Self-directed IRA hard money lending lets you use retirement dollars to become the lender. Your IRA funds a real estate loan secured by a recorded deed of trust. Instead of buying a fund or a stock, your IRA holds the note. The borrower pays interest to your account, and the property stands behind the debt. This guide covers the process, the rules that keep an IRA compliant, and the due diligence that protects principal.
What is self-directed IRA hard money lending?
Self-directed IRA hard money lending means using a self-directed IRA to fund a short-term loan to a third party borrower. Real estate secures the loan. Your IRA is the lender of record. The promissory note and the deed of trust are assets of the account, exactly the way a mutual fund would be.
A self-directed IRA is not a different kind of retirement account under the tax code. It is a normal IRA held at a custodian who allows alternative assets. Every self-directed IRA must sit with a regulated custodian under Internal Revenue Code Section 408. So you cannot hold the note in your own name and call it retirement money.
Hard money loans are also called private money or trust deed loans, and the labels overlap in confusing ways. Our breakdown of a bridge loan versus a hard money loan sorts out the difference. Terms typically run 12 to 24 months, interest only, secured by a first or second lien. The term is short and the collateral is specific. As a result, many investors find a note easier to underwrite than an equity position in a property.
Why investors use retirement money to fund trust deeds
The first reason is simple diversification. Retirement portfolios usually track public markets. A trust deed, by contrast, is tied to one property and one borrower. We cover the wider landscape in four ways to invest in private real estate lending.
The second reason is tax treatment. Interest income earned by an IRA is passive income, so it generally does not trigger unrelated business income tax. In a Roth account, that interest can compound entirely tax free.
The third reason is control over the structure. Lending on title is not the same as buying into a pooled fund, and the difference shows up in what you can see and what you can decline. Our article on debt funds versus lending on title walks through both.
The fourth reason is defined terms. A note has a stated rate, a stated maturity date, and a stated payment. You know what the investment is supposed to do and when it is supposed to do it. That said, none of this removes risk, and a defined term is not a guaranteed outcome.
How the self-directed IRA hard money lending process works
The mechanics are more procedural than complicated. Below is the sequence most investors follow. Each step matters, because a shortcut in one place can create a tax problem in another.
Step one: Open the account with a self-directed custodian
First, choose a custodian that actually administers notes and deeds of trust. Not every custodian handles them well. So ask how many private debt investments they process, and how long funding takes. Then ask for the fee schedule in writing, including asset holding fees, transaction fees, and wire fees.
Step two: Fund the account
Next, move money in. Most investors transfer an existing IRA or roll over a former employer plan. Annual contributions alone rarely reach a workable loan amount. For 2026, the IRA contribution limit is $7,500, or $8,600 if you are 50 or older. Transfers and rollovers, by contrast, have no dollar cap.
Step three: Review the loan before you commit
Now the real work begins. You receive the loan package, the disclosures, and the underwriting file. Because the custodian does not evaluate the merits of your investment, this review is entirely yours. If the terms are unfamiliar, our guide to reading a private lender term sheet explains what each line actually commits you to. More on what to look for in the due diligence section below.
Step four: Direct the custodian to fund
After you approve the loan, you submit a direction of investment form. The custodian then wires IRA funds into escrow. Importantly, the money moves from the IRA to escrow directly. It never passes through your personal bank account, not even briefly.
Step five: Confirm titling of the note and deed of trust
Titling is where good deals become bad tax outcomes. The note and the deed of trust must name the custodian for the benefit of your account. A typical format reads “ABC Trust Company FBO Jane Investor IRA.” Your personal name alone on a recorded document is a problem. Catch it before recording, not after.
Step six: Collect payments back into the IRA
Finally, every dollar of interest and principal returns to the custodian for the benefit of the IRA. Likewise, every expense related to the loan pays out of the IRA. If you personally collect a payment or pay a legal fee, the IRS can treat that as a distribution or a contribution.
The rules that decide whether your IRA stays an IRA
Self-directed IRA hard money lending is legal, common, and well established. However, the compliance rules are unforgiving, and the penalty for breaking them is severe.
Disqualified persons and prohibited transactions
Your IRA cannot lend to you, your spouse, your parents, your children, or their spouses. It also cannot lend to any entity that you or those family members control. These are disqualified persons under Internal Revenue Code Section 4975. Lending to them is a prohibited transaction even at a fair market rate.
