet. That's a smarter way to do it. Now, on larger rehabs, this is going to be more important for you guys. You don't have to front money for rehab costs at all. I I've seen people that just say, no, I'll loan you the money to buy it and you pay for the rehab. Okay. That's smart. That's that's a way to get your borrower invested in the deal with their own money. But if you're going to front or have a draw, some sort of draw schedule to cover the rehab, I think make sure some work is done before you pay for rehabs that haven't been started. So, anyways, that's my opinion on uh large rehabs and whether or not you you front money in. Now, we're going to some specifics. If anybody has ever got a loan from a bank, okay, you're familiar with the things that they ask for you. Okay. First, they usually escrow taxes and insurance. Okay. Now, this is a way for the bank to leverage and make sure that taxes are paid. We're talking property taxes. Now, if you're going to use your IRA like the lender, you got to make sure that you account for this. You got to make sure that taxes are being paid. The easiest way for taxes to find out taxes are paid on a property, go to the county assessors page and just look up the property in the county assessor and make sure property taxes are paid. You want to make sure you do this because you don't want payments being made from the borrower to you or your IRA, but nobody's paying the property taxes because you both might lose that property to foreclosure through the accounty assessor. If there's a homeowner's insurance policy, make sure the borrower adds your IRA as an additional insured or the mortgagey on the insurance binder. That way, if the house burns down, your IRAs are made whole. Whatever accounts you use, you get a check from the homeowner's insurance policy that covers the fire. Don't rely on the borrower to pay your IRA back if the if the house burns down. Make sure, like any other bank does, make sure your IRAs are listed on the insurance policy, the homeowner's insurance policy.

SPEAKER_03 54:15

This is also a good way to test if your uh insurance broker actually knows what the hell they're doing.

SPEAKER_01 54:19

Yeah, if they don't know, if they say, well, we've never added an IRA on an insurance binder, find an insurance private provider that knows what we're talking about. So it's just some, it's not common for people, so sometimes they get confused. Um understand the foreclosure process in the state that you the house is is resides in. Okay. This is for secured promissory note investing, okay. Understand the foreclosure laws. Um, we'll talk a little bit about foreclosure laws here in a second, but I want to get to the case studies.

SPEAKER_03 54:47

Yeah, and this, by the way, what he's about to talk about, this I've had two different people ask specifically about Florida with these types of questions. So uh they said, is it is it similar to Texas? Because you use Texas as a it is similar.

