Using SDIRA for private lending

[David Espana]

I have set up a self-directed IRA account for my real estate investments. I have been approached by an investor/developer to lend second or third position on his projects (which is allowed by my SDIRA custodian as long as there is a Promissory Note and Deed of Trust). He offers 10% interest on private money with the loan & interest being payable in one lump sum upon the sale of the rehabbed property. My thinking is that 10% is a little low due to second or third position loans being riskier than first position loans. I believe that 12% or higher is more realistic for second or third positions. Any thoughts on what is a realistic rate range for these loan positions would be greatly appreciated. Also any general advise on this topic (private lending) is also welcome.

[Justin R.]

@David Espana The type of project you're describing is my niche here locally.  I also lend for other people's projects.  A few data points from experience:

1. There is zero chance a 700sqft addition and a legal second unit of 700sqft can be done for $150k, all in.  The fact that it's historic and targeting a $1M price point makes the impossible even less possible.

2. If you're willing to lend in 3rd position at 12%, I'd court you for our projects and give you a much better deal.  That's way under priced for the risk you're taking.

3. A year experience in the SD market isn't much.

I lend a decent chunk of capital out and, from what you describe, I wouldn't touch this situation.