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August 19, 2021
In part 1 of this post, we stated that lending is one of the top investment strategies Self-directed IRA investors use today.
But, before lending, or using your IRA like a bank to lend your hard-earned retirement dollars to someone else, here are 5 more things that you should consider to help safeguard your IRA.
Remember that the thing that is collateralized in most loans, especially with IRAs, is the house. That’s your collateral.
The last thing you want is to not have clear title on that property if your money is secured by it. Especially, if your IRA might own that property down the road. So, spend the money. Get title insurance on your loans.
Many times, the borrower’s paying for most of that anyways. But, close with a title company and an attorney. That’s what banks do.
If you’re going to use your IRA like a bank, you need to think like a bank.
This goes for your hazard insurance, flood insurance – any insurance – that has to do with that property.
You want to make sure that in the worst-case scenario – if the house burns down, the house floods, a tornado hits it, etc. – the insurance company knows that your IRA is the lender.
There are several ways you can do this.
Ask your borrower to send you proof that the property taxes are paid. Nowadays with online services and Google, it’s easy to look at your County Assessor on where that house is situated and find out if property taxes are being paid.
The worst thing that can happen is your borrower is paying your IRA interest on time and nobody’s paying the property taxes.
The County Assessor might come in and take that property from both parties, and you don’t want that to happen.
So, make sure property taxes are paid on your underlying collateral, which is that property.
If your IRA is making a loan to an entity, not an individual – and this happens more commonly than you think – ask for a personal guarantee from the borrower.
Most real estate investors looking for private capital, aren’t buying property in their own personal name. They’re buying property through an LLC or some entity that they formed.
Make sure – if you really want to safeguard your IRA in the event of default – that you also ask for a personal guarantee from that person, not just the loan to the LLC with no guarantee.
One of the most important things you should not do is loan to somebody would feel uncomfortable foreclosing on.
Remember your role to your IRA. You are a fiduciary to your IRA, and you have to act in the best interest of it.
You cloud that fiduciary responsibility when you loan to individuals like:
• Family members
• Close relations
• Good friends
If that person doesn’t pay your IRA back, ask yourself: “Whose best interest you have to keep in mind”?
I’ve seen relationships go down the tubes because of breaking this rule.
So, make sure that if you’re going to use your IRA like a bank – like a business – you need to treat it as such. It’s your retirement nest egg.
Make sure that if you’re going to loan money out of your IRA, it is to somebody that understands they will be foreclosed on if they don’t pay.
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