Second Liens, Guarantees, And Risk Pricing

International, Entity Loans, And PGs

SPEAKER_01 55:00

I would say Texas is very similar to Florida, which is very similar to a lot of the Sunbelt states, is similar to Arizona. Uh, I mean, and I'll skip to that. Let's let's just talk about that. So, you know, there's different states, and and usually you're gonna run into these terms, a judicial state versus a non-judicial state. It's just like it sounds. In judicial states, judicial states, if you make a loan secured by real estate, you have to go through the courts to file a judgment against the borrower if they don't pay. Everybody knows if you got to go through the courts or the legal system, it takes longer. I like to deal with states that are non-judicial states. Non-judicial states usually have the agreement like the deed of trust or a mortgage that allows you as the lender to circumvent the courts and file the foreclosure without having to file a judgment against the borrower. Okay. Now there is a process to this, but typically non-judicial states are gonna work much, much faster in taking the property through foreclosure than a judicial state. Okay, understand the documents that are securing your money to the property, whether it's a deed of trust state, a mortgage state, or and sometimes they use both. So Florida is an example of a you know, a deed of trust or a mortgage state, so is Arizona, so is uh uh Texas. Um also, this is a little outdated, but still, this is why I don't like to own loan on owner-occupied property. I don't want to deal with Dodd-Frank law. Okay, Dodd-Frank law is a is are laws that help protect uh homeowners in homes against the lenders, against predatory lending. This Dodd-Frank does not apply to investment property. So I don't have to abide by Dodd-Frank laws as long as I'm loaning to Daniel on an investment property, a non-owner-occupied property. So that's why I like to deal with investment property only. And then does the state have redemption rights? All redemption rights is is it gives the borrower X amount of time to pay back the the judgment or pay back uh the interest and all the losses over a certain period of time after the foreclosure is ended. Again, there's no there's no redemption rights in the state of Texas for investment property. A lot of other states on investment property, there's no redemption rights. But just make sure you understand what redemption rights are. It's not the end of the world, but try to stick to a state, I would say, that you're comfortable with the foreclosure laws. If you're comfortable in the judicial state with that doesn't use a deed of trust or mortgage, that's fine. I I like to stick with where it's where it's easy. So let's talk about the process and go over one or two case studies real quick. So if you're interested in doing some private money lending, if you've got a relationship with a real estate investor, or maybe you are the real estate investor and you want to start putting people in these into your deals through their self-directed IRA accounts, what's the process? It's a three-step process. One, you just have your client, or if it's you the client, open your self-directed IRAs. We've got a special deal right now where if you open by the end of the month, you save 200 bucks. Book a call with Michelle or book a call with anybody on our IRA account executive team through directed IRA.com. It only takes you five minutes to get your accounts open. Next, you're gonna fund your self-directed IRAs. This is either through contribution, transfer, or rollover. Okay, contribution is just money you put in. Transfers are for between one IRA and another IRA. You don't have to move everything from your IRAs. If you've got 100 grand at Fidelity and you just want to lend 50, all you got to do is move 50. You can still keep your Charles Schwaber Fidelity account open, but IRA transfers are quick and easy in most cases. Rollovers can take a little bit of time, but they can still be done. So this is when you have an old employer 401k or you have an old 403B. Uh, you've left that company, usually you can roll that money right into a self-directed IRA. Now, people always ask, Nate, I still work at the company. Can I still do it? Ask your company, ask your benefits department. Sometimes, if you've been there X amount of years, you've been there for a long time and you're fully vested and you're still working there, they'll let you do what's called an in-service rollover, but that's not our decision. That's your employer's decision. Once you get the account open and funded, then you're gonna work through our client portal to direct your custodian, directed IRA, to make a loan to borrower Bob or make a loan to Daniel. Okay. We're gonna need evidence of the promissory note. Okay, you're gonna show our investment team the promissory note. It's gonna list your IRAs as the lenders. Remember, nothing is in my name when it's the money being deployed from my retirement account. So if I'm gonna make a loan from my self-directed Roth, the lender on the note is gonna read directed trust company for the benefit of Nate Hair Roth IRA. That's the name to my IRA. Directed Trust Company is my custodian. They're deploying the funds for the benefit of my Roth IRA. Once directed IRA deploys the money for the investment and you give us the proper instructions to make the investment happen, usually, if you're doing it through a secured note, the title company is gonna send us the deed of trust and we're gonna keep a promissory, a copy of the promissory note in our safe. Okay. This is the same evidence that a Fidelity shows. They hold stock certificates, we hold notes, they hold mutual fund agreements, we hold deeds of trust. So we're gonna retain the documents as your IRA custodian, but you have to direct us to make the investment based on the borrowers that you vetted and based on the promissory note that you provide. This is what we call self-direction. So let's talk a little bit about some case studies here.

SPEAKER_00 1:00:53

Oop, I just turned this off.

