Private lending IRAs are becoming more and more popular for people looking to make up time when it comes to their retirement savings. Whether they have chosen to begin saving for their retirement late or lost all of their savings during the Great Recession of 2008, these individuals needed to find a retirement account that would allow them to make regular, tax-advantaged deposits that provided a better rate of return than a traditional IRA or 401k. Private lending IRAs offer that.
Private lending IRAs put you in control of your rate of return. This is because this type of self directed IRA allows you to become the bank. A private lending IRA allows you to loan the funds in your IRA to individuals in exchange for a promissory note and the repayment of the loan plus interest, an interest rate that you set. It is this interest rate that provides you with your return on your investment.
A traditional IRA and 401k provides you with the opportunity to invest in a range of stocks, bonds and mutual funds. You are encouraged to choose a mixture of these investments in order to diversify your portfolio and balance your risk. This approach is usually profitable, especially if you have time to wait. This is because the average rate of return on an investment like this is around 5% annually. Now, consider this for a minute. What if you were able to double that rate of return to 10% or more? Would you consider making a change?
A private lending IRA allows you to do just that. You can increase the rate of return by setting the interest rate for the loans you are making to the rate of return you want. For example, let’s say you choose to loan $100,000 to someone in order to help them purchase a new home. The interest rate you and your borrower agree on is 9%. At this rate, with an agreement of interest only payments for five years, you stand to make $45,000 in just five years. What’s more is that you can reuse the interest payments you receive to make other loans, allowing you to compound your earnings over the same period of time. Traditional IRAs and 401ks simply can’t match this rate of return.
Of course, this potential for profit comes with a downside. There is always a risk that your loan won’t be repaid. However, just like with a traditional lender and loan arrangement, you have the ability to repossess the property that was purchased with the proceeds of the loan you serviced. Because the loan to value ratio for loans made with private lending the IRAs cannot exceed 75%, you can sell the repossessed property for its fair market value, which will exceed the loan balance, netting you a nice profit.
If you are interested in learning more about private lending IRAs, consider reading the private lending IRA reviews here. They offer a wealth of knowledge that will help you decide if a private lending IRA is right for your needs.