Today I want to talk about another way you can use a Checkbook Control IRA LLC to be a hard money lender or a hard money borrower.
First let us define a hard money lender. A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate.
Many hard money loans are made by private investors, generally in their local areas. Usually the credit score of the borrower is not important, as the loan is secured by the value of the collateral property. Typically, the maximum loan to value ratio (LTV) is 65–70%. That is, if the property
is worth $100,000, the lender would advance $65,000–70,000 against it. This LTV provides added security for the lender, in case the borrower does not pay, and they must foreclose on the property.
Let us look at a case study of someone doing a hard money loan with their Checkbook Control IRA LLC. John has $70k in his IRA LLC that he is willing to lend. Tom has a property that he is closing on and needs cash. Tom is buying the property for $100,000 but the property is valued at $135,000. John requires Tom to sign a deed in lieu of foreclosure. Tom borrows the $70,000 from John’s IRA LLC for 18% annualized return for 90 days. That’s $3,106.84. If Tom does not pay by the 90th day John is guaranteed another 90 days of interest. So, Tom is motivated to get that loan paid back before 90 days.
You can use our Checkbook Control IRA LLC to be the borrower or the lender.
LET’S LOOK AT IT FROM THE LENDER’S VIEW
John’s IRA LLC is a passive investor, meaning no work for him. John’s IRA LLC will be the first lien holder on a property that is valued at $135k for a loan of $70k. AS the manager of his IRA LLC, John will have in his possession a deed in lieu of foreclosure just in case Tom fails to make payment. John’s IRA LLC is guaranteed 18% every 90 days annualized. 18% X $70k=$12,600/365days =$34.52 X 90 days = $3,106.84
LET’S LOOK AT IT FROM THE BORROWER’S VIEW
Tom is able to purchase an investment property that is valued at $135k that he invested $30k of his own funds. If Tom is able to flip/sell this property in 90 days, let us assume that it took Tom $15k to fix the property. So out of pocket for Tom would be his original $30k as down payment and $15k to fix the property for a total of $45k. After the sale Tom would owe $73,106.84 to John’s IRA LLC. Toms original investment of $45k would be returned to him and his profit in 90 days is $16,894.00. That’s just over 37% return in 90 days.