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Four Eligible IRA Investments You May Have Not Thought of Including in Your IRA

More Ways To Invest IRA Funds

Four lesser-used, but still popular investments for a self-directed IRA include (1) water rights, (2) mineral rights, (3) real estate development and (4) tax liens. Average investors usually leave these types of investments up to the experts, but with the right help, you can learn to spot deals that you might otherwise pass up.

Knowing the ins and outs of the assets you are investing in can help prevent you from missing red flags or great opportunities. That said, having a long list of allowable IRA investments doesn’t necessarily mean that it is prudent to invest in every asset class, especially ones that you don’t know anything about.

Key Video Highlights

[0:35 Terry addresses buying water and mineral rights in an IRA and why he would proceed with caution.]
[0:59 When investing with a self directed IRA, you should invest in things you know.]
[1:30 Find an expert to help you in areas that you don’t know a lot about. If you don’t do this, then stick with what you know.]
[2:15 Real Estate development in an IRA. Again, make sure you know what you are doing or go into business with someone who does, so long as that person is not a disqualified party. Don’t risk your IRA on a roll of the dice.]
[3:00 Terry provides an overview for how you might purchase tax liens in your IRA account. The anecdote Terry shares about a client that purchases tax liens in Colorado even though tax liens aren’t available for purchase in New Mexico is worth watching the entire video.]
[4:22 Purchasing a tax lien in an IRA LLC… Terry touches on the IRA LLC, but in future videos, he plans on covering the process more thoroughly, so stay tuned.]

Having a strong relationship with an advisor experienced in the world of alternative assets can prove invaluable. We strongly recommend you invest your IRA in alternative investments that you understand, or hire someone you trust who does. As an IRA investor, you should always know exactly what your IRA is purchasing, the titles you own (to your assets), and the income-producing opportunities of those assets. In addition, as part of your due diligence, we suggest retaining an attorney or a CPA to help you secure the proper documentation needed to further insulate you from either a bad deal or a fraudulent scheme.

Water and Mineral Rights Are Considered Allowable IRA Investments

Water, mineral, oil and gas rights are all permissible investment options for your IRA. As an investor, you purchase the rights to the water and minerals on a piece of land. You don’t need to own the land; you simply buy the right to drill it. It’s not a straight, across the board investment, however, because each state can view the ownership of mineral rights differently. There are also laws in place that govern the mining and drilling rights to the land.

As an IRA investor, you would purchase the mineral rights of the land and effectively share ownership of it — you would own the agreed-upon mineral(s) under the ground while the property owner would own the surface land and buildings on it.

Sometimes speculators will buy mineral rights to a property with the hopes of selling them on to a mining or drilling company at a profit. Again, this can be a risky endeavor with no guarantee of a profitable turnaround.

“Three things are required to make a successful mineral rights deal: 1) knowledge, 2) skill, and 3) patience. If your abilities fail in any one of the three you can lose a lot of money.  If you don’t have all three of these abilities, then find a good attorney or other mineral property, professional. Their assistance usually doesn’t cost a lot, but the difference that they can make in the transaction can be enormous.” – Geology.com

Real Estate Development – A Popular IRA Long-Term Investment Option 

When investing your IRA funds in real estate, you can purchase undeveloped land, subdivide it, develop the land with residential or commercial buildings, and either sell or lease the real estate for a profit.

  • Subdivide land: Buy a piece of land, subdivide it into lots, and sell off the individual lots, or sell off sections at a time.
  • Renovate multi-family buildings: For example, buy a fourplex or an apartment building and convert the units into condos. You can also sell the finished condos through owner financing.

“Section 408 of the Internal Revenue Code allows for the purchase of property with funds held in many common forms of IRAs, including a Traditional IRA,

a Roth IRA and a simplified employee pension (SEP) IRA.” — Investopedia

 Tax Liens – Another Eligible Investment Choice for an IRA

A tax lien is a claim local municipalities place on a property until such a time as the property tax owed is paid. Interest accumulates on the lien until it is paid off. The interest rate on tax liens varies by state, but it usually runs at the 10 percent mark and can go as high as 36 percent. If or when the lien is paid off, the IRA receives the amount owed plus the agreed upon interest. If the property owner is unable to pay back the tax lien, then the house is put up for sale and the collector or lien holder has first rights to the property to make up for the debt owed.

“A lien is a legal claim against the property for the unpaid amount that is owed; property that has a lien attached to it cannot be sold or refinanced until the taxes are paid and the lien is removed.”

 — Mark P. Cussen, CFP®, CMFC, AFC

Tax lien certificates are usually sold or auctioned off by the issuing municipality and can be attached to any type of property – commercial, multi-family, raw land, etc. They can be purchased by your IRA, and the property owner then sets up a repayment plan, which typically runs from as short as three months to as long as six years. These types of options to purchase tax liens are allowed in various states, for example, Colorado does offer them while New Mexico does not. Check with your CPA to confirm whether your state does.

