To diversify their portfolio, investors sometimes need to think outside the box. This means considering alternative investments such as mortgage notes. Investing in mortgage notes allows investors to get involved in the real estate investing world without flipping houses or vetting tenants for rentals.
When an investor uses their self-directed IRA to invest in a mortgage-backed note, the IRA acts like a bank by loaning money to the borrower. The IRA then receives a note and deed of trust. According to the terms of the mortgage, the borrower pays back the principal and/or interest to the IRA each month until the loan is satisfied. Once payments have been completed, the borrower owns the property outright.
The deed of trust provides protection for the investor in the event of default, putting a lien against the property so the mortgage holder can foreclose and take control of the property if necessary. If this happens, the IRA will own the property instead of the mortgage. The investor is then free to do with the property as they see fit.
To invest in a mortgage note, the investor needs to work with a title company or real estate broker. They will help to gather all of the necessary forms for the investor to sign and send to Mountain West IRA. As the custodian, Mountain West IRA will then review the paperwork before approving the investment to make sure everything is in order.
Mortgage notes do not require as much personal involvement as directly owning a piece of real estate, making them a favorable investment to many investors. For those interested in investing in mortgage notes with their self-directed IRA, visit the Mountain West IRA website to learn more.
When investors with self-directed IRAs consider investing in real estate, they usually think of rental properties or homes they can flip instead of raw land. For many people it can be difficult to imagine the potential of vacant land and the healthy returns which may be available from this type of investment.
While raw land can require a longer investment timeframe than some other real estate investments, it offers great opportunities for those who understand and are willing to take on the commitment. There are a variety of prospective uses for raw land, including:
- Residential and Commercial Development Property
If growth is expected in the area of the raw land, it could be parceled off and sold or leased to building contractors and investors. Or, investors could choose to develop the land themselves.
- Oil and Mineral Producing Land
Investors may choose to lease mineral rights to mining companies or other investors.
Soft and hard woods can be planted, harvested, and sold for profit. Tracts of the land could also be leased to others such as timber companies.
Some other uses for raw land include:
- Raising crops
- Raising cattle or other animals
When considering investing in raw land, investors should understand not only the process, but the rules set forth by the IRS regarding this type of investment.
- All income and expenses relevant to the investment must flow directly into and out of IRA funds
- Avoid prohibited transactions and dealings with disqualified persons.
- Land purchased with the intent of running a business within an IRA is subject to Unrelated Business Income Tax.
- If the IRA took out a loan to purchase the asset, Unrelated Debt Financed Income Tax may apply.
For those interested in diversifying their portfolio by investing a self-directed IRA in raw land, contact Mountain West IRA. They can answers question investors might have before starting the process.
With a self-directed IRA comes many investment options. One of these options is investing the IRA in a tax lien. A popular investment option due to the lower purchase price when compared to other investments, investing in a tax lien can potentially quadruple the initial investment.
A tax lien is a taxing unit sold by a governmental agency when a property owner is delinquent on property taxes. Tax liens are sold to investors when the governmental agency needs money immediately for the budget and to avoid foreclosure. The investor then gets the right to collect interest, serve notice of foreclosure and obtain possession of the property when applicable.
Using an IRA for Investing
The investor will have to research whether the county they are looking at offers tax liens. Once they determine that it does the investor will need to research the properties offered. Most liens are sold at live auction, but sometimes they are offered online as well.
The governmental agency will generally expect the money immediately or within 48 hours after the sale. With a traditional self-directed IRA, the investment has to go through an approval process before the money can be accessed. For more information about this process when investing in a tax lien contact Mountain West IRA.
Holding the Tax Lien
Once the investor has the tax lien they just need to wait until the delinquent taxes are paid. If the taxes are not paid the investor will receive first right of refusal for the next year’s delinquent taxes. Generally, the tax payer must suffer for three years before the investor has the right to foreclose. This means the lien holder has to pay three years of past-due taxes before they can see a return on the investment. If the tax payer defaults on their taxes for the three years, the investor can take possession of the property through foreclosure, which can be a huge return on that particular investment.
