Providing Loans Versus Buying Commercial Real Estate
When you purchase property within an IRA, you must pay all expenses
associated with that property from the IRA. This means every light
bill, every painter, every plumber, the management company, the real
estate broker, and every fee must be paid directly from the IRA. With a
self-directed IRA LLC, this is simply a matter of keeping the
checkbooks straight but it does take time. Providing loans usually
requires you to pay fewer such expenses and if the loan is so
structured you might end up with the property anyway if the borrower
defaults.
Thousands of commercial loans are secured every day as people raise money for new business ventures, for re-investing in their businesses, and for purchasing existing businesses or pieces thereof. These loans are secured with collateral and terms concerning property rights and penalties in case of default. A loan's risk is linked, of course, to the borrower's likelihood to not pay it back, affecting the interest charged on the loan.
Commercial real estate is any piece of real property that is used exclusively for business purposes. This includes warehouses, hotels, resorts, golf courses, storage facilities, office towers, malls, industrial parks, parking lots, etc. (any place where goods or services are sold). Loans for commercial real estate ventures are usually given different terms than those used for residential real estate transactions.
If you are using your IRA to provide loans for commercial real estate, especially international real estate, you should have a self-directed IRA so that you can make payments on expenses incurred during the course of the investment without triggering hefty fees and while staying in compliance with the law. IRAs are subject to different laws than other sources of capital but most of the restrictions placed on their use are products of the IRA providers.
