Partnering Your Self-Directed IRA Funds

If you are already using a Self-Directed IRA, you know that your choices for investing your retirement savings have been greatly expanded into alternatives such as tax liens, private stock, and precious metals. Well, here is another advantage to these powerful vehicles that might be new to you: you may partner your Self-Directed IRA funds with another IRA to acquire investments that would be out of your reach otherwise.

Partnering Self-Directed IRA funds is nothing new. Since their conception in 1974, Self-Directed IRAs have been considered separate entities, which means they can conduct business with others. And this strategy is often critical when it comes to investing in real estate, which can require larger amounts of funds for its purchase.

If you are not familiar with partnering your Self-Directed IRA funds, here is how it works:

It works like any other partnership

You find and partner with a like-minded individual(s):

  • Partner your Self-Directed IRA’s funds with your funds
  • Your Self-Directed IRA funds may also partner with someone else’s personal or IRA funds
  • You can partner your Self-Directed IRA with more than one IRA

And just like any partnership, you take on a stake in the investment. For example, if your Self-Directed IRA funds 30% of the investment, it pays 30% of the expenses, incurs 30% of the losses, and receives 30% of the income. The other partner or partners make up the rest of the 70%.

What are the benefits of partnering?

As you can see in the previous example, you can invest in potentially lucrative investments by partnering with others who take on a share of any losses and expenses. Of course, your percentage of any gains or income is proportionately reduced, but if your Self-Directed IRA has limited funds, you probably would not have had access to the investment in the first place.

Partnering your Self-Directed IRA funds opens the door to the many possibilities of real-estate investing, including buying the property through direct purchase or investing in a promissory note. Partnering helps increase your purchasing power and gives you the opportunity to participate in purchases that can produce a higher return-on-investment and provide even more capital for future investments.

Also keep in mind that the ability to partner with multiple Self-Directed IRAs gives you increased buying power, so the option of larger investments comes into play. While your gains will still correspond to your Self-Directed IRAs percentage in the investment, you may be able to get onboard some fairly big properties that could end up being game-changers for your retirement portfolio, all the while limiting your liability if the investment turns out to be a washout.

Do not break the “Disqualified Persons” rule

On any new transaction, you can partner with anyone you choose, even those who are on the list of disqualified persons:

  • You and your spouse
  • Your employer
  • Your lineal ascendants and descendants, as well as their spouses (children, parents, etc.)
  • Any person providing plan-related services (custodians, advisors, fiduciaries, administrators, etc.)
  • Any entity (business, corporation, partnership, etc.) of which you are at least 50 percent owner, whether directly or indirectly

An investment is considered to be a new transaction if you are making the first purchase of the property. In other words, if your Self-Directed IRA is newly buying the property, you are allowed to partner with anyone you want.

If the Self-Directed IRA decides to sell part of the investment and bring in a partner, this would not be considered a new transaction. In this case, the Self-Directed IRA would not be allowed to bring in a disqualified person as a partner.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Investing in Multifamily Real Estate with a Self-Directed IRA

You might not realize it but investing in multifamily real estate with a Self-Directed IRA makes solid investment sense. If you are like many retirement investors, you have your money spread among stocks, bonds, and cash according to your tolerance for risk or your proximity to retirement. You probably feel secure with your mix, believing that it protects you through almost any economic downturn or black swan that comes your way.

Stocks are a wonderful long-term investment, but their volatility can be gut-wrenching if a substantial portion of your portfolio is devoted to them (remember back in 2000 when investors saw their equities pull back as much as 50%). And bonds are good for adding some stability and income to a portfolio, but they can decline in value when interest rates are on the rise.

A Self-Directed IRA can add much-needed diversification from typical investments like stocks, bonds, and CDs by allowing you access to alternative investments such as tax lien certificates, precious metals, private stock…and multifamily real estate investments.

Why invest in multifamily real estate with a Self-Directed IRA?

Real estate is a tangible and secure asset. As financier and politician Russell Sage once said:

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”

What’s more, real estate often grows faster than a lot of those traditional investments. Multifamily properties provide greater potential to assist you in building that all-important retirement wealth. And investing in multifamily real estate with a Self-Directed IRA also lets you take a more proactive approach to growing your retirement account.

There are those who choose to buy one rental house at a time, satisfied that two or three single properties are all they need for a secure retirement. Others prefer the convenience of having several properties at the same location, and that is where multifamily real estate investing comes in.