For more information or questions regarding investing in tax liens contact Mountain West IRA. Tax liens are just one of many investment options with a self-directed IRA from Mountain West IRA.
One of the advantages of opening a self-directed IRA with Mountain West IRA is the ability to invest in real estate. Before considering this investment option, it is important to understand the rules to avoid making a tax or legal mistake.
Owning Real Estate
For over 30 years it has been legal to buy real estate with a self-directed IRA, something often misunderstood by many investors. In this situation, the real estate will actually be purchased with the IRA account as the owner rather than the individual person owning the real estate.
Do: Send authorization paperwork to Mountain West IRA two business days prior to funding, who will then release the funds for the real estate purchase. Mountain West IRA’s website has more details about real estate transactions.
Do Not: Take money out of the self-directed IRA to purchase the real estate. The withdrawal will be considered ordinary income and taxable as an IRA distribution.
Using Real Estate
Real estate purchased with an IRA should only be used as a tax-deferral and investment growth vehicle. Rental income, expenses, and gains related to the real estate should be deposited in the self-directed IRA account to defer the taxes.
Do: Use the property as a rental to provide rental income and capital growth.
Do Not: Personally use the property or allow disqualified people to use it.
Real estate is an investment that can be purchased with a self-directed IRA and then managed by yourself or a property manager. Many investors choose to hire a property management company to handle the day-to-day operations of the property making it a low maintenance investment during retirement.
For more rules and regulations related to using a self-directed IRA to purchase real estate, visit Mountain West IRA’s website. Also check the calendar for upcoming seminars on real estate and self-directed IRAs.
Some investors do not realize it is legal to purchase non-traditional assets using an IRA. In 1974, the Employee Retirement Income Security Act passed the responsibility of retirement savings from the employer to the employee. The next year, IRAs were created. Self-Directed Individual Retirement Accounts provide investors the ability to direct where retirement funds are invested.
Under both ERISA and IRS Codes, only two types of investments are excluded. These are life insurance contracts and collectibles. Collectibles include works of art, jewelry, rugs, etc. Aside from these exclusions, retirement investment opportunities have a wide range. This allows all investors to find something that works for them.
Investors may not have known about Self-Directed IRAs because the retirement industry has long been dominated by custodians focused on a very narrow selection of investments such as stocks, CD’s, and mutual funds. Mountain West IRA, on the other hand, believes in offering investors the freedom to choose with self-directed retirement accounts.
With a Self-Directed Retirement Account through Mountain West IRA, investors can choose from the following non-traditional assets:
- Real estate
- Single family and multi-unit homes
- Apartment buildings
- Cash flow properties
- Tax deeds/liens
- Improved or unimproved raw land
- Notes and Mortgages
- Unsecured notes
- Secured notes
- Precious Metals
- Private Placements
- Partnerships and Joint Ventures
- Privately held stock
Even this lengthy list of options is not all inclusive. Many investors find other creative investment opportunities or choose to utilize multiple investment vehicles including traditional assets like stocks, bonds, and mutual funds. Visit Mountain West IRA’s website to learn more about self-direction and the non-traditional investments available to investors.
Even in a sluggish economy, bed-and-breakfasts are a popular choice for tourists seeking lodging off the beaten path. They offer guests the opportunity to socialize with other travelers in a more intimate setting. Many countries offer a variation of the bed-and-breakfast, but most are small lodging establishments with fewer than 10 bedrooms available to rent out. For retirees who love to provide hospitality, they also offer post-retirement job opportunities. And with their rebounding popularity, bed-and-breakfasts may also be an excellent investment opportunity for your self-directed IRA.
While it generally requires significant legal guidance to invest your self-directed IRA in a business you’re personally going to run, investors who want to avoid self-dealing can do so by investing in a business owned by someone else; perhaps a trusted colleague with great business sense. This helps you avoid prohibited transactions.