Conversions, Volume, And Final Resources

SPEAKER_01 1:00:55

Okay, so let's go over case study number one. This is just a quick, easy example of a simple interest loan that I did with my Roth and my HSA. Now you could take this and do multiple accounts. I told you I did one loan with 14 IRAs. I've done one with eight. This one I just did with two. And these are the most, I guess, beneficial accounts to me, which is my Roth and my HSA. I don't qualify for a solo K. I'm not self-employed, I don't have kids, so I don't have need have the need for the HSA. So I use my Roth and my HSA. Now, this was a borrower that found a property through skip tracing. Uh, it was a property that was abandoned in a in a rough part of Houston. Okay, he found the owner was a great-grandson of the deceased uh owner. So this had passed through probate and it went to a great-grandson who was living in another state. Now, this great-grandson had no idea that this property even existed, but the grandfather left it to the grandson. So what he found this, he found the owner and basically negotiated a pretty stellar deal because the homeowner, the new homeowner, the one that inherited it, needed some money for a little bit of a problem that he was having. So the real estate investor was getting this at well below market value. The problem was it was abandoned for two years. He sent me pictures of the house, and this isn't the actual house. I wish I still had the pictures, but the grass in the appraisal was as tall as the roof. It was a little single story. There was some cracks in the foundation or in the um walkway, but nothing in the foundation, nothing serious. Um, but he negotiated that he can buy this property for$75,000, put$25,000 in it. And I said, What do you think the house is worth after all that work's done? And he said, probably$215,000. So for me as a lender, I know that I at least have the opportunity to secure a$100,000 investment on an investment that's worth potentially$215,000. So am I scared of foreclosure? No, not at all. I don't want to foreclose. I want the uh the real estate investor to knock it out of the park. But if he dies or if he doesn't pay me back, I get a house worth$215,000. So the first thing I did when I got these numbers, I actually took it to a real estate investor, friend of mine that was familiar with the area. I asked him for a second opinion. So even me, I leverage other professionals. So I sent it to a friend that was a real estate investor and I said, Hey, what do you comp this property out at? He had no interest in the deal. He ran comps back to me and said, Nate, I think he's being conservative. I ran it at 237.5. So even now I'm feeling more comfortable about this deal. So why did this investor come to me? He already took it to his conventional bank. They looked at the prop the pictures of the property, they said, No chance we're touching that. Let us know when you fix it up. He went to a hard money lender. The hard money lender was going to charge him 18%, but they couldn't get him the money until about two weeks. They still had an underwriting process. He wanted to make sure that this owner didn't wise up and think, oh, I'm giving this property away for too much. He wanted to close on it fast. So he knew that if he had a self-directed IRA investor, all we needed to do was produce a promissory note, have a title open, which he already did, and we can close in three days because that's how fast directed IRA processes these note investments. So basically, what we did is we had our attorney draft a promissory note. We had 12% interest, which was he was happy to pay. The borrower even paid two points up front, which was just wrapped into his closing costs of the loan. Because it's not Dodd-Frank under Dodd-Frank law, basically what we did is I did this as a 18-month balloon note. Now, what does that mean? All that means is that his payments on$100,000 is spread out as if the loan was payable over 30 years. But the principal balance of the loan is due in 18 months. So the payments feel like to him it's covered over 30 years, but he's got to pay the entire loan off in 18 months. But I also gave him an out with an optional clause in the note that he can pay for an extension if he needs an extension, which I think was one point or two points, is what I usually would do. So I gave, I'm working with the borrower. I'm making sure that it's a fair deal to him. It my rate was between conventional rates and hard money. So 12% was great for him, considering he can get the money in three days. I felt pretty confident that this was a good deal. And here are the two lenders on the note. This is how simple you can bring in two uh IRAs on the same note or multiple IRAs. Lender one read directed trust company for the benefit of Nate Hare's Roth IRA. And then little parentheses said, as to the undivided interest of 75%, because of that 100 grand, 75 grand was coming from my Roth. And then there's another lender listed says, and directed trust. Company for the benefit of Nate Hare's HSA to the undivided interest of 25%. And$25,000 came from my HSA. Now this is considered a fractionalized note. Both lenders are on one note. We still have one first lien position and one wire goes from directed IRA to the title company. Okay, one D to trust comes back showing both lenders on the D to trust. The borrower only has to make one payment. If it's a$1,000 monthly payment, he sends$1,000 to directed trust company, maybe makes a little footer on the note or the ACH that it's to this property. And then directed IRA just splits the interest income or the interest payment 75% to my Roth, 25% to my HSA. Again, you could put as many accounts as you want on there. You don't need an IRA LLC to do all this, but you can do an IRA LLC to partner all these accounts together. But notes is pretty easy to get them all because you just list every account on the note. Now we closed at a local title company. We closed in three days. He got the property under contract and bought. He ended up fixing the property up. He was going to flip it, but by the time that it got fixed up, the area that he was working in was actually kind of being revitalized. So he decided, you know what? I'm just going to keep this as a rental. So prior to that 18-month balloon payment coming due, he just took the property back, got a new appraisal, opened title, and refinanced my loan with his conventional bank that saw the property and goes, Oh, wow, it looks great now. Yes, we'll give you a conventional investor loan. So their loan is conventional bank paid my loan off, and I got all the interest payments on time every single month because this investor never wanted to lose this property with all the equity on it because I got and I got on-time payments. So what do you do when you structure these notes to be short-term notes? Well, I get paid through the refinance or the sale of the property, and then I just get to redeploy the funds right into another deal. Maybe a deal with the same borrower. But now I'm compounding my interest. So key points to remember you can't loan money out of your IRA to yourself or a disqualified person. You and the borrower are free to set your own loan terms. You can loan money secured or unsecured if you're crazy. And you can you can use an IRA-owned LLC, but it's not necessary, it's not an investment with a lot of moving parts. So I would just say consult with an IRA specialist. If you're if you're going to do a lot of these through the year, maybe an IRA LLC helps you. But simply partnering different uh accounts on one note use works pretty fine as well. So what questions do we have?