There are substantial benefits

Investing in multifamily real estate with a Self-Directed IRA can provide you with valuable tax advantages. Here are some of them:

  • You can eliminate capital gains taxes.
  • You can eliminate income taxes.
  • You can eliminate dividend taxes.
  • With a Self-Directed Roth IRA there will never be any taxes to pay on the profits from the investments.
  • You can invest your Self-Directed IRA into multifamily real estate without worrying about withdrawal tax penalties

In addition to allowing your investments to grow tax-deferred or tax-free, investing in multifamily real estate with a Self-Directed IRA protects your assets and helps you with estate planning by creating lasting wealth for you and future generations.

Here is how it works

If you do not already have a Self-Directed IRA, American IRA can help you open one. Once it is set up, you will be ready to start investing in multifamily real estate in your new Self-Directed IRA.

You will start by choosing among apartment buildings, townhomes, and duplexes. As with any investment, you will need to do your due diligence—including looking at income and expense records, copies of leases, and rent rolls—to make sure the asset is worthwhile. Comparing the income that was generated in the past to its expenses can help you determine whether or not this is a viable investment.

The IRS has stringent rules for real estate investing

Because the IRS has these strict rules concerning investing in real estate with a Self-Directed IRA, it probably is not advisable to go it alone. Get advice from professionals such as an experienced real estate broker, an attorney, and a financial advisor.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

 

Investing in Out-of-State Properties with a Self-Directed IRA

Investing in local real estate can be complicated, but when you move the process out of state, all those challenges can become magnified. Because of this, Self-Directed IRA investors will not give out-of-state properties a serious look. They focus on the negatives and miss out on good deals.

Investing in a property that is located in another state adds diversity to your portfolio and could give you a bigger return on your investment (ROI) than properties in your state. Sure, there are unknowns you must deal with:

  • You do not know the area.
  • You might not know the laws.
  • You cannot walk into a property and see it firsthand.
  • You have not developed any contacts.

But these are not barriers since each of them can be overcome. Many of us do not have the cash to make a real estate investment, and few of us have enough cash flow to support two mortgages, but a lot of us have accumulated retirement funds that could be used to take advantage of a potentially lucrative investment.

You cannot invest in real estate with a conventional IRA, but you can if you have a Self-Directed IRA. Once you have opened a Self-Directed IRA account, you have opened yourself to a vast array of investment opportunities, including real estate.

If you want to get started in real estate and believe that greater value is available in another state, here are a few suggestions to consider:

Decide what you want

It makes sense to know what kind of property you want before you start searching. Make a list of your goals for the property and what you want to see in it. Only then can you look for something that meets your criteria. Otherwise, you could get distracted during the process and end up with something that does not fit.

Ask yourself what kind of property you want and who would be an ideal tenant for it. Decide how much you want to invest in the property and how much rent you will need to get a good ROI for your Self-Directed IRA.

Without starting with a clear vision of what you want, it is no use deciding on a location.

Research the area

After you have come up with specifics for a property, you can focus on the area. You should get to know everything about where you are looking. Things are different from one area to the other. Look at:

  • Tax rates
  • Property values
  • Demographics
  • Employment rate and type
  • Crime rate
  • Local laws and restrictions

All of these factors help you decide if this is a viable area in which to invest. Most of this information is readily available. Check out the prospective city’s website for their Annual Financial Report. Once you have a handle on the area, you can start looking at specific properties to invest in with your Self-Directed IRA.

Pay attention to the details

Once you find an investment property that sounds good, dig into the details. That will not be as easy since you are not there in person. Here is where technology can assist you with video tours of the property, Skype, and electronic documentation. You can see the neighborhood and the property itself on Google Maps. If you are not up to speed on technology, take the time to learn enough to help you make this investment from a distance.

Other recommendations include getting in touch with area property managers to get their opinion on the property you are considering, evaluating rent prices, and talking to local investors who are familiar with the neighborhood and the property. As soon as you have the property under contract, hire an appraiser and a reputable inspector.

Assemble a trustworthy property management team

It can be very unnerving to own an investment property in your Self-Directed IRA that is hundreds (or even thousands) of miles away. That is why it is crucial to hire a property management company that you can trust to run the day-to-day operations of your investment.

