As an IRA Custodian, Preferred Trust Company does not sell any investments or offer any investment, tax or legal advice. While we do not recommend any investment we do want our clients to be educated on the type of investments that a Self-Directed IRA can facilitate. We strongly recommend that the investor seek professional advice from the appropriate legal, accounting and/or tax professionals of their choice prior to making an investment decision to ensure that they fit your retirement goals.

As a passive custodian Preferred Trust does not endorse or offer investments. The popular investment options below are a reflection of the types of investment strategies used by our current clients.

Private Debt Investments, Deeds of Trust / Mortgage Notes

Another option for those looking to invest in real estate without all the hassle, cost and time needed for investing in real property are private debt instruments. These include notes secured by deeds of trust and/or mortgages; contracts for deeds (taking over an existing loan); and corporate debt offerings. This alternative investment option matches quality real estate borrowers with investors seeking capital preservation in (at times) collateralized turn-key real estate. These investments offer diversification, control, double-digit returns and ease.

Trust deeds are often offered by a hard money lender. Hard money lenders are entities that provide funding for residential and commercial building. The economy and the strength of the financial market dictates the level in which banks and financial institutions are lending money. Hard money lenders fill the gap when a loan size is too large for a community bank and too small for large institution banks for short term financing for land acquisition or development. Reasons for considering trust deed investments:

  • High demand for real estate loans: The recent credit crisis has created a high demand for specialized loans, since real estate developers are often unable to obtain the funding they need through conventional sources. As a trust deed investor, you can therefore expect a higher interest rate for the amount you lend, as well as lower loan-to-value ratios, which will significantly lower your risk.
  • Less risk: Real estate developers and investors have a great deal to lose if they fail to make loan payments, so your risk as a lender is significantly less than if you were to invest in stocks. Moreover, real estate investments generally bring in highly attractive returns, since the situation is similar to when you invest in a fixed yield bond that pays off at maturity.
  • Diversification of your portfolio: It is considered part of a sound strategy to divide your investments between trust deeds, equities and fixed-income investments. Real estate is proving to be a popular sector in which to invest, as are the tech and agricultural sectors.
  • Greater control: You can choose the real estate project you wish to invest in.
  • Speed: You may not wish to have your investment tied to a particular project for too long; with a trust deed you are looking at a waiting period of between six and 24 months.
  • Simplicity: There isn’t too much to analyze, since trust deeds cover a turn-key real estate investment.
  • Trust deeds yield more than bonds: Individual trust investments are considered too small to interest large corporate or government investors. Therefore, the deed market is generally monopolized by smaller investors who, with the right professional guidance, can ascertain the risk, value and expected return to be garnered from particular investments.
  • The time is right: Experience has led lenders to be wary of risking over approximately 65% of market value. Moreover, most lenders are requiring safety nets like personal guarantees of creditworthiness. Finally, the significant drop in property prices recently experienced (up to 40 per cent in many cases) is not likely given current values.
  • The minimum investment amount varies: Some investment firms welcome investments as low as $10,000, while others set much higher limits. This variation allows you to make a smaller investment at first, to ascertain whether or not you are comfortable with this type of investment.

Private Equity Investments / Private Placements

Private equity, sometimes referred to as a private placement, consists of ownership interest in companies that are not publicly traded on a stock exchange. These alternative investments can be made in an existing business, a real estate venture, an investment partnership, and other areas.

Perhaps the best-known form of private equity investing is buying a stake in a new company with growth potential.

There are two primary ways in which your self-directed IRA can invest in private equity:

  • Through a fund: This may include Private Equity funds or Venture Capital funds.
  • Directly into a company: This means a direct investment of money into private companies.

Important things to consider when investing in private placements:

  • If it is an existing entity – total ownership by disqualified individuals (including the IRA owner) cannot be higher than 50%.
  • If the IRA is running a business in a flow through entity (i.e. Limited Partnership or LLC) it may be subject to UBIT (Unrelated Business Income Tax).
  • The IRA owner cannot work for a business owned by their IRA.