SPEAKER_03 1:08:41

Uh if I lend to a flipper and they do a great job, can I add the property to my personal rental portfolio?

SPEAKER_01 1:08:49

So say that again. That sounds prohibited.

SPEAKER_03 1:08:52

Yeah. So what I what I'm thinking they actually mean is can they add it to their IRA afterwards? So once they've lent the money and they like the rental, can they just keep it in their IRA? Can they give the borrower or the flipper just more money to purchase?

SPEAKER_01 1:09:08

Sure. I actually that's not prohibited because basically what you're doing, you're taking an asset that's already in the IRA and just doing an asset conversion to another type of asset. So your retirement accounts aren't really transacting with a disqualified person, they're transacting with themselves. Um, we see this oftentimes the other way around. I see clients that will buy a rental property in their IRA. So the asset starts as a as a rental property, and then what they do is they sell or finance it and convert that home ownership into a note secured by the same property. So um, sure, your IRA could buy the property from the borrower if you want. Um, that wouldn't be prohibited in that case.

SPEAKER_03 1:09:49

And then I have uh two questions, but they kind of can be one. Is there a maximum amount of interest that your self-directed IRE question can charge on a loan? Well, they wrote to oneself, you can't borrow money to yourself.

SPEAKER_01 1:10:02

You can't borrow money from yourself, but let's talk about money being lent to a non-disqualified person. Is there a max interest rate? Yes. And this is called usury. So each state has different usury rates. Okay. This is the legal limit that a lender is allowed to charge a borrower. Now, in most states that I've worked in, Texas included, the usury rate is 18%. So this is the max you can charge a borrower. Now, 18% is the combination of points and interest. Okay. This is why you see if you deal with any hard money lenders, it's interesting to see they max out your interest rate. No, no offense to hard money lenders, they're great. So we need them as real estate investors. But they'll usually charge some in some cases four points up front and 14%. Why? Because those two combined equal 18%. So um, as long as you're not charging above usury rates, okay, you're you're gonna be within the legal limit. Now, what happens if you charge more? Um, if you charge more, it doesn't make it illegal. It just means that your promissory note that's charging Daniel 24% is a voidable contract for Daniel. He can decide to not pay me, and I have no recourse because I just charged him more than the legal limit. So do I trust him to not do that? I don't know. I mean I've seen people charge more than the usury rate, but in the event they have to go to court, the judge is gonna look at it and go, Well, you're charging too much. So, right, so this is kind of a hard position to be in. So you don't want to be in a in an investment that has avoidable contract.

SPEAKER_03 1:11:35

I'm taking my credit card companies to court.

SPEAKER_01 1:11:37

Well, credit cards are different. So we're talking about a different type of loan. We're talking about a individual loan to a from a lender to a borrower.

SPEAKER_03 1:11:45

This one's a good one. It's talking about small accounts, uh, just getting started, focusing on private lending. Uh, they're specifically asking, would you recommend to draft documents yourself for smaller accounts? Uh I think you should talk about handling smaller accounts as well as answering the question more generally of should you, small or large, draft the documents yourself.