Try to get as many referrals as possible and interview several before making a decision. Make sure they are communicating promptly and clearly during the screening process. If not, that could be a red flag that they will be unresponsive after you hire them. You are looking for a company that will keep you informed, manage your tenants, and guards your investment.

The property management company is vital to the success of your out-of-state investment property. Take your time and choose it carefully.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

How a Self-Directed IRA Helps Millennials Retire Sooner

“Retirement? I cannot even pay off my student loans!” We get it. However, there is a process to it, and starting a Self-Directed IRA sooner rather than later puts you on the way.

You have your monthly mortgage or rent to worry about along with paying back student loans, healthcare costs, and sometimes just making ends meet.

Whether you are employed or work for yourself, chances are you have started an IRA or 401K. Ideally, your employer also contributes a percentage of your pay to your plan as a benefit of working for them. You elect to contribute a small percentage of your pay as well.

At this point in time, your retirement planning consists of, if you have time, opening your monthly statement and seeing a bunch of numbers and percentages on a chart. You struggle to find that number at the bottom of the third page that you think tells you how much you have saved up thus far. It looks like your money will add up and that 30 to 40 years from now you might have enough to be able to retire.

It does not have to be that way. By converting to (or starting) a Self-Directed IRA, you can take control over your retirement possibilities.

If you are knowledgeable about your current “plan”, you often need to research the various funding options your current plan makes available to you and read through pages of growth and pie charts in order to make a decision.

What this means is that you are being asked to take your valuable time to make what is really an uninformed decision about something that may not impact you for many years.

The companies that “manage” these IRA and 401K plans make their money by charging employers service fees for “managing” all of these accounts. The opportunities they present for investing are usually limited to those entities the management company does business with or has a financial relationship with.

On the other hand, starting your own Self-Directed IRA allows you to freely choose your investing decisions.

Now think about how many people you know that do not own a home and are paying rent every month. The amount of rent they (or you) pay each month is based on a number of cost factors.

Suppose a landlord charging your friend $1,000 per month winds up with $75 per month “profit” after their mortgage cost, property tax, maintenance, janitorial service, garbage removal, redecorating, and property management costs. Suppose this landlord owns a 10 unit apartment building. That would make their “profit” $750 per month.

Chances are that your current IRA or 401K plan is not generating $750 per month (or $9,000 per year) for you at this early stage. Even if you have $100,000 in your account, a $9,000 annual contribution equates to 9%. It does not take very long to verify that your current plan is not producing at a 9% rate for you.

With that in mind, suppose you have a Self-Directed IRA instead. Among the capabilities it provides is an ability to invest in real estate at any time. This means that you could purchase or partner in the purchase of an apartment building or any other form of rental property.

Using your friend’s apartment above as an example, doing this under your own Self-Directed IRA could be contributing some or all of that $750 per month “profit” to your fund every month, and it is tax free.

It takes your personal time to find either a partner or the right investment property to purchase. Think of which is more worth your while. You could spend time each month trying to interpret your current IRA or 401K statement and making fast decisions about your 2% gain. Or, you could spend that time next month toward purchasing the best real estate opportunity to grow your Self-Directed IRA as quickly as possible.

Thinking long term, you could use your monthly profits toward investing in additional properties which generate rental profits and grow your own empire.

Suppose that you start your Self-Directed IRA now, and that ten years from now, your rental properties combine to be valued at $700,000. By then, your debt is paid off or close to it. You could then either keep growing your portfolio or you could sell it and retire.

That is ten years from now. Not thirty. The choice could be yours.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Be Cautious, Due Diligence is a Must with Your Self-Directed IRA

We see stories in the news all the time about criminal activity milking millions of consumers out of large and small sums of money. We all need to be even more careful when it comes to our Self-Directed IRA account.

Perhaps the biggest lesson came a few years ago when the owner of a large chunk of commercial land in Texas perpetrated rumors that the Disney people were looking to develop a theme park along the line of DisneyLand in that area.

Based on this “information”, several large commercial developers invested in what they were told was land surrounding where the Disney people were expected to build. They wanted to be able to develop hotels, restaurants, and everything else that families want near a Disney property.

However, there was no truth to the “news” that Disney had any plans to build there. The discovery of these lies was not discovered until several developers had spent millions of dollars on land which had much less value than they were told.

What does this have to do with a Self-Directed IRA?

If that scenario can happen to multi-million-dollar investors with teams of executives, this could happen to you and your family as investors dealing with some or all of your retirement money.