Real Estate Investment Trusts (REIT)

Real Estate Investment Trust (REIT) allows an investor to diversify into many different real estate investments while earning a dividend of sort for the invested capital.  Due to the unique nature of the tax structure, a REIT is required to pass 90% of its income each year on to the investors, so the yields tend to be high relative to other investments.  There are many types of REITs however a self-directed IRA is only permitted to invest in privately held REITs.

When evaluating privately held REITs and real estate companies, conduct property due diligence by requesting a copy of the company’s annual report, prospectus and other financial information. Consider reviewing the following:

  • A demonstrated ability to increase earnings in a reliable manner.
  • Management teams able to quickly and effectively reinvest available cash flow as well as consistently complete new projects on time and within budget.
  • Strong operating characteristics such as effective corporate governance procedures, conservative leverage, accepted accounting practices, strong tenant relationships and clearly defined operating strategies in competitive markets.

Real Property

A popular investment option is direct or indirect real estate investing.

With IRA real estate investing, you can invest in property for long-term appreciation, rental income, or a short-term ‘fix & flip’. The investment properties may include; single family and multi-unit homes, apartment buildings, condominiums, commercial property, and improved or unimproved land, just to name a few.

When seeking ways to diversify your retirement portfolio, real estate may be an option.  It may provide recurring income and potential appreciation in value over time. However, real estate investing is not for the faint of heart, as you must consider allocation of your time, cost, and commitment before considering this type of investment.

 

Required Documents to Close a Real Estate Deal

  • Preferred Trust Investment Authorization & Direction Form
  • Contract or Purchase Agreement
  • Appraisal or BPO
  • Liability Insurance
  • Property Management Agreement
  • Title Insurance
  • Draft of the Deed
  • Settlement or Closing Statement
  • Wiring Instructions

Real Estate Purchase Options

  • You can co-buy real estate with your IRA funds and personal cash
  • Use a blend of IRA funds and a non-recourse loan or other private lender
  • Loan funds to another person and collateralize the loan with real estate

Unrelated Business Income Tax (UBIT)

If your IRA owns an asset that produces UBIT, your IRA may be subject to an UBIT pursuant to Section 511 of the Internal Revenue Code. Generally, IRA investments that can generate UBIT include any investment that incurs debt financing. Consult your tax advisor.

Tax Liens / Tax Deeds

Investors buy tax liens for the right to collect taxes and interest from a property owner, or to foreclose on the property. Investors seek out tax liens due to the relatively low capital required, as well as the possibility of large returns. Some states don’t offer tax liens, but instead offer tax deeds. A tax deed sale is a governmental sale of real estate to cover nonpayment of taxes. These offer investors an opportunity to buy a property deed at a discount.

You may have a Self-Directed IRA but do you know all the alternative investment options available? The companies currently listed below are some options that our clients have engaged to help them diversify their investment portfolio. Click on the company name to view more information about the company.

Ignite Funding is an alternative investment that matches quality real estate Borrowers with Investors seeking capital preservation in collateralized turn-key real estate offering diversification, double-digit growth and short-term investments. Since 2011, Ignite Funding has funded over a Billion in loans with Investor capital and paid out over $100mm in interest income to investors.

 

Paradyme Funding– Paradyme has a wide range of high-quality, 1st trust deed investments that address the income-generating requirements of private investors and real estate portfolio managers alike. Our success is the direct result of brokering over $500 million of real estate since 2011. This experience has provided us with the flexibility and capacity to underwrite and service all types of trust deed investments from the simple and uncomplicated to the most sophisticated and complex.

Resources are provided for general information and do not represent tax, legal and/or investment advice. Account usage, selection of investments and the performance of those investments are the sole responsibility of the investor and not Preferred Trust Company. Presence on our Resource page does not constitute a recommendation. 

Preferred Trust Company strongly recommends that the investor seek professional advice from appropriate legal, accounting and/or tax advisors of their own choosing prior to making investments.