SPEAKER_01 1:12:08

So if we're talking about draft the documents, we're really talking about the promissory note. Uh uh, this is again, this is my opinion. I don't think you should draft your first promissory note by yourself. Now, if you're going to do the same types of loans, let's say it's just simple interest loans, same terms, same state, same typical properties, you could probably edit that uh promissory note investment, but have the first one drafted by an attorney. Now, I know some real estate investors are probably freaking out, like, no, you want a new note for every single deal. I will just say I've used the same note template for my deals, uh, you know, but I got the first one drafted. Now, if I'm gonna do something more creative, and I think I want to jump to here's a way that we can be creative, okay, but we can exceed the usury rate. You want to see that? Let's do one quick case study because I want to get this out. Okay, so here's another deal that I was part of where we were loaning money to a flipper out of Fort Worth. Now, this deal was a little bit different, okay. Now, normally we would loan this person um, you know, 12% and two points, typical deal, just like the one that we saw before. Uh, this is one of the ones we partnered 14 accounts together. But this deal was a little different that he found. He found this property, little property outside of Fort Worth. Okay, now this was a double-wide mobile home. It's not like we enjoyed mobile homes as as uh as loans, uh, underlying assets. But what was really interesting about this property was the land the mobile home was tied to. It sat by a nice pond, it was way out in the sticks. I mean, nobody really lived out here. It was it was basically on this long stretch of highway. But the investor saw that there was a lot of development being planned right coming up to this area. So this was a really a land play. The borrower wanted to borrow the borrow our money to really hold the land. The property where this resided, it wasn't really rentable during the 12 months of the year. He can rent it out. He thought he can Airbnb it during the spring and the summertime. Here's the point of this story. We ran the numbers on loaning him$50,000 to buy and hold this property. But when we ran, when he ran the numbers at 12%, based on what he think thought he can rent it at, he realized that paying 12% interest on 50 grand, he was gonna have to reach in his back pocket and pay some of the negative rents because he wasn't gonna be able to generate enough income through renting this property. And it was just a land play. Okay. So he almost walked from this deal. He almost said, you know what, I can't get money from my bank because they don't loan on mobile homes at all. I can't get a hard money lender to loan on it, and the interest rate is just too much. I'm gonna be in the red for you know X amount of years while I try to hold this property just to sell it as a land deal. So we backed up and he said, Well, hold on one second, because we kind of like this deal. We can structure this with some different terms in the note. This does not have to be a simple interest loan. We can structure it to where we can have an interest rate that you're comfortable paying based on the rents that you think that you can generate from this property. And if we have to reduce our monthly, if we have to reduce our interest as the lender, maybe we can just structure some profit on the back end through what's called a shared equity loan or a shared appreciation note. So this is how we structure this deal. Said, how much do you think you can get in rents for the year? Let's take that amount, divide that into our loan amount, and figure out what the interest rate would be that you can pay where you don't have to reach in your back pocket. The rents will cover the mortgage. So we backed into the interest rate that he can afford to break even, which was six percent. We also said, okay, let's structure this differently. We'll structure it to where the note has an equity kicker to the lender, which the borrower actually brought up. He said, I'll give you a little bit of the equity if you can drop my interest rate to six percent. And we said, Great, since it's a long-term deal, we won't even charge you two points up front. We'll do this loan for zero origination points, six percent interest, but the the borrower put a clause in the note that the lenders would get 50% of the equity when he sold the property. Long story short, okay, we're still the lenders. We don't have ownership right to this property, even though we have an equity kicker. So we're not in control of the property. We don't tell the borrower when he sells the property. That's completely up to him. But this allowed him to break even on the rents while he held this property. So essentially he used none of his own money to buy it. He reached in his pocket for nothing to pay the mortgage payments to us. The renters in the property were enough, that income was enough to pay our mortgage payment. And then when he finally sold the property three years later, he sold it for$130,000. So he got net, we netted about$50,$80,000 on this. So he got$40,000 at closing. And then us as lenders split amongst the other all the accounts on the note,$40,000 split pro rata amongst those IRAs. Now, if we do a deal like this, equity is not counted in usury because it's not interest charged or received. It's part of the equity. We're actually part of the risk. So we can actually make far more than 18% if we have an equity kicker in there because that has no bearing on uh usury rates. Now, some people say, well, why would he give up so much equity? Realize there was no deal that he can find that would allow him to pick this property up unless he just used his own money. He was very, very comfortable using other people's money so he can buy more deals. But as a borrower, ask yourself this question: How many properties could you buy if you used none of your own money, other people's money, and never had to put a dime in for any negative rents where the rents covered the mortgage? And every time you did a deal like that, when you went to the closing table when it sold, you walked with 40 grand in your pocket. How many deals would you do? You would do every single deal like that. If you use none of your money, it's like a cash, like a cash-free ATM. You just put a number in, you get 40 grand every single time. Now, again, I'm joking, you're not gonna set up every deal like this, but this is just how creative and how you can create win-win scenarios. This is a tool in your tool belt as a borrower, but also as a lender, you got to realize that these are some options where you can try to find a win-win scenario that allows your borrowers to perform, but also allows you to make considerable return on the back end by being the financier. So I hope this was beneficial to you guys. If you want copies of the PowerPoint, uh, you can just email me, Nate.hare. If somebody could type that in, Nate.hare at directed IRA.com. If you want a copy of the PowerPoint, I'll send it to you. Um, and just some final reminders, and maybe we'll take some questions if we can. If you want more education about how we can how you can self-direct your account, make sure that you sign up to be a client or go to the self-directed IRA summit.com. You can purchase early bird tickets there. Uh, we do have our large alt asset summit coming up in the fall. That's altassetsummit.com. That's our only live live event, but make sure that you keep that on your radar uh in the fall. And if you want to schedule a call with our IRA count executives and open an account today, whether you're opening a Roth, a Roth 401k, HSAs or ESAs, you can save$200. Make sure they you ask the sales rep or ask the IRA count executive for their promo that gives you$200 off the account, but that's only between now and the end of February. So make sure you scan that code or book with uh directedIRA.com. Uh you'll see a new account uh schedule call right at the top of the page. So I know we went over, but I hope this was helpful to you guys. Let us know in the chat if it was helpful. There was a lot of information to cover. Um, do we have any final questions that we need to address?

