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Permitted IRA Investment Options That You and Your Financial Advisor Should Know About

Joint Ventures in Real Estate and in Other Industries

Joint ventures are exactly as named – a joint agreement to invest in something in order to profit financially. Gains are shared equally, but so are losses and liabilities, depending on the contract language used. With this in mind, joint ventures can involve less risk for the IRA investor, as long as a knowledgeable attorney drafts the paperwork.

Joint Venture IRA Investments in Real Estate

Real estate loans, promissory notes and deeds of trust are all permissible investments. Financing notes are a popular IRA real estate investment. Say the owner of a property holds the financing note on it, but now wants a lump sum rather than wait the twenty year period for it to be paid in full by the borrower. You and an investment partner can buy his existing note for a lump sum (at a discounted price compared to the full value of the note) and subsequently start receiving the monthly payments that would have originally gone to him. Your interest received (the percentage based on your portion of the upfront investment amount) will go back into your IRA and will remain tax deferred.

Key Video Highlights

[0:21] Terry talks about joint venture investment and real estate, which are just a few of the many IRA permitted investments.
[0:51] If you are considering making an investment with your IRA, have an attorney review the documentation with you.
[1:05] Other allowable IRA investments include real estate loans, promissory notes and deeds of trust.
[1:59] Talk to your attorney about creating your loan, or buying an existing note to collect a monthly income.
[2:38] Make sure you keep enough money in the IRA in the event that you may have to sell back your property.
[3:00] You can invest your IRA in a restaurant partnership business, but keep in mind that it is a very tough industry.
[3:21] A business loan secured by equipment or assets is also in a specialized industry; you should definitely use an attorney for this option.
[4:07] There are many different types of businesses that you can invest in with your IRA. The only ones that are not allowable investments are life insurance, collectibles and sub S corporation stock.

Investments You Can Make In Your IRA Video

Check our Youtube channel and our video at: https://www.youtube.com/watch?v=aV6ZlPyj2k8

As an IRA investor, make your offer based on the term, the remaining term, the interest rate and the building or property itself. Keep in mind that you might have to foreclose on and eventually own the property due to the borrower defaulting on his payment. You need to make sure that the property is one that you and your partner can easily sell or rent in case that happens. Also be aware that.

“Owning property in an IRA negates all the familiar tax benefits of owning investment real estate. You can’t deduct property taxes or mortgage interest or take advantage of depreciation.”

~ James Lange, CPA and financial planner

A real estate contract defines the buying and selling terms of owner financing between two parties. Talk to your attorney about your joint venture plans — creating your loan on a property, or buying an existing note to collect a monthly income. Also, be sure to never buy a property or note from a disqualified person – a relation or anyone that causes you to benefit further than normal from the transaction. As with any IRA transaction, your self-directed IRA account is purely an investment tool for your future, and you cannot use it to enhance your personal life today.

When a renter defaults on your joint venture IRA property note

If you buy a piece of property on a REC (owner financing), there is always the possibility that if the buyer cannot make any more monthly payments, you and your investment partner have to take the property back. In the event of a default, you may need extra funds in your IRA to pay your share, in order to:

  • Fix the house back up to turnkey standards in order to sell it again.
  • Pay an attorney for foreclosure.
  • Clean the property up to rent out or get ready for resale.

You may not use personal funds to do any of these things, so having the extra funds in your IRA is vital before taking on a real estate investment like this. If you do use personal funds, there will be resulting taxes and penalties from the IRS.

Self-directed IRA allowed investments in the restaurant partnership business 

The restaurant business is a very tough industry, and you and your investment partner are strongly advised to stick to investments you understand. There is always the option of partnering with someone who has grown up in the restaurant business, in which case this could be a highly effective investment, but the failure rate of restaurants in the last few years has been very high. Financial institutions are averse to giving loans for the restaurant business, and when they do, they usually require a 50 percent down payment because of the associated risk factor.

The only reason why this might be a good IRA investment choice is if you partner with someone who is already running, or has run, a profitable restaurant in the past and can show you hard numbers based on former successes regarding the potential profits.

Be sure to only sign a partnership agreement (written by an experienced attorney) that minimizes your liability and loss. Also, exercise due diligence on every investment, even the ones you think understand well. A simple oversight could potentially cause problems down the road.