Even though the criminals in the Texas Disney scandal were eventually caught, several of those that invested under the false pretenses lost at least part of their money.

Back in December 2017, the Securities & Exchange Commission uncovered a scandal which generated more than $1.2 billion invested into a line of what proved to be unregistered securities. The majority of those who invested into this fraud were seniors, many of whom lost all of their retirement money.

That amount all came from consumers located within the state of Florida alone.

When you have your Self-Directed IRA, you have the flexibility of making your own investment decisions in terms of real estate and/or business interests you purchase in order to grow your funds.

This is why you need to exercise extreme caution and check into every detail before you make any payments.

Chances are you have or had a Traditional IRA or 401K plan, which are often administered by a management company retained by the employer, union, or other professional organization.

Those entities handle the due diligence process prior to making the various investing opportunities available to their clients.

However, while the Self-Directed IRA allows you the opportunity to invest with a higher rate of return, you, in turn, take on the responsibility of having to live with your decisions regardless of how well they work for you.

There are due diligence steps that you can take to ensure that an investment you are considering is a legitimate opportunity for you.

  • If you are considering investing in a real estate trust fund or holding company, you can check with the Securities & Exchange Commission. You should also do online research. Look for any complaints or inconsistencies in information they distribute including a company web site.
  • There are ways to research prior to making a purchase, or even making an offer, on a specific property. You can review comps, which are comparable prices of similar nearby properties, by looking at web sites such as Realtor.com.
  • In the event that a builder or developer is involved, you should research their recent transaction history. If a contractor is involved, you should check with the city or village in which the property is located to verify that the company is actually licensed there.
  • If it is not a property you can easily go and see for yourself, it is all the more reason to be careful. Unless you know for a fact that the company is reliable, do not invest in anything out of your area or out of state.

You should also research the community surrounding a potential real estate investment. There is the scene in the TV show from many years ago called “The Honeymooners”. Alice is complaining to Ralph about the time he bought a parking lot across from a movie theatre and how badly that investment turned out.

“How did I know they were building a drive-in?” was Ralph’s response. Good for a laugh, but a lesson for all of us in the process.

Make certain that you treat your Self-Directed IRA at all times like it is your own money. After all, it is.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

The Seven Deadly Sins of Self-Directed IRA Investing

1.)  Paying too much. Experienced investors will tell you: Make your money when you buy. Not when you sell.

This means that whatever the investment, the best investors are buying assets at a discount to the intrinsic value of the property. Time and reasonable care and effort will result in unlocking            value, and you can profit handsomely simply by selling the property for what it is worth. You do not have to hope you find a foolish buyer willing to give you more than it is worth. That is not a        strategy. Find unloved properties, ugly ducklings and hidden gems that you can buy on sale, take a little care, fix them up, and you can rent or sell for a fair price.

2.)  Doing business with relatives. It is not a great idea in any context. But if you do business directly with the wrong relative in your Self-Directed IRA, it is actually illegal – and could        result in severe fines, taxes and penalties.

Congress expressly forbids owners of Self-Directed IRAs from using them to buy from, borrow from, lend to or sell to certain family members. Specifically, you cannot transact with these              individuals:

  • Your spouse
  • Your own descendants and those of your spouse
  • Your own grandparents and great grandparents and those of your spouse
  • Your attorney, accountant or advisor who advises you on your Self-Directed IRA in a fiduciary capacity
  • Any entities controlled by any of these prohibited counterparties.

3.)  Commingling funds.  You cannot involve your own personal funds in your Self-Directed IRA investment in any way. All purchases related to your investment must come from your Self-  Directed IRA account that contains the property. Technically, by law, you cannot even change a lightbulb in your property unless you bought the bulb with money from your Self-Directed        IRA account.

Self-Directed IRA owners should work closely with American IRA, LLC to ensure that all transactions related to your property are routed through your IRA account.

4.)  Accepting rent payments personally. If you are renting out a Real Estate IRA property, you cannot accept a rent check made out to your own name. Rents and all other payments          related to your Self-Directed IRA must be made out to the entity that holds the property, or to your Self-Directed IRA account itself.

Likewise, you cannot take a cash payment directly. Doing so risks having the IRS declare the payment to be a prohibited transaction, potentially triggering the disallowance of the Self-              Directed IRA’s tax advantages, along with tax liability, penalties and lots of legal bills.

