Using a private investor IRA to flip a house

[Alexander Felice]

Hey friends!

My partner and I want to flip a house and we have someone who wants to fund us, but they want to explore the option of using an IRA to do so. From what I understand this is possible if it's set up as a self-directed IRA?

Can someone explain to me in a little more detail how I facilitate this process? Is this a scenario where my business can use the money at will and just pay her back (plus interest) at the end? As I read more it seems that isn't as simple as I would like. 

Thanks in advance!

[Jon Holdman]

Very do-able.  Best to do it as a loan secured against a specific property.

The lender needs to get their IRA set up with a true self direct IRA company. I've been through a couple and currently have IRAServices as my custodian. The lender would then get their money from their current custodian to the new one. Then the IRA makes a loan to you. The IRA is the lender. The name of the lender is actually something like "IRAServices for benefit of IRA" or some such. There is usually paperwork that has to be submitted to the custodian with information about the loan. Once approved, the custodian will wire money or send a check to the title company. Payments (doesn't sound like you're doing these) would go back to the custodian. As would the pay off at the end.

Another alternative is an IRA LLC. That's what I ended up doing because my old custodian (Sterling Trust Company) was just too slow in dealing with the paperwork. That setup has the IRA holder set up as the manager of an LLC that is owned by the IRA. The IRA's money goes into the LLC and then the manager can just write checks. However, the IRA owner has to be intimately familiar with the rules for IRAs. If you do it with a custodian, they will make sure the rules are followed.

Using the money at will would mean the IRA is loaning you or your entity money. Or investing in your entity. Also possible. But more complex for you as the borrower. It could be an unsecured loan just to you. The custodian may have issues with that. As a lender, I certainly would. Or it could be an investment in your entity. But that gets you into "selling securities". I have made some investments like that. But the person running the entity went through the SEC filing and paperwork process to properly set up a "private placement". That's a time consuming and expensive (tens of thousands) process. If you're raising enough money, its worthwhile. If you're talking about $100K, its probably not.