IRA permitted business loans secured by equipment or assets of the business

This is a specialized area, but can be profitable if your contracts and documentation ensure the safety of your interest. Many IRA owners dream of becoming successful entrepreneurs, and see their IRA accounts as being the sugar daddies of their ventures. This is not what self-directed IRAs are designed for – the rules are made to give owners the best possible return on their funds in order to live out a comfortable retirement. However sometimes, high risks pay great dividends, and if you have a great business plan in place and are already generating an adequate income, then it stands to reason that a business loan secured by your existing equipment or assets, or those of your joint venture partner, will help the business grow to the next level.

Kathleen White, who used $350,000 from her retirement account to launch a Two Men and a Truck franchise in Virginia Beach, Va., has no regrets. She had worked with the parent company previously, when she worked in economic development for the state of Michigan. ~ USA Today

One of the advantages of investing via your IRA is that the IRA owns your investment portion of the company, there are no monthly payments to make to pay back the investment, and taxes are deferred. A huge disadvantage of using the IRA as a business loan is the lack of diversification of your funds, so if the business goes belly up, unfortunately, so does most of your IRA.

There are many different types of businesses that you can invest in with your IRA. The only ones that are not allowable investments are life insurance, collectibles and sub S corporation stock. So again, if you have not done this before, find a good real estate attorney and have them review the documentation in full. You might need to do SEC filings to make sure that you have an interest if you’re lending money.

Takeaways

  • Joint ventures = joint profit sharing
  • You can share the financing of mortgage notes with your self-directed IRA.
  • Beware of using your IRA to invest with a partner in the restaurant business.
  • You can use your IRA to grant business loans.

Summary of Recommended Resources:

Video Transcript: 

Hi, I am Terry White, CEO of Sunwest Trust. Welcome to Tuesday at 2:00 PM. Today we are going to continue our series of talking about investments that you can make in your IRA. I don’t want to make you think I know a lot about all of these things, but I know a little about each of them.

We will talk quickly about joint venture investments in real estate or other industries. You might be going in with someone in this manner: you would invest some money along with them, and then you would share in the profits, or potentially the losses, in that business in a joint venture. You might not have any liability. You might just be putting money up to fund the venture. A lot of that will depend on how the documents are created. If you consider doing something with a joint venture, then I would recommend you have an attorney review the documents in full and make sure you understand what you’re getting yourself into first.

Now, this next area I know quite a bit about: real estate loans, promissory notes, and deeds of trust. What I know best primarily involves buying cash flows. I have done that for 30 years where you have someone who is receiving monthly payments here in New Mexico on a real estate contract. If they decide for one reason or another that they would prefer a lump sum of cash today, as opposed to a monthly payment over the next 10 years or so, then you might make them an offer that’s basically based on the term, the remaining term, the interest rate, and the building itself or the property itself. You obviously want to look at those kinds of things as if you might actually come to own that property, because there’s always a chance; however remote, that you might own the property that you loan money on.

So again, in those instances, I would also recommend that if you have not done this before, you find a good real estate attorney and have them review the documentation. If you’re creating such a loan, there’s two ways to go about it. You could create a loan where you could lend somebody money and take a secured interest in a piece of property as collateral, or you could buy an existing note, as I have done so in the past several times, even hundreds of times over the years, and get a return that way. So you trade a lump sum of cash for a monthly income, and typically you would hope to get a yield.  There’s always the possibility that you might take that property back. When you’re doing that in your IRA, keep in mind that you want to have enough cash in the IRA in the event you have to take it back. You might have to pay an attorney for foreclosure. You will probably have to clean the property up and get it ready to resell it, or whatever you decide to do with it. That in itself is a subject of a Tuesday at 2:00 video, which we’ll probably do later.

As to the restaurant partnership business—I don’t know anything about restaurants. I have heard that it’s a very tough business to break into. So you might want to stay away from that one—but it’s completely up to you if you understand restaurants. That might be something that you could do very well in, or maybe you’re working with someone who is a good restaurateur who understands that, and so you could invest in that area. Business loans secured by equipment or assets of the business—again, it’s a specialized area. You want to be careful and make sure you have the proper documentation in place, and make sure that you’re secured, meaning that your interest is secure.

You might need to do SEC filings to make sure that you have an interest if you’re lending money. I would definitely use an attorney. There are a few more things we’re going to talk about next week that you can also invest in using your IRA. The point I want to leave you with is that I don’t want you to think this is a finite list. There are a lot of different things you can invest in. The only things you can’t invest in are life insurance, collectibles and Sub S-corporation stock.


Permitted Investment Options For Your IRA That You and Your Financial Advisor Should Know About 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.