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What to Know Before Investing in Private Lending

At a glance: Here's what you need to know before you initiate your private loan investment.

Self-directed IRA lending allows your IRA to loan money to non-disqualified persons/entities. The IRA receives principal and interest, similar to a bank. The IRA holder chooses the borrower, principal amount, interest rate, length of the term and payment frequency. The account holder also decides whether or not the note is secured by collateral. Your IRA can also purchase existing notes as assets for the account. NDTCO will not fund transactions that could be perceived as a gift.   

The IRS requires an authorized IRA provider for all IRAs. NDTCO provides services for all types of IRA lending. The IRA account holder handles the investment strategy and negotiation. Then, NDTCO is instructed by the account holder to send money from the IRA to fund the loan. We make sure the paperwork substantiates the loan, is an investment made by your IRA, and deserves the tax benefits associated with the account type.  

Possible Structures 

Your account can lend money to individuals and businesses or purchase existing loans through third-party platforms. 

  • Individual Loans 
  • Business Startup Loans 
  • Business Capital Infusion 
  • Purchase of Existing Loans 

Collateral & Cash Flow 

COLLATERAL 

The IRA holder chooses the borrower and negotiates the specifics of the loan. One of the key decisions is whether to attach collateral to the loan. The IRS allows the IRA holder to decide whether or not the loan will be secured by collateral and, if so, what the collateral will be. Not all loans require collateral, and leaving a note unsecured is a decision that falls upon the account holder. If an account holder chooses a secured loan, it is the account holder’s responsibility to record any associated Deed of Trust and then file the release of Deed of Trust once the loan is paid off.   

Due diligence on the borrower is the task of the IRA holder. Considerations during the due diligence process may include making sure the borrower is in a position to pay the loan off or making certain the loan document gives the IRA a clear path to the collateral in the event of default.   

CASH FLOW 

As the IRA holder, you can specify whether your account is to receive monthly, quarterly, or even annual payments. The payment can be applied to interest, principle or both.  

Keep in mind the lender is your IRA; all loan payments, principal and interest, flow directly back to the IRA, not into your personal accounts. Once the payment has been received by your IRA, you decide what to do with that money: reinvest it, leave it in a cash position, etc.  

Due Diligence 

As the IRA holder, you are responsible for performing due diligence on your IRA’s investments. Neither the IRS nor NDTCO researches or endorses the investments, businesses, or principals involved in your IRA’s transactions. A competent professional in the legal, financial advice or accounting fields can also be engaged if you need additional help deciding if the investment being considered is legitimate, meets your risk tolerance, and is right for your investment goals.  

New Direction Trust Company reviews the note to ensure it contains the required content, however it is your responsibility to create, monitor and execute the terms and conditions of the note.  

Disqualified Persons 

All IRAs have a list of people who are disqualified from certain interactions with that account (called Prohibited Transactions). Below is a graphic that depicts related persons that are considered to be “disqualified” by the IRS. Keep in mind that any entity that is owned or controlled by a Disqualified Person or combination of Disqualified Persons may also be disqualified. Your IRA cannot make a loan to yourself or any Disqualified Person or entity. Visit this page for everything you need to know about disqualified persons or prohibited transactions.  

NON-DISQUALIFIED PERSONS INCLUDE: 

  • Brother 
  • Sister 
  • Brother-in-law 
  • Sister-in-law 
  • Niece 
  • Nephew 
  • Aunt 
  • Uncle 
  • Cousin 

DISQUALIFIED PERSONS & ENTITIES INCLUDE: 

  • The account holder (you) 
  • The account holder’s linear ascendants (parents, grandparents, etc.) 
  • The account holder’s linear descendants (children, grandchildren, etc.) and their spouses 
  • Fiduciaries to the account (accountants, financial advisors, attorneys, etc.) 
  • Tax-advantaged savings accounts held by any of the aforementioned individuals 
  • Businesses or entities owned or controlled by any of the aforementioned individuals 

Additionally, you cannot receive the note payments or interest personally, they must come to the account. You cannot lend the money to a disqualified person or entity. You can learn more about Prohibited Transactions here. 

Fees 

ANNUAL ADMINISTRATION FEES 

(Assessed and billed annually per asset) 

Private Lending Assets 

$390 per asset 

PROCESSING FEES 

Purchase, Sale, or Exchange 

$130 

OUTGOING MOVEMENT OF FUNDS 

Due when funds leave your account 

ACH 

$0 

Check 

$20 

Cashier or Official Bank Check 

$35 

Wire 

$35 

International Wire 

$35 

Overnight Mail 

$50 

Returned Item or Stop Payment Request or Void Check 

$50 

Annual Administration fees are charged based upon the custodial services provided and are not dependent upon an investment’s performance. Thus, Administration fees are non-refundable regardless of whether the account holder is unable to generate profits or returns.