Siblings, cousins, and friends generally fall outside the disqualified person definition. Even so, confirm the relationship chart with your CPA before funding, because the consequence is not a fine. A prohibited transaction can disqualify the entire IRA as of January 1 of that year. The full account balance then becomes taxable.
No personal benefit and no personal guarantee
You cannot take a fee, a kickback, or a side benefit from a loan your IRA funds. Similarly, you cannot personally guarantee an obligation of the IRA. The account has to stand on its own.
UBIT, UDFI, and when taxes actually apply
Interest income from a note is passive, so it is generally not subject to unrelated business income tax. Unrelated debt financed income is different. UDFI applies when the IRA itself borrows money to make an investment, which is uncommon in straight note lending. Watch for loans that tie your return to the profit of the borrower’s project. Profit participation, rather than a stated interest rate, can change the analysis.
Required minimum distributions and liquidity
Traditional, SEP, and SIMPLE IRAs require distributions beginning at age 73. A note is not liquid, and you cannot distribute half of a deed of trust easily. Therefore, if you are near RMD age, plan the maturity dates so cash is available when the distribution is due.
Due diligence for self-directed IRA hard money lending
This is the part that protects your principal. Rate is what you get paid. Due diligence is why you get paid back. For context on where pricing sits in this market, see our breakdown of private money loan rates in California.
The property
Start with value. Ask for an appraisal or a broker price opinion, then read it rather than skimming the number on the front page. Check the comparable sales, the date of the report, and whether the value is as-is or after-repair.
Then calculate the loan to value yourself. A first position loan at 65 percent of a defensible as-is value has meaningful protective equity. The same loan at 65 percent of an optimistic after-repair value may have very little.
The borrower
Next, look at the person behind the payment. Borrowers come to private capital for specific reasons, and our overview of when to use a bridge loan covers the situations that show up most often. Review credit, liquidity after closing, and experience with the exact project type in front of you. A borrower who has completed four similar renovations is a different risk than one who has completed none.
Also ask about background checks and prior defaults. A borrower with a foreclosure or judgment history is not automatically disqualified, but you should know before funding rather than after.
The documents
Confirm the file includes a promissory note and a recorded deed of trust. It should also include an ALTA lender’s title policy insuring your lien position. Finally, property insurance should name the IRA as mortgagee through a lender’s loss payable endorsement. In California, that endorsement is typically Form 438BFU. Our guide to private loan insurance requirements in California covers what that endorsement does and why it matters.
If the loan is a construction or rehab loan, review the draw process too, and read what lenders require in construction loans for contractors. Funds held back and released against inspected work protect the collateral value that supports your position.
The lien position and the senior debt
Verify the preliminary title report yourself. Look for senior liens, tax liens, mechanics liens, and any unexpected recorded interest. If your IRA is in second position, know the senior balance and the senior payment. Also confirm whether the senior lender will notify you of default.
The servicer and the broker
Ask who collects payments, who handles impounds, and who files the notice of default if the borrower stops paying. Our loan servicing page explains how we handle that side. Ask how the broker gets paid, and whether any fee comes out of your yield. A lender who answers those questions clearly is telling you how they will behave when a loan goes sideways.
The exit
Every short term loan needs a defined exit. Usually that is a sale, a refinance, or a construction takeout. We wrote about the refinance path in getting back to conventional financing after a private loan. Ask what happens if the exit slips by six months, because in private lending it often does.
What a funded loan looks like in practice
A recent Mayacamas Lending transaction shows how the pieces fit together. Our walkthrough of how the Mayacamas private lending process works covers each stage in detail. We placed a client’s self-directed IRA into a first deed of trust secured by a commercial property. The loan closed below 30 percent loan to value, which means the property carried more than three dollars of value for every dollar the IRA advanced.
The term is 12 months, interest only. Every month, we collect the borrower’s payment and deposit it directly into the client’s self-directed IRA account. The investor never touches the money personally, so the account stays clean from a compliance standpoint.
Two details in that structure matter more than the rate. First, protective equity at that level means the property would need to lose a large share of its value before principal is exposed. Second, first position means the IRA controls the default process rather than waiting behind a senior lender.
This is one loan and not a projection. Every file underwrites differently, and low leverage on one property says nothing about the next one. Still, it illustrates what self-directed IRA hard money lending looks like when the paperwork, the lien position, and the payment flow all line up correctly.
