Lending & Borrowering Out of Your IRA
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Transcript of Lending & Borrowering Out of Your IRA
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Either a Lender or a Borrower Be – Private
Financing with Self-Directed IRAs
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Disclaimer
The Entrust Group, Inc. and its franchisees ("Entrust") do not provide investment advice or endorse any products.
All information and materials are for educational purposes only. All parties are encouraged to consult with their attorneys, accountants and financial advisors before entering into any type of investment.
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Who is The Entrust Group?
LARGEST NETWORK of Self-Directed TPAs.
NO CONFLICTS OF INTEREST with how you want to invest.
WITHOUT LIMITS imposed by other custodians.
OVER 25 YEARS managing self-directed accounts!
More than $5 Billion in assets under management!
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What is a “Self-Directed” IRA?
An IRA in which the IRA owner directs all investments in the account. There is no legal distinction between a “self-directed IRA” and any other IRA except with a truly self-directed IRA the account agreement allows the broadest possible spectrum of investments.
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IRSIRA Investor
Tax Savings
What are the benefits of self-direction?
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DiversificationDiversification
What are the benefits of self-direction?
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Social investing! It’s midnight. Do you Social investing! It’s midnight. Do you know where your IRA dollars are?know where your IRA dollars are?
What are the benefits of self-direction?
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Take control of your retirement!Take control of your retirement!
What are the benefits of self-direction?
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Invest in what you know best!
What are the benefits of self-direction?
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What types of plans can be self-directed?
• Traditional IRA
(including rollovers)
• Roth IRA
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Employer plans:
• SEP IRA
• SIMPLE IRA
• Individual 401(k)
• Roth 401(k)
What types of plans can be self-directed?
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Special plans:
• Coverdell
Education Savings
Account (ESA)
• Health Savings
Accounts (HSA)
What types of plans can be self-directed?
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ALL of the above accounts can be self-
directed!
What types of plans can be self-directed?
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What can I invest in with a self-directed IRA?
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Investment Choices
• Real Estate, including foreign property
• Real Estate Notes
• Options
• Secured/Unsecured Notes
• Limited Liability Companies
• Limited Partnerships
• Private Stock
• And a whole lot more……
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Private or Hard Money Lending
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Quote of the Day
“Neither a borrower nor a
lender be; For loan oft loses
both itself and friend, And
borrowing dulls the edge of
husbandry.”
- William Shakespeare, English
playwright, in Hamlet
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Quote of the Day
“Shakespeare was
WRONG!”- H. Quincy Long, President of
Entrust Retirement Services, Inc.
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Jack Brown has $100,000 in an IRA and wants to loan $70,000 to an investor as a first mortgage on a $100,000 investment home.
• 70% LTV (loan to value)• 12% interest rate• Interest only payments with
balloon payment in 1 year• Minimum loan term of 3 months• 3% origination fee• Buyer pays all costs for legal and Entrust fees
Case Study: Real Estate Note
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1. Jack completes a Buy Direction Letter for the new note.
2. Title company or a lawyer of Jack’s choosing prepares note and closing docs showing the IRA as the “Lender”:
Entrust Retirement Services, Inc. FBO Jack Brown IRA #12345-11
3. Jack approves all closing docs and Entrust wires funds to title
company.
4. The deed of trust is recorded and held by Entrust, along with the original note and closing documents.
Case Study: Real Estate Note
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Key Points to Remember
• You cannot loan your IRA money to yourself or any other disqualified person.
• You and the borrower are free to set your own loan terms.
• IRAs can loan money unsecured or secured by assets other than real estate, such as equipment or mobile homes.
Case Study: Real Estate Note
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People Restrictions on IRAs
Disqualified Persons = Those persons who cannot benefit from or enter into transactions with your IRA or other plan.
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Fiduciary “F”(includes IRA Owner)
Member of F’s Family
Corporation “C” if F owns
(directly or indirectly)50% or more of vote or
value of stock
Partnership “P” if F owns
(directly or indirectly)50% or more of capital or profits
interest in P
Trust or Estate “T” if F owns
(directly or indirectly)50% or more of
Beneficial interest in T
10% or more
partner or joint
venturer with CF’s Spouse
F’s Ancestor
F’s LinealDescendant “LD”
LD’s Spouse
Officer or Director of C
Highly Compensated
Employee of C (10% or more of
wages)
10% or more shareholder of C
Person with management
or administrative functions of P
Highly Compensated
Employee of P (10% or more of
wages)
10% or more partner of P
Trustee of T
Highly Compensated
Employee of T (10% or more of wages)
10% or more beneficial interest
owner of T
10% or more
partner or joint
venturer with P
10% or more
partner or joint
venturer with T
IRA
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Lending Money
Prohibited Transaction RestrictionsProhibited Transaction RestrictionsAny Any direct or indirectdirect or indirect
Mr. IRA Disqualified Person
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You CAN combine your IRAs You CAN combine your IRAs with other IRAs to make a loan.with other IRAs to make a loan.
Partnering IRAs to Make a Loan
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Usury
What’s a little usury among friends?
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What is the effect of usury?
Is there a usury prison?
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Usury
Usury rules in Texas:
1. 18% either contracted for, charged or received.
