When I was first introduced to self-directed IRAs, I happened to be at a REIA meeting, seeking strategies for funding my real estate deals. I had acquired a certain amount of doorways, and the bank was cutting me off.
I saw that people were lending from their IRAs to other rehabbers for their deals. They were making 15% in their IRA with points, and the investment (loan) was backed by collateral (property). That just made sense to me.
Up until that point, I had gotten beaten up in my own retirement account with the traditional investment vehicles. I didn’t even know you could have a self-directed account. Now, I utilize several strategies for investing from my IRA, such as notes, flipping houses or investing in shares of LLCs that do commercial real estate.
With a self-directed IRA, you as the account owner are in control of keeping your money working for you. In fact, you could even have a checkbook IRA, which is great for those, who want to limit IRA custodian fees and have the freedom of checkbook control to do deals quickly and efficiently (just be careful not to run a business from your IRA or become too active in the account).
Yet I’m always amazed at how much IRA money is sitting idly in people’s accounts, out of sight, out of mind, doing very little. I’ve had this discussion on more than one occasion about the fact that millions and millions of IRA dollars are just sitting around looking for the next investment.
So, what are the easiest investment vehicles to utilize from a self-directed account?
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
When it comes to investing with your IRA, I don’t think it gets much easier than using notes as the vehicle. The paperwork is quick and simple, there’s no transfer tax (often times no income tax, especially in a Roth), and it can be done with small amounts of money.
Just think about Lending Club, where half of the country can invest in small notes for as little as $25 from their IRA account.
If you invest in performing notes, it can be a very passive experience. For example, investing in a secured residential mortgage backed by hard real estate becomes much easier when utilizing a licensed servicer.
Utilizing a licensed servicer for your note is similar to having a property manager for your rental property, except it can be more affordable and scalable. The servicer also helps you stay out of trouble by maintaining compliance with federal regulations and keeping you safe with your IRA account, as you don’t want to become a disqualified retirement account entity because you were deemed to be too active in your note management or collections role.
Private money is another great way to obtain funding for your real estate deals. It really pays to become well-versed in IRA account investing, so you can teach others about how they can invest in real estate with you. Demonstrate all the advantages of IRA investing, and once they realize all the options self-directed IRA accounts allow, you’ll soon have more money than deals.
Believe it or not, lending out private money to others is a great way to get others to lend money to you.
Some people struggle with how to re-invest their returns, but a good thing to remember is that you can combine IRA accounts with each other or combine them with regular money in order to make larger investments. Just be sure to title the assets in the correct proportions.
Options are another great investment in your IRA. If you’re a house flipper, I could never understand why you wouldn’t be using your IRA account to improve the tax situation. What’s the point of giving a third or more of your money to the government?
You can also put an option on a property titled in your IRA, and then sell the option to a rehabber buddy, who pays a premium to your IRA for the right to buy it, rehab it and either keep it as a long-term buy-and-hold or sell it retail.
Why would you give away your good deal? It’s because your buddy might return the favor to you or another party in your circle of rehab friends, in order for all of you to build your retirement accounts together by the use of options.
Whether you’re investing in small notes on an online platform, doing rehab funding for friends or just investing passively in performing, institutional notes, it’s easy to see why notes are my favorite IRA strategy.
So, what’s yours?
Don’t forget to leave a comment below!