California disclosures every trust deed investor should receive
California regulates this space specifically, and the disclosures are useful even when they are not required. Our guide to trust deed investing in California goes deeper on the investor side of these rules.
When a licensed broker arranges the loan, you should receive a Lender/Purchaser Disclosure Statement. Form RE 851A applies when you fund a new loan, and Form RE 851B applies when you purchase an existing note. The statement summarizes the loan amount, the property value, senior encumbrances, the term, and the payment structure.
Brokers must also make reasonable efforts to determine suitability. For that reason, you may need to complete an investor questionnaire, Form RE 870, before your first investment. In addition, California’s multi-lender exemption allows up to 10 lenders on a single trust deed. So ask how many investors share your note, and how decisions get made in a default.
The Department of Real Estate publishes a plain English booklet called “Trust Deed Investments: What You Should Know!!” (RE 35). It is worth an hour of your time before your first loan.
Useful California references:
DRE Form RE 851A, Lender/Purchaser Disclosure Statement DRE publication RE 35, Trust Deed Investments IRS retirement plan contribution limits
What can go wrong in self-directed IRA hard money lending
Borrowers default. In California, a nonjudicial foreclosure typically takes at least four months from the notice of default. It takes longer if the borrower files bankruptcy. During that period, your IRA receives no payments while it may still owe custodial fees and legal costs.
Valuations can also be wrong. If the appraisal was optimistic and the market softens, protective equity disappears quickly. Junior positions carry additional exposure, because protecting a second lien can require curing the senior loan out of IRA funds.
Finally, notes are illiquid. You can sometimes sell a performing note, though usually at a discount and rarely on your schedule. For that reason, most experienced investors keep a cash reserve inside the IRA rather than deploying every dollar into loans.
Where to open a self-directed IRA for note investing
Several established custodians administer private debt. Fees, funding speed, and service quality vary quite a bit, so compare at least two before opening an account. Mayacamas Lending has no financial relationship with any of these companies, and this list is informational only.
Equity Trust Company is one of the largest self-directed custodians and has a dedicated private debt process. The Entrust Group, based in Oakland, California, administers notes, real estate, and private placements. uDirect IRA Services, based in Irvine, California, focuses heavily on real estate and private lending. IRAR Trust Company, based in San Carlos, California, publishes detailed guidance on notes and UBIT. Advanta IRA offers note and trust deed administration along with extensive investor education.
Every one of these firms is a directed custodian. In other words, they hold the asset and process the paperwork, and they do not evaluate whether your loan is a good one.
Frequently asked questions
Can my IRA lend money to my own LLC?
No. Your IRA cannot lend to an entity you control, because you are a disqualified person under Section 4975. This holds true even if the interest rate is at market and the loan is fully secured.
Do I pay taxes on the interest my IRA earns?
Generally no. Interest paid to an IRA is passive income and is not subject to unrelated business income tax. In a traditional IRA it grows tax deferred, and in a Roth IRA qualified distributions come out tax free.
How much money do I need to start?
It depends on the lender. Many California private lenders set minimums between $50,000 and $250,000 per loan, though fractional participations can lower that number.
Who holds the original note?
Your custodian does. The original promissory note is an asset of the IRA, so the custodian holds it or holds it through a designated servicer.
Can I use a Roth IRA for hard money lending?
Yes. Self-directed IRA hard money lending works with traditional, Roth, SEP, and SIMPLE accounts. Many investors prefer Roth accounts because interest compounds tax free.
What happens if the borrower stops paying?
The servicer or broker starts the default process, and your IRA pays the associated costs. Recovery depends on your lien position and the protective equity in the property, which is precisely why underwriting matters more than rate.
Working with a lender that shows you the file
At Mayacamas Lending, we underwrite every loan we place with private capital. Then we show investors the same file we used to reach our own decision. That means the appraisal, the title report, the borrower package, the insurance, and the exit. If something in a deal concerns us, we say so before you fund rather than after.
Are you considering self-directed IRA hard money lending in California? We are glad to walk through an actual loan file with you. Contact our Santa Rosa office to start that conversation, or read our frequently asked questions first.
This article is educational and is not tax, legal, or investment advice. Mayacamas Lending, Inc. does not provide tax advice, and rules change. Consult your CPA and attorney before directing your IRA into any investment.
Mayacamas Lending, Inc. | CA DRE #02306252