SPEAKER_03 1:20:08

Yes, we have a we have a few in here. So, do you want to do like an example one? Someone's giving an example of one of their logics.

SPEAKER_02 1:20:16

Yeah.

SPEAKER_03 1:20:16

So if we lend 100K on a note that pays two points origination, 12% annual, six-month term, can we do it within a self-directed traditional IRA? Actually, we really like this one.

SPEAKER_02 1:20:28

Yep.

SPEAKER_03 1:20:28

Then immediately move it to self-directed Roth and pay tax only on the 100K, but the 8K that they would receive, that's the promise they would receive as a Roth investment. So we avoid tax on the growth of the note.

SPEAKER_01 1:20:41

Yes. So you got to do it pretty quick though. Yeah. So I would probably say if you know that you're going to do that, just convert the cash. So convert the 100K cash before it becomes a note. Here's why I say that's easier. Converting cash is easy. All you do is you fill out a Roth conversion form with us, and we know the value of cash. When you convert an existing asset, we have to get an appraisal of that asset, or we have to get in a we have to get a third-party valuation of the asset. Now, if you do it very quickly, we'll take the value of the note, the balance of the note. But you got to convert it right after you basically do the note. It's much easier just to convert the cash so it's already in a Roth IRA. And then you don't have to create any um any allonges or transfer of liens that show the note transferring ownership from your traditional to your Roth IRA. Because that's what you're gonna have to do if the loan has already been deployed out of your traditional. You're gonna have to change the lender on the note. It's much easier to just convert the 100K cash, have that already in the Roth IRA. And then when you draft the promissory note, the lender is the Roth IRA. And then all the interest income just goes back to the Roth tax-free.

SPEAKER_03 1:21:52

And then here's a pretty simple one. Is there a limit to number of loans per year?

SPEAKER_01 1:21:56

Nope. No limit on uh on loans per year. So that's one of the cool things. You can keep money deployed and deploy it with different loans and spread out your risk as many times as you want.

SPEAKER_03 1:22:06

All right. And then does a business have to well how about this one? My self-directed IRA LLC is legally resting in the state of Texas. Any complications lending outside Texas or internationally?

SPEAKER_01 1:22:22

No. Um, I would just say make sure you understand the foreclosure laws in the state or the country that you're gonna loan money to. Um, you know, usually if you're loaning money out of out of the country, it's gonna be done through some sort of entity. Um, I don't know anybody that's actually secured property with their IRA directly to a property in another country. Um, it's usually done through some sort of trust or some sort of LLC that can invest internationally. That's a side note. Um, but you're not limited what the state that you're in, the state that your custodian resides in, you can tell us to loan money anywhere on the whole entire globe, including other states. Just understand the foreclosure process in the state that you're loaning in.