If you are interested in building your retirement portfolio, think about investing your self-directed IRA in nontraditional assets, whether it’s a bed-and-breakfast or another investment you’re interested in. We won’t tell you what to invest in—the beauty of self-directed IRAs is the freedom they offer you as the investor. Give us a call so we can help you get started with investing today. Now’s the time!
While self-directed IRAs offer a wealth of investment possibilities, getting started with investing can be a daunting task for new investors. While we do not make any recommendations about investments, for six years Mountain West IRA has been showing individuals and small businesses why they should take advantage of self-directed retirement plans. Experienced investors have a wealth of investment information to offer, including these 7 tips:
- Quality over quantity—when new investors first begin investing, many of them go for every opportunity that comes their way, whether it is because of excitement or to meet a perceived target. Seasoned investors instead sit back and wait for solid investments to come along. While new investors may not have the resources to wait for deals, many experienced investors would recommend doing one quality deal rather than a multitude of average deals.
- Put your goals on paper—if you don’t develop a concrete goal for where you want to be in a year, it will be difficult to make any smart investments happen. Seasoned investment professionals often instruct neophytes to put together a plan before they even start investing. And while realistic goals are important to your investment success, it can be difficult to determine how to set those. Speaking with experienced investors in your field and asking them their honest opinions regarding profits per deal and average amount of time required to complete the deal can help you forge realistic goals. Real estate investment (REI) clubs are a good place to start for mentorship. Then, based on the information you learn and the amount of cash and credit you have on hand, create a framework for your long-term goals. Fill in short-term goals in between these long-term goals.
- Don’t limit your profits—just because you got a great deal doesn’t mean you have to pass along all of your savings to the buyer. While most investors wouldn’t recommend you gouging people, reaping profits is part of business. At some point, your profit margin may not be as large as expected, so taking advantage of large profits when they come can help secure your finances.
- Hang on to your full-time job—while it may be tempting for some investors to drop their day jobs and fully commit to investing, experienced investors recommend establishing oneself with banks and credit card companies before branching out on one’s own. Jobs provide a safety net while new investors learn the ropes of good investing.
- Start investing as early as possible—the longer investments have been established, the more growth can be obtained. So the sooner investors begin investing, the more wealth their investments build. Many experienced investors say they wish they’d gotten in the game sooner.
- Use investing partners wisely—there are plenty of eager investors out there, but smart investors choose an investing partner that complements them. This complement may be expertise, knowledge, connections, or money. However, seasoned investors would recommend against choosing a partner with little in common besides a dream or goal. If there is nothing complementary or beneficial about the partnership, it may be wise to steer clear. Again, this is business.
- Dare to dream—it’s difficult to achieve anything without dedication and perseverance. Willpower can overcome even difficult objective conditions like poor credit or little cash. If you have a dream, it’s time to enact it. Contact Mountain West IRA about setting up your self-directed IRA to achieve your dream.
Though we live in an increasingly mobile society, many Americans still haven’t adopted the desire to downsize their possessions to fit this transient lifestyle. That means storage space is at a premium, which opens up a potential investment opportunity for the savvy investor: storage units. Self-storage offers many of the same attractive investment qualities that rentals, office buildings, and other properties offer, including passive income, tax advantages, and appreciation. Investment in self-storage is also made more attractive for many reasons that include:
- Many retirees downsize their homes during retirement but aren’t yet willing to part with a lifetime of possessions. Instead, they seek out additional storage space that their smaller homes can’t offer.
- Some neighborhood housing associations and new housing communities do not allow storage of vehicles like boats, RVs, or even multiple cars on the street outside homes.
- College students use storage space during summer vacation
- Businesses that have downsized and are working out of smaller office space require additional storage space.
Small distributors, start-ups without office space, or home-based businesses use storage space from which to operate their business because operating and development costs of storage units are much more affordable than apartment or retail space. These lower costs also make break-even occupancy ranges lower than other real estate investments. Also, if a storage unit operates on a month-to-month lease, investors can adjust rental rates to compensate for demand. To add further stability to the investment, demand for self-storage is not dependent on the economy. When the economy is booming, people tend to buy more things and thus need more storage. When the economy is slow, people downsize and seek cheaper storage alternatives for the belongings they’re not ready to get rid of.
