Can a Self-Directed IRA hold a mortgage on a rental property?

[Richard Patrie]

Hi BP Community!

I'm a year into my real estate investment journey, and learning as I go. In the last year I've acquired 7 properties through a mix of seller-financing and my HELOC (1st lien position).

These properties are held in 2 LLCs, and I own 5 of them free and clear.

I have a self-directed IRA and was looking at using it to acquire rental property. I really didn't like the option of the IRA owning the property because it doesn't allow me to touch the property in any way. I can't make any DIY repairs, deal with tenants, collect rent etc. The IRS views this as a benefit to me and not for the good of the IRA. If I do the work myself, then the IRS perceives that I am personally benefiting by providing sweat equity. I found this pretty restrictive.

Then I got to thinking. Currently, my self directed IRA holds peer-peer notes from Lending Club. (www.LendingClub.com) This platform allows investors to lend money to individuals to buy a car, consolidate debt, make home improvements, pay medical bills, etc.

So, in the IRA I hold thousands of notes ($25 each) for a fixed term (3 or 5 years) at a fixed rate of return; usually 5-8%.

Has anyone ever used their self directed IRA to hold the mortgage on a rental property?

I'd like to refinance a duplex that is held in my LLC. The LLC would still own the house, and the IRA would hold the paper. I'd then make monthly payments over a 15 yr period at 7% back to the IRA.

Since the IRA isn't on the deed, and the house isn't occupied by me, my friends, or family, I don't see how this would violate IRS rules. It'd be no different than going to a bank with the same outcome.

I plan to speak with my IRA custodian, I just wanted to see if anyone has employed this strategy, and provide any thoughts.

Thanks