Private Lending

Imagine using your retirement account as a small lending institution. With a Kingdom Trust account, you can lend retirement account funds out to other individuals and companies via promissory notes with the benefit of earning interest on the loans.

Investing in private lending can actually involve a couple of investment types and with different borrower types.

Private lending via an IRA or another qualified retirement account can involve the purchase of an existing promissory note, either secured or unsecured. A secured note is backed by collateral, providing an additional layer of security and guaranteeing the lender some type of property in case of default. An unsecured note, by contrast, isn’t backed by collateral and generally carries a higher interest rate.

This investing method can also involve debt secured by deeds of trusts or mortgages. If you’ve borrowed money to purchase a home, then you’ve probably experienced this situation (very rarely is a loan serviced by only one lender from inception to payoff).

Let’s say a small lender or an individual makes a loan and then needs to recover the money lent for some purpose (other than borrower default). This provides an opportunity for an investor to use cash or liquid assets in a Self-Directed IRA, for example, to purchase the note and its associated payments. The lender will usually be willing to sell the note at a discount, and the IRA will receive both interest and some of the principal as well.

A third option is to loan money to a company via a promissory note, with collateral being corporate stock. A secured note, in this case, has a different level of risk since the success of the issuing company can directly impact the value of the collateral. An example of an unsecured note in this category is a bridge loan to a company seeking debt financing. While similar on the surface, this is unlike a private equity investment where the loaned amount includes a purchase of securities.

Your private lending investment options include

  • secured or unsecured notes
  • residential and commercial mortgages and deeds of trusts
  • performing and non-performing (or discounted) notes
  • business loans (including microloans) and personal loans
  • automobile and equipment financing
  • debt-financed notes
  • equity participation loans

Investing in private lending can essentially turn your retirement account into a bank.

While some loans can be secured by real estate (called “hard money” loans), there are also loans to be made for the purchase of automobiles, business equipment and anything else one might want to purchase with credit. The keys are that the loans can be made from your retirement account and that you can set your own rate of return and origination fees.

Another popular way to do private lending through your retirement account is via marketplace lending, as various prominent marketplace lending portals have a strategic relationship with Kingdom Trust. Investments are also often made indirectly by investing in a pooled investment vehicle (PIV) or fund, which either invests in loans or other debt instruments.

One question we run into is whether you can lend money to your children with your retirement account funds. You absolutely should not. This is known as a prohibited transaction. It is critical you avoid conducting a transaction with a disqualified person, whether in private lending or any other investment using retirement funds. Disqualified persons include your fiduciaries and members of your family (such as your spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). For more information, please see our eBooks on prohibited transactions or view the IRS page on prohibited transactions.

Different paperwork is required depending on the exact nature of your private lending investment. For more information, view our Investment Direction Kit found in our Account Forms. And should you have any questions, contact Client Services.

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