Many people want to invest in real estate but they don’t have the cash on hand to do it. It can be risky to take out a big loan. As a result, people are turning to small dollar IRAs to start investing with as little as $500. This is a great option because it carries a lower risk and investors can learn more about real estate while they are investing.
Private Money Lending
Many ordinary citizens are becoming private moneylenders with their small dollar IRA accounts. These are IRA accounts with less than $50,000. They can invest themselves or pool their resources with other small dollar IRA account holders.
Private money lending is secured by real estate. The terms are negotiable but typically the duration is five or fewer years and the interest is 10% with two points to the lender. The terms can be anything that the lender and borrower agree on so they are very flexible.
What Type of IRA Works?
The first rule is that a lender needs to have a self-directed IRA account. There are different options including a Health Savings Account (HSA), a Coverdell Education Savings Account (ESA), or an Individual 401(k) and checkbook-controlled IRA.
Important Factors to Consider
It is extremely important for potential private moneylenders to take steps to protect themselves by doing thorough examinations of all of the information. The lender must look at the borrowers and verify that they have reliable business models and a track record of repaying loans on time. It is also important to visit the property in person to see what condition it is in and assess the after-repair value (ARV).
Lenders need to work with a reputable title company and make sure that they are in the first lien position. In addition, they should be clear on the fees for the transaction and have solid contracts with any other lenders who are pooling resources.
Using small dollar IRAs can be very profitable but it is critical that investors do their due diligence to make sure that they minimize their risks.