Self-storage has the lowest default rate of all property types, but like any investment, investors must take time and due diligence to make sure that the storage unit is worth the investment. Well-run, modern self-storage in a good location is desirable to investors and provides a very liquid investment, while old industrial storage units without surveillance don’t command as much demand. As it continues to rise in popularity, self-storage could provide a tangible investment opportunity for you to invest your self-directed IRA in. This is just one of many investment possibilities. That’s the beauty of a self-directed IRA. Since you self-direct your own IRA, you’re responsible for your own investments. We can’t tell you what to invest in or where to find available storage facilities. Self-direction is your choice, but we’re here to show you how to take advantage of self-directed retirement plans. Contact Mountain West to start investing with your self-directed IRA.
Over time, real estate investments have afforded many people the powerful combination of appreciation and income. The purchase of real estate through a self-directed IRA is a popular choice for this and other reasons. Concerned you don’t have enough funds in your IRA for the entire purchase? If your self-directed IRA doesn’t have enough money to pay for the entire purchase on its own, you may be able to finance or leverage the purchase of the income producing property. Keep in mind, if you don’t have enough money in your retirement account to purchase the real estate, the IRS forbids you from extending credit to your own IRA account. So, what are your options?
Real estate investment accounts can use borrowed money as long as the account holder’s credit history, income, or assets are not used to guarantee loan repayment to the creditor. In other words, there can be no personal guarantee given by you as the account holder and consequently, there can be no personal recourse against you since the property and the loan are held within the retirement plan. The loan your IRA would need to acquire is normally known as a non-recourse loan. Be aware that loans for property inside of IRAs may require the payment of Unrelated Business Income Tax (UBIT). It is the IRA holder’s responsibility to have the tax form (990T) prepared by a tax advisor and have the IRA administrator submit the appropriate forms for the property owned by the IRA. The staff at Mountain West IRA can maintain the appropriate records for your self-directed IRA real estate investment. Our goal is to assist you with your alternative asset purchases while paying little or no taxes. Contact Mountain West IRA for additional information.
3 Benefits of Leveraging Your Self-Directed IRA:
- Tax considerations—one of the great benefits of an IRA is tax-deferral. As an investor, you’re able to put more money into investing than you would with a taxable account. When your investment generates income that exceeds expenses, you will be subject to the UBIT. However, the taxes you pay when computing UBIT can be significantly lower than traditional income taxes.
- Benefit from growth—leverage allows an investor to purchase a larger, more valuable asset and profit from its growth, with only a smaller out-of-pocket expense.
- Diversification—instead of investing your entire self-directed IRA balance on one property, you can split the balance among several properties as a down payment and use leverage to finance the rest. By diversifying your investment portfolio, you generate revenue on several properties and minimize your financial risk.
Using a non-recourse loan in conjunction with your Mountain West self-directed IRA is a powerful tool to build your wealth. However, it’s one that needs to be carefully managed. For over six years, Mountain West IRA has been showing individuals and small businesses how to take advantage of self-directed retirement plans as one of the nation’s leading independent self-directed IRA and 401(k) administration companies. With a knowledgeable staff and our clients’ best interests in mind, we offer the outstanding customer service that only an independently owned and operated administrator can. If you’re ready to start your own self-directed IRA, contact Mountain West IRA today.
Mountain West will be hosting a workshop on “How to Buy Real Estate and Alternative Assets in IRAs and Qualified Plans” Tuesday, November 19.
CEO Jon Galane will be providing valuable CE credit covering the following topics:
- Buying real estate in IRAs and Qualified Plans
- Prohibited Transactions by Disqualified Persons
- Regulations regarding self-directed IRAs
- How to leverage IRAs and the benefits that can provide
$25 covers cost of lunch and all materials.
This class is good for 8 hours of continuing education credit through the Idaho Real Estate Commission.
Register here >>
Tuesday, November 19
10096 W. Fairview Ave.
Boise, ID 83704
9:00 am – 5:00 pm