Monday, February 5, 2007

Private Money Lending: Use Your Self-Directed IRA to Increase Your Returns

Most people that have an IRA or old 401k invest their money in either low yielding money market funds, bonds or stocks. Few people know of something called a Self-Directed IRA from which you can invest in a wide variety of instruments such as mortgages, real estate, tax liens and franchises in addition to traditional stocks. Every financial adviser is telling you to diversify your portfolio but to them, it is usually limited to the realm of stocks and bonds.

With a Self-Directed IRA you are prohibited from investing in real estate that you live in or collectibles, but there are many ways to invest that can be quite profitable. My brother took an old 401k when he left his job and put it into a Self-Directed IRA and has been investing in ocean front property. Since one of the mega-trends in real estate is the growth in the value of ocean front, he has made a small fortune, all accumulating in a Roth IRA which he will not have to pay taxes on.

Another method of making money in this type of IRA is to become a bank. Everyone who has paid interest in a credit card or other loan and then looked at the measly interest rate in their savings account knows that banks can make a lot of money. Many real estate investors are looking for funds and are willing to pay a higher interest rate than normal - 10%, 12% or more.

I am in the process of looking for this type of lender. My program is to pay 10% interest with the loan secured by a Deed, Promissory Note, Title Insurance and Hazard Insurance. Loans will never exceed 75% of the after-repaired value of the house, so even should a lender have to foreclose, he or she should be able to recover their equity. Choosing an established investor should reduce that risk. This creates a relatively safe investment compared to stocks.

There are many companies that will convert your existing IRA or an old 401K into a self-directed IRA:

I've put my IRA into Equity Trust. I can't lend money to myself, but I can purchase real estate using the IRA. One property I plan to buy for $10K should sell for $20K within a month. Last year my IRA had a return of 1% in my stock portfolio.

Should you decide to do this, investigate it carefully and do your due diligence. A good place to find real estate investors is a local REI club which usually has meetings advertised in the real estate section of the paper every month.

10 comments:

Anonymous said...

Loaning money to your LLC, Paul? I hope you followed the 50% Rule of the Plan Assets Rule or the DOL ruling 2004-8 regarding controlling interest or else you have a prohibited transaction. Maybe you had an attorney help you take care of simultaneous funding? I hope Equity Trust did not tell you that was OK. Devil is in the details. I learned everything from PENSCO. They seem to have the most knowledgable people and are fairly conservative with what they will allow you to do when involving disqualified parties. They will also look over your LLC for any obvious prohibited transactions for free prior to investing and even que up attorneys in every state that you can speak with for advice! I have had a great experience with them.

Paul said...

You are correct that you cannot loan money to your business. However, I can purchase a portion of a piece of real estate as long as I adhere to something called "undivided interest". So if I buy a property for $20K using $10k from my IRA I have 50% interest. When I sell the property 50% of the sale price must go back to the IRA. That is my current understanding.

Anonymous said...

That is different than loaning money to an LLC you currently own already, like for first post said. If you do a TIC with your self and your IRA that is fine. Your IRA can own any % and you can include disqualified parties, if you simultaneously fund. www.penscotrust.com is a good source for education. Why did you choose Equity Trust, if you don't mind me asking? When I compared them, pensco seemed overall a better value.

Paul said...

Equity Trust was recommended to me by someone in the same business. Don't know much about Pensco. Guidant seemed like a great plan but was cost prohibitive to me

Steve Burns said...

I have always found Equity Trust to be the very best people that you could ask to work with. They have an education branch called Retirement Education Group that will train you what to and what NOT to do. They KNOW what they are doing. Dick Desich has been doing this for over three Decades now. Give them a call at 440-323-5491 and ask for information. I have been working with Brian Honohan. The person teaching training in REG is Edwin Kelly. They can help with what ever you need!

Anonymous said...

When I was looking at the Equity Trust Co. fee schedule, I became concerned about the fees that could accumulate on either a rehab project or a long-term investment. For every cashier's check that you ask ETC to write -- monthly utilities? contractor costs? -- it seems they would charge $10 plus $18 overnight delivery. It wouldn't take long for those $28's to really add up. I wonder if I'm overlooking something?

Investment Ninja said...

Through my research I found that custodians such as Equity Trust have a long fee schedule that can drain your funds. By using a company such as Guidant you can basically eliminate transactional, asset-based and holding fees saving you hundreds of dollars. You also will have checkbook control which means you don't have the time restrictions of the custodial paperwork process and you are free to make whatever investments you want, whenever you want. I would recommend researching and speaking with Guidant before making any decisions.

Paul said...

Yes, I spoke with Guidant and they seemed like the ideal way to go for someone with a large IRA. I believe they told me it would take $4k to set up the account. If I had my 401k available, I would have gone that way, but my IRA is considerably smaller and it would have been cost prohibitive.

Andy said...

Hi Paul,

I noticed that you're in the Buffalo area, as am I. I'm trying to find either a lawyer or accountant in the WNY area who has experience in self directed IRA's so that I can raise some funds for an aviation technology company. Did you work with any advisors or have you relied on the advice of the IRA custodian?
Thanks!!

Paul said...

I've only gotten advice from the folks at Equity Trust. Sorry I can't help with local experts.