5.)  Signing a personal guarantee for a real estate IRA mortgage. The law mandates that you cannot pledge your Self-Directed IRA asset as collateral for a personal or business loan      outside of the IRA. All mortgages on your Self-Directed IRA property must be on a non-recourse That means that in the event you default, the only course the lender can take is to foreclose          on the property itself. They cannot come after you, personally. If you sign a personal guarantee, or pledge non-IRA assets to secure the loan, the IRS could strip your account of its tax-                        advantaged status, resulting in significant taxes and penalties.

6.)  Forgetting about RMDs. Real estate is highly illiquid. But if you have assets in a Self-Directed IRA, Self-Directed Solo 401(K) or other tax-deferred savings vehicle, you will need to  come up with cash each year to make your required minimum distribution, beginning by April 1st of the year following the year in which you turn age 70 1/2.

Self-Directed IRA owners should plan ahead so they are not caught in a cash crunch, unable to quickly raise the money within the IRA to make the RMD.

7.)  Paying a high percentage each year just to hold the asset. Many Self-Directed IRA firms charge a percentage of assets under management to hold IRA properties on your behalf.      Many times this is needlessly expensive and inefficient.

For investors who tend to buy and hold over long periods of time, switching to American IRA’s flat-rate, menu-based fee structure, rather than a high expense ratio, wrap fee or other AUM                charge can save thousands of dollars each year on fees.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Everything Realtors Need to Know About Self-Directed IRAs

For realtors, there is no doubt about it: the more people are interested in real estate, the better business will be. Yet many realtors do not know that real estate is one of the most popular retirement investments outside of the stock market—especially with those who run their own Self-Directed IRAs. An investor that uses their Self-Directed IRA to purchase real estate still has access to non-recourse loans. And though there are some limits on what an investor can do with real estate using a retirement account, it will only help realtors to know what is possible.

Why It Is Important Realtors Understand Self-Directed IRAs

The concept is simple: there is no reason to ignore one corner of the market where real estate is involved. By using Self-Directed IRAs for real estate investments, retirement investors can put aside wealth in the form of real estate with the tax advantages of any other retirement investment account. That provides additional incentive for any real estate investor looking to build long-term wealth to utilize one of these retirement plans for their own real estate investing purposes.

Self-Directed IRAs also allow individual investors to partner up and make real estate investments that way, there are plenty of options available to those who choose to self-direct. Realtors who know clients who self-direct may be able to bring more opportunities their way, especially when it comes to “investment” real estate that otherwise has difficulty finding enough potential buyers.

Alternative Funding Strategies with Self-Directed IRAs

Realtors who recognize an opportunity when they see it can offer alternative funding ideas to their clients. For example, because a Self-Directed IRA is expected to act as a separate entity from the individual, it is possible for an individual to partner up with themselves to muster the funds necessary—provided that the real estate investment itself still adheres to the rules of Self-Directed IRAs. For example, investors cannot live in the real estate in which they are investing with a Self-Directed IRA, whereas personal real estate purchases can also double as residences. Still, this funding advantage can offer a realtor a tremendous amount of flexibility in fully exploring the market for a given piece of real estate investment property.

Limitations of Self-Directed IRAs and Real Estate

Although it is important to be mindful of these tremendous advantages for investors—even as a realtor—it also pays to know the potential limitations. For example, you would not want to bring the idea of buying a personal home to anyone investing in real estate with a Self-Directed IRA—unless the idea was to go through the usual means, and not through the investment vehicle itself. Self-Directed IRAs can only be used on real estate if those investments are kept separate, as the accounts themselves are considered separate entities.

The good news? It is advantageous for any realtor to know that there are plenty of options—including non-recourse loans—for those who invest with a Self-Directed Real Estate IRA. Knowing these options can grant realtors access to a larger market than they ever thought possible.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Best Flipping Markets for a Self-Directed IRA

If you are a property flipper, you already know some areas are better for Self-Directed IRA returns than others. Flipping is the practice of buying real estate, making improvements to unlock value in the property that may have been hidden to the previous owners and to other buyers.

It works well in rising markets, of course, but it is at its heart a market neutral strategy that can provide good results even in flat and falling real estate markets. The reason: Skilled flippers can add value through improvements faster than a falling market can suck value away.