Tax liens can be a risky IRA investment: property owners can refuse to pay or renege on their payment schedules, foreclosure might reveal other liens on the property you were unaware of, or the property might not have been assessed correctly and actually be worth little.

Again, in regards to the four types of investments covered, I want to strongly recommend you only invest in assets you are knowledgeable about. Your financial future depends on it.

Takeaways:

  • Invest in what you know.
  • Don’t be shy and ask for help.
  • Get expert help with assessing an asset or a deal prior to committing your retirement funds.
  • Hire an attorney to review the documentation of your deal prior to investing.
  • Although there are huge possible upsides to investing in the four aforementioned areas, there are incredible downsides if you lack experience.

Summary of Recommended Resources:

Geology.com Mineral Rights: Basic information about mineral, surface, oil and gas rights

Investopedia.com House Your Retirement with Self-Directed Real Estate IRAs and Investing in Property Tax Liens

Home Guides How to Use a Self-Directed IRA to Purchase a Tax Lien

Full Video Transcript:

Hi, my name is Terry White with Sunwest Trust, and here at Tuesday at 2:00, again, we’re continuing a series on talking about things that you can invest your IRA in. A few weeks ago we talked about what the IRS says regarding what you cannot invest in. Last week we talked about real estate. This time we’re going to talk about four more things, and a couple of these things I don’t personally know a lot about.

It’s a great opportunity for me to encourage you to maybe overlook some of those things that you don’t know anything about. We’re going to talk about water rights and mineral rights, and I know that you can purchase those things, and you can do that in your IRA, but I don’t know a lot about how you would value water rights, how you would go about selling them, nor how they would go about creating income.

A really good point that needs to be made is when you’re investing with a self-directed IRA, invest in things you know. Last week, we talked about real estate, and I have been involved in owning real estate and buying and selling real estate, as well as managing real estate. I have done all of that for the last 25 or 30 years for my own portfolio. I understand real estate, but water rights and mineral rights are something that I have never done anything with before.

I probably personally would want to stay away from that, and if I ran across something that just seemed too great of a deal to pass up, I would definitely find someone else who understood. Then I’d have a really good discussion with them before I made a decision to make that investment, and as we always say, I would talk to a CPA or a tax attorney, or even an attorney to make sure the documentation was sound.

You know, I might be buying water rights or mineral rights, but because I don’t know a lot about it, I would want to make sure an attorney looked over the documentation to make sure I know exactly what my IRA is purchasing. It would also tell me the title that I have to it and what I might be able to do with it. That’s a really great opportunity for me to talk to you about that issue, and to explain basically not to invest in something that you don’t know anything about. Stick to the things that you know something about.

The next thing here is real estate development, and that’s something I personally know about. I have never actually done it, but you know, you’re talking about opportunities to maybe buy a piece of land and then subdivide it into lots and sell off all of the individual lots. Here in New Mexico, you could do that in rural areas, and you might buy the land and then sell it off on real estate contracts and get a decent return on your money. That’s something that could be done.

You could also, which is one of the things I’ve seen done a lot, is buy a sixplex, or you know, six or eight-unit apartment house, and then turn it into condominiums. That could be maybe considered a real estate development type deal. That’s something that you might do, and the last thing I wanted to talk about today was tax liens.

Now, tax liens are something that is not available here in New Mexico, but I know in Colorado they are. I don’t know a lot about exactly how they work, and I think they work differently in every state, but the basic idea is that you have a piece of property—somebody has a piece of property that they haven’t paid the taxes on. A lien is put on that property, and then they offer that lien for sale to someone, and what happens is either the owner of the property comes in and pays off the tax lien with an interest rate that’s usually set by statute, perhaps 10% or something. I think in Colorado it might be 10%, and so you get your money back plus an extra 10% or you could potentially get the property.

I know one of our clients buys some tax liens in Colorado, and there’s a couple of ways to do it. The way this particular client does it is he plans on going to Colorado and say spending $10,000 on tax liens. We cut him a check for $10,000. He goes up there, and he buys whatever he wants to buy. They then give him back the difference. Let’s say he only buys $8,000 worth of tax liens. He gets a check back for $2,000, brings it back to us, and then we put that back in his account, and he’s got $8,000 worth of tax liens.

The other way to do it, and we’ll talk about it in future videos, is if you had an LLC, the LLC could actually buy the tax lien, and then if you’re the manager of the LLC or if you have the manager of the LLC with you, they could sign a check and therefore purchase those tax liens.

Those are four more things that I think are valuable things to look at as investments for your IRA. Again, I want to strongly recommend that you don’t invest in things that you don’t understand or that you don’t know anything about. Stay tuned for next week. We’ll talk about some more investments.

Next week, we’re going to be talking about LLCs and limited liability companies—that’s what LLC stands for—limited partnerships and C-corporation stock. I look forward to seeing you again next week, thanks.


Four Eligible IRA Investments You May Have Not Thought of Including in Your IRA was published on:

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.