Private Lending With a Self-Directed IRA: Structure, Loan Terms, and What Happens in a Default
Private lending — your IRA acts as the bank, secured by a recorded deed of trust on real property — is one of the cleanest, most predictable strategies inside a self-directed IRA. Cash flow is contractual rather than operational. Returns currently run 10-12% per year secured by 25-35% equity cushions. There's no tenant, no roof, and no evictions for you to deal with.
For a real estate investor with a substantial IRA, private lending often produces better risk-adjusted returns than direct ownership inside the IRA. This article covers the structure, the loan terms that protect the IRA, the servicing decision, and the specific mechanics of foreclosure if a borrower defaults.
The structure
Private lending IRA setup uses the standard Checkbook IRA LLC chain:
- Your IRA owns an LLC.
- The LLC has a bank account funded with IRA money from your existing IRA / 401k funds.
- The LLC writes a check to a borrower (or, more commonly, to escrow).
- The borrower signs a promissory note and a deed of trust, with the LLC as the lender/beneficiary.
- Monthly interest payments come into the LLC's account.
Same structural simplicity as an IRA LLC for direct real estate, with less operational complexity once the loan is funded.
Typical 2026 loan terms
| Term | Range | Notes |
|---|---|---|
| Interest rate | 8-12% | Higher for higher-risk borrowers, faster-execution loans |
| Points (recommended) | 1-3 at origination | Boost yield by 100-300 bps |
| LTV maximum (recommended) | 65-70% | Hard cap; below 60% for borrower-occupied |
| Term length (recommended) | 6-24 months | Usually short — bridge, fix-and-flip, value-add bridge |
| Position (recommended) | First lien | Junior liens are doable but exposure changes math |
| Recourse (recommended) | Personal guarantee from borrower | The borrower personally guarantees; your IRA does not |
A $200,000 first-lien at 11% with 2 points generates roughly $22,000/year of interest plus potentially $4,000 of points — about a 13% yield on funded capital. Tax-deferred (or tax-free in a Roth).
Secured vs. unsecured lending
Secured lending is almost always preferred. Unsecured lending into an IRA is allowed, but the absence of collateral makes default recovery much harder, and a single bad note can wipe out years of returns. If a deal can only be done unsecured, it's usually too risky for retirement capital.
When you do secure: insist on a recorded deed of trust (or mortgage, depending on state), title insurance naming the LLC as the insured, and a third-party closing.
The servicing decision
You can self-service the loan (collect payments, send statements, track escrow). Many investors do.
But for compliance and clean recordkeeping, third-party loan servicing is often worth it:
-Servicer is the named recipient of payments — clean separation between IRA and personal accounts.
-If the loan goes to default, the servicer's records support foreclosure.
-Costs: typically $25-$45/month per loan, well worth the audit trail.
For investors holding 3+ notes, third-party servicing is highly recommended
What happens if the borrower defaults
The IRA-owned LLC can foreclose. The mechanics depend on state foreclosure law:
-Non-judicial foreclosure states (CA, TX, AZ, NV, GA, etc.): trustee files notice of default, runs the statutory clock, and conducts a trustee's sale. Total timeline: 4-7 months. The LLC can credit-bid up to the loan balance and take title to the property.
-Judicial foreclosure states (NY, FL, NJ, IL, etc.): file a lawsuit, get judgment, schedule a sheriff's sale. Total timeline: 9-24 months.
If the LLC takes the property at foreclosure, the Checkbook IRA LLC now owns real estate instead of a note. From there, the IRA can:
-Hold and rent the property (now subject to all the IRA real estate rules — no personal use, third-party management, etc.).
-Sell the property to a third party for cash.
You cannot personally buy the property from your IRA, even at fair market value.
Disqualified persons (especially important in lending)
Your IRA cannot lend to:
-You.
-Your spouse.
-Your parents, grandparents.
-Your kids, grandkids.
-Any entity the above own 50%+.
It can lend to siblings, cousins, friends, and business partners (provided they're not also disqualified persons through other relationships).
The disqualified-person check is usually the first compliance review on every new loan. Skipping it once is the most common way private lending IRAs get disqualified.
UBIT on lending — usually no, sometimes yes
Interest income on a passive loan is not UBIT — IRC § 512(b)(1) excludes interest from unrelated business income.
Two situations can flip this:
- The IRA functions as a "trade or business" of lending. If your IRA originates 20+ loans per year, the IRS may characterize it as an active business. Most investors with 1-10 notes are safely passive.
- Acquisition indebtedness. If the IRA borrowed money to make the loan (rare), UDFI applies.
For typical investors making 1-5 loans/year, no UBIT.
Building the deal pipeline
Note investors find borrowers through:
-Real estate investor associations (REIAs).
-Hard money broker networks.
-Real estate attorneys with note origination practices.
-Direct relationships with established flippers and rehabbers.
-Note marketplaces (Garnaco, Paperstac, NotePro).
Reasonable expectation: 1-2 months from "decided to lend" to first funded note. Vetting borrowers and setting underwriting standards takes longer than people expect.
FAQ
Can I take a discount on a note in default and resell it? Yes. Buying notes at discount and reselling them is allowed. The mechanics are the same as origination — title in the LLC, money flowing through the LLC's account.
Can my IRA lend to an LLC I personally own? No. Your LLC is a disqualified-person entity if you own 50%+. You cannot lend IRA money to your own business.
What rate of return is reasonable to expect? 8-12% all-in (interest + points), depending on risk tier and competition. Returns above 13% usually mean either higher leverage exposure, second-lien position, or borrower risk you'd want to underwrite carefully.
Can I use the loan payments to fund living expenses? Not until distribution age. All payments must come into the LLC account and stay in the IRA structure.
Considering a private lending IRA but not sure how to structure your first loan? Schedule a private lending strategy call — 30 minutes, no fee.