SPEAKER_03 1:23:05

Is it possible? And it says would you recommend, but we're not recommending anything, uh, to take a second position.

SPEAKER_01 1:23:14

Okay, so that's an interesting topic. So second positions, uh, I I don't typically like to do second position loans, but that doesn't mean that they're not great opportunities. Um, I know a lot of people that make a living just doing second and third lean position loans. Now, what I would probably say is realize the difference between being first lean position and second. Um, if a foreclosure happens, if you're the one foreclosing and you're in second lean position, you got to find a way to pay off the first mortgagey or the first lien position holder. But if the first lien position holder forecloses, they're only obligated to take sell the property and get paid back on their share. If there's extra money and you're in second lien position, the first lien position holder gets paid first. So this is one of the potential problems with a loan in a second lien position. But if there's enough equity in the property and everything goes fine and there's no foreclosure, it can be very profitable. Now, if you are in second, third lean position, realize there is some added risk for you as the lender. If you think like a bank, when banks have added risk onto the loan, they charge higher interest. So I would say if I did do a second lien position loan, it wouldn't be at 12%. I would have to hedge my risk by charging the borrower a little bit more. Banks do this, everybody does this. So second lien position because of the risk, it's fine. Just make sure that you close the title company. You trust the borrower is gonna pay, you trust that the project is going to sell or do it or perform. But you might want to think about charging maybe some extra points up front or charge or a higher interest rate. Maybe points would be better because you get paid right away. But definitely leverage your risk by charging a little more if you're gonna be in a riskier position.

SPEAKER_03 1:25:00

Uh, thoughts on lending to a company that is a syndication uh with no lien but secured with personal guarantees.

SPEAKER_01 1:25:08

Okay, so you you kind of hit it on the head that last statement. I would say if you're loaning to an entity, um, you know, loaning to an entity, you might not be secured by the property or depends on how it's structured. But if I'm loaning to somebody's entity, I'm gonna ask for a personal guarantee at the same time. That's just what I do. Okay, you don't have to. Um, there's a lot of people that probably won't give you the personal guarantee. But if I have to file suit against somebody and I don't ask for a personal guarantee, well, am I gonna have to file suit to an LLC that's basically been disbanded and no longer exists? I can be potentially out money in that case. So I want to ask for a personal guarantee by the by the operators of that entity. Okay. So it's not, it's kind of different than loaning to an individual with a deed of trust. I just get to take the property and I can go after the individual. Sometimes if you're loaning to an entity, those assets can be shielded. So yeah, if you're loaning to an entity, that is something that you can ask for. Will you get it every time? Maybe not, but I like to ask for a personal guarantee if I'm loaning to entities.

SPEAKER_03 1:26:12

All right. And I think we'll we'll end on this one. Can a quick bridge loan be utilized outside of usury laws? For instance, 5k for two weeks at 20% simple interest. So total 1,000% interest, no points.

SPEAKER_01 1:26:24

Yeah, so usury doesn't specify like what type of loan. If it's an individual, and we're talking about you know, an individual private money loan, which can be my money or my retirement count account's money, um, they're pretty strict on usury's just based at 18%. Doesn't matter if it's a bridge loan, second, third, fourth lien position. So you're really maxed out at that 18% in most states. But this is where we can bypass that by wrapping in some equity on the deal that's not considered charged interest. But if it's charged interest, you know, you just don't want to be an avoidable contract charging the borrower more than 18%. Find a creative way to incorporate an equity kicker in the deal if you want to, if you want to make more, and the borrower is okay with that. Just my opinion.

SPEAKER_03 1:27:08

All right. I think that's it.

SPEAKER_01 1:27:09

Cool. I well, hopefully, hopefully this was helpful to you guys. Um, this is just a little deep dive, and I know we went way over, but we have a lot of good questions, and we still have almost 140 people on, so you guys are are active. So I appreciate your time uh for me and Daniel. Uh, tune into our next self directed IRA uh webinar next week. We do these every Tuesday at 12 p.m. Pacific time. We'll see you next week.

SPEAKER_02 1:27:32

Thanks, guys.