2. Penalty for usury – 3X excess interest plus attorney’s fees for commercial transaction.
3. Late charges (not to exceed 5%), prepayment penalties and return check charges are NOT interest.
4. Points collected by lender up front ARE interest.
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Foreclosure
Worst Case Scenario
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Foreclosure
Best Case Scenario
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Foreclosure
Foreclosure procedure in Texas:
1. Send notice of default and demand to cure default – 20 days homestead, unclear for investor loans, but common to send 20 day notice anyway.
2. Send notice of acceleration and copy of foreclosure posting at least 21 days prior to foreclosure.
3. Post foreclosure notice on notice board at county courthouse and file in the real property records.
4. Foreclose on first Tuesday of each month.
Note: No redemption rights in Texas!
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Lender’s Perspective
Things to consider from a lender’s perspective:
1. Do not loan on something you wouldn’t be excited to own if the borrower defaults.
2. Generally, do not advance funds for repairs until the repairs are done, and inspect before advancing funds.
3. Do not loan to someone you would feel uncomfortable foreclosing on!
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Lender’s Perspective
Things to consider from a lender’s perspective:
4. If the loan goes into default, do not delay – take action immediately!
5. Collect interest monthly so you will know if the borrower is getting in trouble.
6. If you are unsure about a loan, hire a professional to help you evaluate the deal.
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Lender’s Perspective
Things to consider from a lender’s perspective:
7. Get title insurance for your loan!
8. Verify that hazard and, if necessary, flood insurance is in place naming the lender as an insured.
9. Insist on evidence that property taxes are paid whenever they become due.
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• Loan Amount: $150,000.00
• LTV (Loan to Value): 50%
• Interest Rate: 12% per year Interest Only
• Term: 24 Months with 2 Optional Extensions
• Discount Points: $6,000 (4%)
• Lien Position: 1st Lien
Case Study – Hard Money Loan
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Does IRA lending work?
• Balance of Account 9/25/2006: $64,960.09
• Anticipated Balance 9/25/2009: $90,259.23
• Dollar Increase in 36 Months: $25,299.14
• Percentage Increase in 36 Months: 38.95%
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Borrower’s Perspective:Making Money NOW
O.P.I.OTHER PEOPLE’S
IRAs
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Create your own private financing source
Borrower’s Perspective:Making Money NOW
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Partnering with OPIPartnering with OPI
Borrower’s Perspective:Making Money NOW
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Things to consider from a borrower’s perspective:
1. Borrowing private money is all about one thing – your relationship with the lender!
2. Take the lender’s temperature when it comes to risk tolerance and how desperate they are for the income.
3. Make the process painless for your lender! If done within an IRA, learn the IRA custodian’s procedures so that all the lender has to do is sign the buy direction letter.
4. Protect your lender’s interest at all costs, even if it means you lose money on the deal!
Borrower’s Perspective:Making Money NOW
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There are TRILLIONS of dollars in retirement accounts!
Borrower’s Perspective:Making Money NOW
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At every gathering there are MILLIONS of dollars available for investment.
Borrower’s Perspective:Making Money NOW
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“Let me help you recover your stock market losses with loans secured by real estate.”
Borrower’s Perspective:Making Money NOW
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Emphasize that as a real estate investor you are Emphasize that as a real estate investor you are helping the economy recover by improving helping the economy recover by improving property values and that their investment is a property values and that their investment is a socially responsible one.socially responsible one.
Borrower’s Perspective:Making Money NOW
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Provide the prospective lender with the details Provide the prospective lender with the details of the transaction, including your price and of the transaction, including your price and comparable sales to show value.comparable sales to show value.
Borrower’s Perspective:Making Money NOW
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Have a “success book” available!Have a “success book” available!
Borrower’s Perspective:Making Money NOW
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Borrower’s Perspective:Making Money NOW
• Interest Rate: 15%
• Points Charged: $0
• Entrust Fees (Paid by Borrower): $370
• Attorney Fees (Paid by Borrower): $450
• Minimum Loan Term: 3 months
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Borrower’s Perspective:Making Money NOW
Results:
• Interest Paid to IRA: 3.75% in 6 weeks
• Profit made by Borrower: $20,000
• Amount of Borrower’s Money Used: $0
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Borrower’s Perspective:Making Money NOW
• Appraised Value: $120,000
• Loan Amount: $67,000
• Escrow for Repairs: $5,000
• Interest Rate: 10% on $72,000 = $7200/yr
• Loan Term: 3 years
• Owner Financed: $120,000 @ 8% = $9600/yr
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Case Study - Shared Appreciation Mortgage
• House can be bought as is for $70,000, needs minor fix-up for $3,000, and is worth around $100,000.
• Taxes and insurance are around $250/month.
• Tenant with long term lease is in the house for $900/month.
• Property will not cash flow with a $75,000, 12% interest-only loan (-$100/month).
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Case Study - Shared Appreciation Mortgage
The solution:
• The borrower had his financial friend’s IRA loan him $75,000 at 6% interest with a shared appreciation mortgage.
• The borrower walked away from closing with cash in his pocket for repairs, a property which will now cash flow at positive $275/month, and one-half of the equity.
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How can I get more information?
www.EntrustTexas.com
P: 214.800.3488 F: 800.320.5950
For More Information:For More Information: