Hard Money Lending - $100k Enough?

[Barry Wong]

Hi BP!

I have around $100k in an IRA account. I haven't contributed to it since 2018, and its annual rate of return has been 5%. I have started to think about reinvesting the money elsewhere with higher returns.

One option I'm considering is hard money lending. However, I'm unsure if $100k is enough to be a hard money lender.

Thoughts?

Best Regards,

Barry Wong

[Jeff S.]

Unlike owning real estate, which is typically taxed at a capital gains rate, lending is not particularly tax efficient since interest income is taxed at your marginal rate, @Barry Wong. On the other hand, lending through a retirement plan is a great way to enjoy relatively high returns tax-free (Roth) or tax-deferred. We have a self-direct 401k plan we’ve been using to make local real estate loans for years. Safety is our #1 priority, and it should be yours too.

Ignore all the out-of-state solicitations you’ll receive now that you wrote you have money to lend and with no experience. Lending to out-of-state strangers is completely unwise in our view and unnecessary. We only lend locally on homes we’ve physically seen and to borrowers we’ve personally met. You should do the same. Unfortunately, in your case, you don’t have nearly enough to make a 1st position loan.

$100k is enough to make a loan in SoCal but it will likely be a 2nd position rehab loan. Subordinate loans such as these are extremely dangerous since they are easily wiped out by a first-position foreclosure. An IRA is not the place to take these risks considering the time value of this tax-free or tax-deferred money.

The good news is that CA allows fractionalized loans without the need for the security exemption required in most other states. Depending on your ability to qualify, your self-directed IRA could participate in a first-position purchase money fractionalized loan. In this case, up to ten lenders, including your SD IRA, would combine relatively small sums into one large first-position loan. Your IRA would be listed as one of the lenders on the note and deed of trust, along with its percent participation. Thus, your retirement plan would enjoy first-position recourse to the property. This must be originated by a licensed CA RE broker and many out there arrange these safely.