Be the Bank and Make 10%-12% Returns in Your IRA/Solo 401k without Tenants

Ever thought about becoming the bank as opposed to simply depositing your money with them?  If the answer is yes, don’t worry, you’re not alone.  The fact is, the majority of us were taught that banks and other financial institutions are where we should put our money.  This, however, won’t get us anywhere.

Think about it, when you deposit money with the bank, what do they do with it?  Simple…they LEND IT for a return greater than the measly interest they pay you.  When it comes to Solo 401 k investments, there is no better compliment to owning rental property than to play the lender and own the mortgage while letting the borrower/landlord make monthly payments to you.

Become a Lienlord instead of a Landlord

Owning the trust deed or mortgage tied to a piece of real estate can cut out many of the inconveniences that landlords often deal with including maintenance, vacancy, property managers, and of course, tenants.

By acting as the lender in a real estate transaction, the trust deed or mortgage, depending on the state, will function as the security instrument and will be recorded against the title of the property thereby protecting your Solo 401 k investments. There are various uses for the funds being lent including short-term rehab loans or long-term buy-and-hold loans, but in each case the interest rate collected is far more than what you make by placing your money in a savings account or CD, and it does not fluctuate with the market like stocks or other investments tied to an index.

Risk is minimized by the evaluation, analysis, and underwriting done by the private money lender who is coordinating the transaction and providing the investment opportunity. Solo 401k and Checkbook IRA plan owners see this as an ideal investment since it is steady and passive.

What is the process?

The process is simple. When you commit, the private money lender will determine the vesting for the loan documents, then alert the escrow holder/intermediary. A title insurance commitment is obtained, and formal documents are drawn. You as the lender don’t sign anything, you simply approve all documents. The borrower signs all documents that you previously approved. Then the borrower purchases a homeowner’s insurance policy and you are listed as the Mortgagee, at which point you wire your loan amount into escrow and escrow sends the Trust Deed or Mortgage to be recorded. Finally comes the best part, you collect your interest payments without lifting a finger.

What are the terms?

The terms vary depending on what the money is used for. A good example is the private money loan programs that my affiliates at Marshall Reddick Real Estate have in place:

Short-term

In this case, the funds are being used to acquire, renovate and add value to distressed properties. The loan term is for 12 months but the typical turnaround time is less than 6 months. The Loan-to-Value is based on a Broker’s Price Opinion (BPO) derived by evaluating non-distressed comps, and a maximum of 75% LTV is lent. The return paid by the borrower is anywhere from 9%-12% annual interest with a balloon at resale or maturity.

Long-Term

In the long-term scenarios, there are 3 purchase money loan programs available. A 15 year fixed-rate loan, a 30 year amortized loan with a balloon in 5-10 years, or a 30 year fixed-rate loan. All require a 40% down payment from the borrower, an appraisal, a 3 year minimum interest guaranty, escrow and title insurance, and homeowner’s insurance. The outcome is having a monthly interest payment set at 7%-8.5%, again without lifting a finger.

Perfect as IRA or Solo 401 k Investments

Having checkbook control of your retirement account cuts out the middleman and makes it fast and convenient to process each private lending transaction, not to mention you won’t miss out on time-sensitive opportunities by having to get approval from your custodian for every transaction.

Marshall Reddick Real Estate is a licensed mortgage lender and has successfully closed hundreds of private loans. If you are interested in safely and securely earning a truly passive, yet high return by lending your hard-earned money on mortgages and trust deeds give them a call. Unlike investing in stocks, your investment is backed by tangible real estate as your collateral. You can even sell your paper asset quickly in the secondary market if necessary, providing high liquidity.