A new survey from the National Association of Realtors lists the top ten markets for real estate flippers. And several of them are right here in the southeast, near many of our Self-Directed IRA clients in or near the Carolinas. And many of these metro markets are at reasonable entry prices. Do not have $758,800 to buy the median-priced home in Los Angeles? Head north to Fresno, or scout out properties in Nashville, New Orleans or Lubbock.

Here are the top 10 most profitable flipping markets this year, according to Realtor.com.   If you use a Self-Directed Roth IRA potential profits as stated below by Realtor.com would be tax free forever.

1.)  Nashville, Tennessee

Median home list price: $367,900
Ratio of flips to all home sales: 4.1%
Average flip profit: $87,200

2.)  Fresno, California

Median home list price: $311,700
Ratio of flips to all home sales: 3.5%
Average flip profit: $53,200

3.)  Palm Bay, Florida

Median home list price: $267,600
Ratio of flips to all home sales: 3.3%
Average flip profit: $71,500

4.)  North Port, Florida

Median home list price: $350,000
Ratio of flips to all home sales: 3.3%
Average flip profit: $85,300

5.)  Baton Rouge, Louisiana

Median home list price: $237,800
Ratio of flips to all home sales: 3.2%
Average flip profit: $70,000

6.)  Chattanooga, Tennessee

Median home list price: $257,500
Ratio of flips to all home sales: 3.1%
Average flip profit: $65,800

7.)  Los Angeles, California

Median home list price: $758,800
Ratio of flips to all home sales: 3%
Average flip profit: $169,400

8.)  Lubbock, Texas

Median home list price: $240,000
Ratio of flips to all home sales: 2.7%
Average flip profit: $46,000

9.)  Medford, Oregon

Median home list price: $410,000
Ratio of flips to all home sales: 2.7%
Average flip profit: $51,200

10.) New Orleans, Louisiana

Median home list price: $280,100
Ratio of flips to all home sales: 2.6%
Average flip profit: $93,400

The best thing: When you flip a property within a Self-Directed IRA, you do not have to pay immediate taxes on the profits. As long as the money remains in the account, you can execute an unlimited number of flips each year, and there will be no taxes due, except potentially unrelated debt-financed income tax on the gains or income attributable to money you borrowed to purchase or improve the property.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Self-Directed IRA Tips: Conducting Due Diligence on Partners and Developers

Self-Directed IRAs are a proven wealth builder and income generator. No other asset class delivers such a potent combination of current income, capital gains potential, leverage – thanks to the possibility of increasing rents over time and finding additional revenue streams – inflation protection.  But of course, no real estate investment is a sure thing. Investment carries risk, and sometimes Self-Directed IRA investments fizzle. Due diligence is a critical skill for any real estate investor. This is especially critical if you are committing Self-Directed IRA funds to an investment along with others. Not only do you need to conduct a sober assessment of the value of the property and its potential for profitability; you must also assess your fellow partners and other stakeholders.

Ask these questions before committing Self-Directed IRA money to an investment.

Does the promoter have skin in the game?

Consider a ham and eggs breakfast: The chicken was involved. The pig was committed.

The difference is key: When you are investing in a real estate deal along with others, you want other partners and your managing partner to be like the pig, not the chicken. You want them as committed to making the deal work as you are.

Obviously, a professional real estate agent cannot be personally invested in every deal he represents. But real estate developers should be, or you should exercise extreme caution: If the opportunity is good enough for your money, why is it not good enough for them?

Real estate developers and promoters should eat their own cooking. Look for projects where the promoter and general manager (for limited partnerships and LLCs) has a significant portion of his or her own wealth invested alongside yours. You want a true managing partner, and not just a manager, at the helm.

Furthermore, if the investment goes south, a promoter with no equity of their own in it is not likely to stick around and make it work. They may just move on to the next project, leaving you and your fellow investors who actually do have your own money invested holding the bag.

What is the commission?

There is nothing wrong with sales commissions. But you should have your eyes open about how much you are paying when you are investing hard-earned Self-Directed IRA assets through a broker. If they take too much money up front in fees and commissions, you have much less money working for you in the investment, compounding for you over time.

Furthermore, it will take that much longer for you to recoup your investment, because you are starting out well underwater. It could take years to break even.

How experienced is the management team?

Have the managers been through the wringer before? What is their track record? Have they developed and managed properties of this type before? If this is their first venture, who were they working with before? Were they learning from some of the best in the industry, or did they leave a bad firm?

