Lending from Your IRA

By Jeffery Watson

At any given time, you will find on my list of to-do projects drafting paperwork for one or more loans being made by IRA accounts in private-lending arrangements. This is something I enjoy doing, but more and more people are coming to me with problem deals they have already funded and are now trying to figure out how they can correct the situation. Let me give you a couple of important principles, and then I want to share with you an important resource when it comes to private lending.

First, you should always look to make what I call “happy-happy” loans from your self-directed retirement accounts. By that I mean you are happy if the borrower fully pays you off as agreed, but you will also be happy if the borrower doesn’t because the cost and hassle of foreclosing to get the collateral to satisfy the debt results in a higher rate of return to your IRA. You are happy either way.

The second principle to remember when doing private lending from your self-directed retirement account is not to make a loan on a piece of property unless you would be willing to buy that same piece of property for the amount you are loaning from your IRA plus any other superior debt such as liens, judgments, HOA fees and taxes.

To employ these two principles, you, as the private lender, must engage in some due diligence. One of the things my firm provides is additional due diligence services for lenders who are uncertain as to what they are doing when lending from one or more IRA accounts or IRA-owned entities.

The necessary due diligence should include due diligence on the property as well as on the borrower. You will need to spend time thinking about the actual merits of the loan, not just thinking about your potential rate of return. More than once, I have seen a disingenuous borrower lure an unsuspecting lender into a transactional relationship by offering an enticing yield, only for the lender to realize they have not only lost the potential return on their principal, but they may have lost the principal as well.

Jeffery S. Watson

Attorney

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 27 years. As a trial lawyer, he has a unique perspective on real estate investing, wealth building and asset protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio 5 times via litigation or legislation:

Smith v. Rudler – 70 Ohio St.3d 397
In re Hugley – 629 N.E.2d 1136
Bahr v. Progressive Insurance – 2009-Ohio-6641
Snyder v. Snyder – 865 N.E.2d 944
H.B. 463 amending the Ohio Civil Rights Act

Jeff has also been a real estate investor since 1994, investing in both residential and commercial properties. He currently represents established real estate investors in commercial and residential matters when the transactions involve self-directed retirement accounts. As a frequent and popular guest speaker and teacher on stages and webinars, he is a recognized thought leader and innovator in the field of real estate investing, wealth building and self-directed retirement account transactions.

He is a nationally-recognized authority regarding regulatory concerns with wholesaling. He was the co-creator of the Option Contract method that revolutionized the short-sale flipping process. Thousands of investors have used documents created by Jeff to flip properties.

Jeff is general counsel to the National Real Estate Investors Association. Jeff is general counsel to and a cofounder of Realeflow, LLC, which made the Inc 500 list in 2011. He currently advises six different national organizations with a combined membership of over 250,000 investors.

From 2010 to present, Jeff has led lobbying efforts in Washington, DC on behalf of real estate investors which has brought about several changes in both government regulation and policy on distressed property purchases and resales. In 2014 and 2015, his efforts on Capitol Hill helped bring about change in the U.S. tax code and helped reinstate the Mortgage Debt Forgiveness Act. Since 2015, Jeff has worked to secure passage of the Seller Finance Enhancement Act.

Jeff’s efforts to secure reform in the real estate arena aren’t just on Capitol Hill. In his home state of Ohio, he has worked with the Ohio Division of Real Estate teaching on the legality of wholesaling.

He is a part owner of Venture Land Title II, LLC, and his law firm prepares deeds and other documents for two title companies. He is also legal counsel to a number of other organizations including Eagleville Bible Church, Inc.

Jeff is the author or co-author of 6 digital books:

• “Understanding Self-directed Individual Retirement Accounts”
• “A Guide to Private Lending”
• “Short Sales Done Right – How to Profitably and Legally Navigate the Short Sale Jungle”
• “Death of the Land Trust … in Short Sales”
• “How to Hire Your ‘Dream Team’ ”
• “Understanding the Foreclosure Process”

In addition to his digital books, Jeff authors an email newsletter twice a week and maintains a blog at WatsonInvested.com on investing, business and entrepreneurship which are read by thousands of successful investors.