5 Ways to Practice Due Diligence for Short-Term IRA Loans to Flippers
Using your Self-Directed IRA or Solo 401(k) to make short-term loans to property flippers can be a great way to grow your retirement savings.
This popular form of investing is well suited to individual investors using a self-directed retirement plan.
- Big banks do not offer these types of loans.
- Individual investors and small private lending funds have always been the primary lenders in this space.
- You can invest locally in your own market and work with other investors you may know and trust.
Short term notes fit well within a retirement investing investment portfolio.
- The interest rates are typically higher.
- Your IRA money can be turned quickly or reallocated to other types of assets based on market conditions.
- Your investment capital is secured by a real asset that produces consistent, predictable returns.
Of course, this all only works if you make the right loans to the right borrowers when executing the right projects.
Following are 4 ways you can set yourself up for success by practicing quality due diligence for short-term IRA loans to house flippers.
1 – Evaluate the Property Condition
The current condition of a property to be flipped is a good starting point for your underwriting process. The amount of work required can help you understand the timeline for the project and the relative amount of risk, both of which are important in determining whether to lend and on what terms.
If the rehab needs are relatively modest, there may be less risk and the project may be completed more quickly.
If the property needs significant work, you’ll want to be careful about how much money to lend relative to the actual current value of the property. A lower loan-to-value and staged release of funds may be more appropriate in such situations.
Condition is also a gauge for unknown risk. The more work a property needs, the more likely that unseen issues may turn up and increase the cost of rehab.
A property needing considerable work may take longer to turn over. Timing can be a concern if the project requires permitting or specialty contractors that may be more difficult to find and schedule. Be sure the length of the loan is appropriate.
2 – Properly Estimate Projected Sales Price
One of the keys to flipping properties, and to underwriting flip loans, is to properly estimate the post-rehab property value — often referred to as after rehab value or ARV.
This target sales price drives the potential for profits on the deal, and serves as security for your loan if the project is completed as planned.
If your lending strategy is based on a certain percentage of the ARV, then getting the estimate right is critical. Researching comparable sales of similar properties is the best way to estimate the ARV for a project, but this isn’t always possible.
A neighborhood may not have recent sales of updated homes with similar characteristics. If the rehab work is too nice for the neighborhood, the price the flipper thinks they may get could be optimistic.
While it’s important to get the flipper’s estimated ARV, you’ll want to do your own analysis. If your numbers are very different, that in and of itself says something about the likely success of the project or the flipper’s experience.
As the lender, your estimate of ARV is what matters when gauging your risk tolerance and willingness to lend on a project.
3 – Gauge Your Borrower’s Experience
One of the most critical factors in evaluating a short-term flip loan is the experience of the flipper:
- Someone who’s been through several successful flips is more likely to complete their proposed project on time and on budget.
- They should have a realistic expectation for the level of unanticipated costs that can crop up once you start tearing walls out.
- They should have contractors they know can get the work done.
- They should have processes and procedures in place to manage and track the project from start to finish.
By comparison, a new flipper may make mistakes that cost time and money. It just happens with a complex endeavor such as a home rehab. This means the project budget needs a conservative eye, and your loan-to-value threshold may need to be lower.
The following factors can help you qualify a new flipper:
- It’s okay to ask your potential borrower about their experience. Ask for a project plan in advance.
- Confirm that they know what repairs may need to happen, and that they have the necessary contractors for each phase of the project lined up.
- If they’ve done flips in the past, analyze those in terms of performance on key metrics like completion on schedule and on budget, or how close the sales price was to their pre-project estimate.
The more confidence you have in your borrower’s ability to execute their plan, the higher the likelihood that both of you will see success and profits at the end of the project.
4 – Choose the Right Loan Terms
Once you have evaluated the project and the borrower, it is time to set loan terms that provide a good return for the amount of risk involved, protect your investment to the highest degree possible, and allow for the borrower to profit if they execute as planned.
The amount of the loan can vary as you find suitable to your risk tolerance. Some relatively standard approaches may include:
- 60-70% of After Rehab Value (ARV)
- 70-90% of acquisition plus rehab costs
- 70-90% of the purchase price
Keep in mind that if the project fails, you want your outstanding loan balance to be less than the property is worth, even if the home has been gutted to the studs in one or more rooms.
The loan value should be commensurate with the risk involved and the experience of the borrower.
Payment plans vary significantly, and may include such formulas as:
- Points up front, no monthly payments, full payment due at sale or end of term.
- No up-front cost, interest only payments monthly, balance due at sale or end of term.
- Points up front, no payments for 3 months, interest only payments monthly, balance due at sale or end of term.
- Some lenders won’t charge points but require a minimum of 6 months interest payments no matter how quickly the property is completed and sold.
Milestone funding is a good way to protect yourself and keep the borrower on-task. It’s common to set milestones for the rehab process, and release funds only after each phase has been completed.
This strategy mitigates risk, as the property will be worth more the further along the rehab process goes. Your loan-to-value ratio can remain positive across the rehab timeline with this approach.
5 – Stay Engaged
Your work is not done once you wire funds from your checkbook IRA or Solo 401(k) bank account to the borrower.
You should regularly check in with your borrower to ensure the project is progressing according to plan and on schedule. If there are issues, you want to know sooner rather than later.
Your loan terms should include conditions that allow you to inspect the project if you are local, or require the borrower to provide video walkthroughs and updates periodically.
Taking the time to fully evaluate a short-term lending opportunity before issuing funds, and monitoring the project during the rebab are the best steps you can take to ensure a successful outcome.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