Also, where is the management team located? Are they near the property or do they have to buy a plane ticket to visit the property they manage?

How much are they borrowing?

Leverage is a powerful tool in real estate investing. But it is a risky one, too: The more money they are borrowing, the more even a small fluctuation in property values can hurt you, and even leave you upside down in your position for years.

It is important that the property meet your risk tolerance criteria, after accounting for leverage.

Furthermore, if the partnership or LLC is using a lot of borrowed money, you may not want to borrow money yourself, in addition to their own built-in leverage. That is just adding leverage on top of leverage. It feels nice in a strong market, but a downturn could be very painful indeed.

What is the exit plan?

Real estate is highly illiquid. It is the nature of the beast. But there should be some planning for a profitable exit, even if it is a few years in the future. The developer could have plans to sell the entire development at a profit after some wise investments enhancing the value of the property. They should be able to give you a rough timeline.

Even if the developer plans to hold indefinitely, there should be some way for you to sell your interest at some point. If not, then you should be paying a lower price to compensate you for the lack of liquidity.

Larger projects have little trouble helping a small investor out of their position, in time. For smaller, less established firms, it is much more difficult.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

Prohibited Transactions and Disqualified Persons in a Self-Directed IRA

The Self-Directed IRA can be one of the most transformative tools any investor employs in their quest for a secure retirement. But while taking advantage of the tax protections in an IRA to invest in alternative retirement assets like precious metals and real estate can be incredibly freeing, it is important to recognize that there are also restrictions in retirement accounts—and those restricts are important to pay attention to if you do not want to be hit by steep penalties.

That is why we have taken the time to compile some of the common prohibited transactions and disqualified persons rules in the Self-Directed IRA. The more you know about your limits, the better you will be able to experience the freedom that comes with investing through a Self-Directed retirement account:

Prohibited Transactions in a Self-Directed IRA

What do we mean by prohibited transactions? These refer to those types of investments you will be expected not to make when you are using a Self-Directed IRA. Remember: while you can use an IRA for a wider variety of investment classes than stocks and bonds, there are some strictly-regulated and prohibited transactions you will need to avoid, including:

  • Alcoholic beverages. Wine is a particularly popular investment, as it keeps well, and rare wines can increase in value over time. But investors cannot use a Self-Directed IRA to protect wine investments, or any alcoholic beverages for that matter.
  • Life insurance. Putting a life insurance policy within a Self-Directed IRA is not possible.
  • Some precious metals. When you do invest in precious metals within a Self-Directed IRA, it is important to work with a reputable dealer and to double-check that the specific bullion or coins you are purchasing are in line with approved metals for an IRA.
  • Antiques and similar items could fall under the category of “collectibles,” making them prohibited transactions for the purposes of investing with a Self-Directed IRA.
  • Fine art is a popular investment for those who want to diversify their assets out of the stock market and other assets tightly tied to the global economy. However, these investments will have to be made without the tax protections of the Self-Directed IRA.
  • Using a Self-Directed IRA for loan collateral is another type of prohibited transaction. Sheltering retirement investments from outside influences also means sheltering them from the possibility of being collected after defaulting on a loan. Since collateral is not the purpose of IRAs, any such transaction would be strictly prohibited.

There is a great deal of freedom within an IRA to invest in the type of assets you want to own—but it is important to keep the above in mind before you get started.

Disqualified Persons in a Self-Directed IRA

In addition to prohibited transactions, there are prohibited individuals who are not allowed to take part in an IRA. What does this mean exactly? Let’s break it down:

  • You, your spouse, and descendants/ascendants or any entities they control can lend to your Self-Directed IRA or borrow from it.
  • Prohibited individuals cannot buy or sell assets directly to your Self-Directed IRA—including any entity they control.
  • The same rule as above applies to the buying or selling of services.
  • Using Self-Directed IRA assets for direct personal benefit—such as living within a house owned by the IRA—is strictly prohibited, and this rule applies to you, your spouse, and descendants/ascendants.

Understanding the limitations of the Self-Directed IRA maybe is not the most fun part of developing your own retirement strategy. But it is integral if you are going to do it the right way and ultimately take advantage of the fantastic opportunities offered within self-direction.

For more information on prohibited transactions and disqualified persons within a Self-Directed IRA, continue reading the information here at www.AmericanIRA.com or call us at 866-7500-IRA.