Moved an old 401k over and made one small loan, less exotic than expected

10 percent first position at 61 percent of the account on a small rental in a cheap market. That is a reasonable first loan and I say that as someone who has not made one yet. What was the loan to value?

The document error you caught is the whole ballgame. If your name goes on the note instead of the custodian, you have arguably taken a distribution and the tax consequences follow, which is why the attorney fee is not optional. Nice that yours was paying attention.

2,850 over nine months on 38k is about 7.5 percent realized, not 10, which tracks if the loan funded a couple of months after you counted from. Worth reconciling your own numbers so you know which one is the real yield. I'd also ask what happens at month 24. Interest only means the whole 38k comes due at once and you are relying on his exit.

@ledger's month 24 point is the one I'd sit with. A balloon on a 24 month interest-only note is a refinance risk you don't control.

A few mechanics worth pinning down, since this thread will get read by people about to do the same thing.

The reason the tax filing did not come up is that interest income earned by an IRA generally sits outside unrelated business income tax. Where a retirement account owes tax is when income is debt-financed, meaning the account itself borrowed, or when the underlying activity is an operating business rather than passive income. A levered real estate fund and a fix-and-flip operation are the two shapes that most often surprise people. That filing is Form 990-T, it has a low dollar threshold, and trust rates climb steeply, so the cost is real when it applies. Confirm current thresholds and rates with a CPA who has actually prepared these.

On the documents, @canton has the substance right. The account, held by the custodian for your benefit, is the lender on the note and the beneficiary on the security instrument. Your personal name appearing as lender is the error to avoid, and recording practice and the name of the security instrument, deed of trust or mortgage, differ by state.

On the 23k idle, that is not a failure. Cash inside a note book has a job. It funds a workout you cannot pay for personally, because you cannot put your own money into the account beyond contribution limits and you cannot do the labor yourself without raising a prohibited-transaction question. How much you hold depends on lien position and borrower quality, and whether your reserve is adequate is a question for a professional who sees your whole file.

@ledger's reconciliation point stands. Compute realized yield from the funding date, not the origination date.

Five weeks on the transfer is faster than I expected from what I've read. Did the old plan let you do it directly or did you have to go through an intermediate account?

Finally, a setup like this. Single loan, single borrower, payments showing up on time. Did you have to visit the property or did you rely on the appraisal?

The bit that catches my eye is finding the borrower through a local investor group. That relationship sourcing is the part I don't have and can't shortcut.

Interest only for 24 months means you get paid and your principal doesn't come back until the end. On land I'd hate that. On a rental with a clear refinance path I understand it. What is his plan at maturity?

@orchard asked mine. Verity, do you know his exit or are you assuming he'll refinance?

I didn't know you could lend out of an old 401k at all. I thought it was stocks or nothing.

@rigging you generally have to move it to a custodian that permits it first, which is what Verity described. The employer plan itself usually won't hold a private note.

The thing I'd flag from the construction side. If that borrower ever needs repairs done to protect your collateral and he walks, you cannot swing a hammer on it yourself and you cannot pay a crew personally. Every dollar comes out of the account. On a cheap house that is manageable. On something bigger it isn't.

So all in, attorney and custodian fees, what did the setup cost you against 2,850 of interest? That is the number I'm missing when I try to price whether it's worth doing at 61k.

Nine months of research and no deal here, and reading this the actual gap for me isn't knowledge, it's that I don't know four local landlords well enough to check their last four deals. @beacon named it.