What they don't want you to know!

I would be interested in hearing your experience in regards to hard-money lending out of an IRA. An anecdotal insight into ensuring the 14.5 percent return Trent?

Over the years I have received numerous calls from stock brokers and the like asking me to look into their latest and greatest. My response has always been, "Truthfully, "I don't invest in anything other than private (hard) money mortgages using my self-directed IRA because that's my business, I've worked in hard money lending for the past 23 years and I understand it. I'm not interested in putting my money into something that is not secured by a tangible asset and I require real estate." Usually the conversation ends there. No one can argue that investments such as stocks, bonds, and mutual funds have lost money for investors and in some cases have lost everything through a bankruptcy or business failure, all you end up with is a worthless piece of paper. If anything goes wrong with my investment mortgages I end up with a property that I can sell or rent out and I cannot be wiped out through a bankruptcy or a business failure.

The mortgages are secured by a house to be purchased, or may already be owned by a real estate investor for a short term, typically 13 months, just enough time to finish the repairs and then refinance to pay off the mortgage or sell to an end buyer who will pay the mortgage off. As a licensed mortgage lender our company goes through all of the usual paperwork; we take an application, run the borrower’s credit, verify income, have the property appraised by one of our appraisers (I also personally inspect the property), insure and close the transaction through a local title company using a full set of mortgage documents, much like a conventional bank. The most I will lend is 50% of the current appraised value so we have plenty of equity protection.

The investor buying the Note and mortgage should always receive a file from the hard money lender containing the information I mentioned above. Each lender has their own guidelines and criteria for underwriting but in any case the most important element in these privately funded loans is the property and a low loan-to-value, as I mentioned we won't lend more than half of the after-repaired-value of the house and that has worked well for us. Using a self-directed IRA, the IRA custodian will require their Mortgage Direction Letter and several others filled out describing the investment and a list of necessary documents needed such as the Note, Mortgage and Assignments to fund the mortgage investment through the IRA. They will make sure their documentation is in place but will not give advice on the investment, they are strictly the custodians of the self-directed IRA account.

The financial crisis has closed off much of the real estate investor’s ability to borrower through conventional means and now must resort to unconventional lenders such as hard money or private money lenders. The rates are typically much higher in hard money because these are not institutional lenders putting up the money, they are private individuals just like you and me. Some of my Note buyers lend with their personal funds, some have cash-out their stock holdings or other investments and many lend through their self-directed IRA's.

There is a saying I like to repeat, "Cheap money is no good if you can't get it." Our borrowers are willing to pay a high rate of 17.9% (extremely high), it funds their real estate deal, they achieve their ultimate goal. Without hard money many real estate investors would be out of the market, their cash on-hand is limited and they understand they may have to pay a premium for this form of financing, it’s cheaper than taking on a partner who wants to split the profit down the middle (many have told me, that’s their unfortunate alternative).

With all of that being said, the self-directed IRA holders will, in essence, be the bank that holds a short term mortgage on a property with all of the same rights and security. During the 13 month term the borrower will make their monthly payments that will be paid directly to the self-directed IRA. We sell these Notes and the mortgages individually at a rate of 15.9%, they're assigned and recorded into the buyers name (self-directed IRA custodians name) and we retain the 2% rate spread as a management fee to oversee the servicing of the borrowers payments and the real estate project, we stay involved before, during and after the Note is paid off.

I know this may have been an extended explanation to your question but I believe it’s better to have too much information than not enough. If you need more details or have a question about hard money or private money lending through a self-directed IRA please e-mail me at Trent@PrivateMoneyMi.com or call my office at (248) 547-3006 or my cell phone at (248) 854-0625. Thanks for the question. Trent Dalrymple, Metro Mortgage Investments LLC, 26789 Woodward Ave., Suite 107, Huntington Woods, MI 48070.