Using IRA as a hard money lender

[Nick B.]

Hello BP!

I wonder if the following financing scheme is legal:

• An investor has an self-directed IRA that is more than enough to cover acquisition and rehab of a house.
• The IRA underwrites a 0% interest private mortgage ("hard money loan") that covers 75% ARV of the said house.
• Once the rehab is complete the investor refinances (rate and term) the IRA loan with a conventional mortgage loan and the original money goes back to the IRA.

In essences the whole transaction looks like a regular hard money to conventional refinance. The difference is the source of hard money and zero interest rate.

If this is considered a prohibited transaction, what if they add an intermediary (e.g. a friend's LLC)? Then IRA loans money to the intermediary which in turn loans the same amount to the investor in form of a hard money loan?

Thanks

Nick