Archive for May 2011

How to use Real Estate in your IRA

Are you looking for other ways of diversifying your retirement account? We all know that we can invest in stocks, bond and mutual funds with your IRA, but there are other investment choices available. Real Estate, Currencies, and Precious metals, are just a few examples of outside the box type investments to add to your portfolio. But today we want to focus on using Real Estate as an IRA asset.

The number one alternative investment people use in their IRA would probably be real estate. And when I say real estate I’m not referring to a REIT, or real estate investment trust or a real estate mutual fund. I’m talking about buying an actual property with your IRA funds.  If this sounds like something you should be doing in your retirement account then the first thing you need to do is find a custodian that will allow you to invest in this type of asset and set up an IRA account with them.  Typically, most banks and brokerage firms limit your investment choices to the usual stock market based products.  But the Internal Revenue code allows individual investors to purchase land, residential property, condos any type of real estate you would like to invest in.

Real estate and other alternative investments can be used in your retirement account.  But we must remember that certain kinds of investments are prohibited in IRA plans. Such as artwork, gems, stamps, antiques and coins that are considered collectibles are a few examples of items that cannot be part of your retirement investment portfolio.

We know that real estate is not a prohibited investment, it is important to know what can cause a prohibited transaction when investing in real estate.

A prohibited transaction occurs when we engage in a transaction with our IRA in certain ways. Here are some of the things we are not allowed to do.  Account holders can’t sell properties to their IRA, or buy from their IRA. Account holders cannot lend money to the IRA or borrow from the IRA. No extending credit to your IRA or getting credit because of your IRA.  And your IRA cannot do business with anyone related to your IRA. That includes you and your spouse and your children and grandchildren and your parents and your grandparents and all of their spouses.  And you cannot engage in a transaction with a business owned by one of these individuals that owns more than 49% of that business.

If you are going to invest in real estate within your IRA it is your responsibility to know these rules and to follow them.

Remember to continue your education about self directed IRAs.

Timothy Schubert

Different Types of Gold investments

 The number one new investment in self directed IRAs is Gold, at least from my desk.  I have seen the number of new account holders investing in precious metals double any other asset class. But there is confusion and a lack of knowledge when it comes to the types of investing there is in the precious metals arena.  There are different ways you could invest in gold and it is important that you understand the different strategies that are available.

One strategy is investing in Gold Bullion. This is when you are investing in real tangible gold.  There are many gold dealers that you can use to purchase your real gold coins and bars. When you buy gold coins directly thru your Self Directed custodian they will have a relationship with a depository that will hold your metals for an annual fee.  There are some gold dealers that will store your IRAs metals in vaults in other countries to satisfy investors who do not trust government regulated institutions to hold their metals.  And then there are those individuals that have checkbook control of their retirement funds and purchase and store the metals themselves.  This strategy is more and more popular because of the before mentioned lack of trust in the U.S. government regulated institutions.

Another way for investors to get in the gold investing game is to invest through an Exchange-Traded Funds, or ETF.  ETFs trade just like a regular stock, but they are backed by real gold that the fund buys.  You don’t get to have or hold real gold pieces this way but it is another way to invest in gold backed funds.  With this method you put your retirement funds in the hands of a money manager that has provided you a prospectus and you have no control over the decisions of your retirement funds.  

You could also buy stock in a gold mining company there are many gold mines that have publicly traded stock that you could hold in your portfolio. Again you will not have real tangible gold but an interest in a gold mining company through stock. Again with this method you are investing in a company that has a board of directors that hopefully is going to make decisions that will help your stock prices go up. You have no control of your retirement funds.

Making gold a part of your portfolio is a strategy that thousands of Americans are engaging in. Holding tangible real gold is better that holding paper or having a ticker symbol to follow.  Make sure you understand what you are investing in before you buy. Educate yourself on what you are allowed to invest in and what you should not invest in.  Make good choices and always take control of your retirement future.

Timothy Schubert

Can I finance a business with a 401k?

Recently I have been having more conversations about using my retirement funds to start a business that I will be employed with and earning my salary.  There are organizations that are teaching this strategy to unemployed individuals that have former employers 401k that they want to use to invest in a business.  While investing in a business is not a prohibited transaction, however investing in a business that I’m going to run has always been my understanding to be self dealing and personal use.

Internal revenue code 4975 tells us that we nor our lineal decedents or ascendance should benefit from a transaction that our retirement account engages in.  Investing a business like a Sub shop is ok, but me working there and earning my living from that investment is prohibited.  I don’t believe that we can use our retirement accounts to buy ourselves a job. 

In a recent article that I read on an online business magazine promoting this strategy when addressing the salary issue it states that “Another notable issue is that paying one’s salary out of retirement funds. To mitigate [the risk of people setting their own salary and consequently bleeding the retirement plan], they recommend that people don’t take a salary out of the proceeds of the retirement fund’s investment. Rather, the salary should come out of future operating revenues. Additionally, they recommend that would-be business owners get a third party, such as an accountant, to tell them what someone in their line of work, in their area of the country, pays themselves.”

Just because they are recommending that we take our salary from the profit of the newly formed business rather than the capital that the retirement account put into the business, it still looks like a distribution. If I take the profits from any investment in my retirement account, that is called a distribution and is a taxable event.  There is no difference from me taking the profits of the business my retirement account owns and calling it a salary and taking a distribution of the profits from my retirement account.

I recently spoke with an attorney and asked him to clarify this strategy; his first response was that if it walks like a duck and it quakes like a duck then it’s a duck.  To him it was a prohibited transaction.  Because so many Americans are out of work and have funds in their previous employers 401k, they are desperate to find work even if it means using their retirement accounts to buy them a job.  But I would be very cautious of going down this slippery slope of possible prohibited transactions.  Our retirement accounts are meant for our retirement years not to create job opportunities for us. 

If this a strategy that you are considering I would recommend you find a good attorney and CPA that understands internal  revenue code and has a good understanding of the Employee Retirement Income Security Act of 1974 (ERISA).  This is not a strategy that you want to just jump into without a circle of experts around you.  

Remember you can always invest in a business but be very careful if it is a business that you are going to be running.  Like always do your good due diligence and continue your education on the power of self direction. 

Timothy Schubert

Borrower and Lender in your IRA

Hard Money Loans

In the world of Self Directed IRAs you could use your retirement account to be both a borrower and lender when it comes to hard money loans. There seems to be a lot of confusion about what is meant by private money loans also known as hard money loans.  The basic idea of private money lending is that private individuals who have money to invest choose to loan that money,  generally on real estate secured transactions, with the desire to receive a fair return on their investment.  The defining characteristic of private money is the process and criteria by which the money is allocated to loans. Private money is quite different than institutional money in the following ways:

With private money lenders, there is greater flexibility with regard to the types of loans and circumstances which money will be lent.

The amount of collateral is more important to hard money lenders than the qualifications of the borrower, although both are considered.

It is generally possible to transact a hard money loan very quickly. Income verification is rarely required, and appraisals are often not required.

Hard money loans tend to be more expensive than institutional loans.

The loans tend to be of shorter duration.

There is a common error in thought about hard money borrowers and that is that they are desperate borrowers, in trouble and without other options.  Private money borrowers are more often than not, solid individuals or businesses that have opportunities that do not fit well with the rigid structures of institutional lending; they require speed and flexibility not available through conventional banks.

When it comes to your self directed IRA, being a private money lender can be very profitable for your retirement account as most hard money loans earn 12 to 18 percent depending on the risk associated with the loan.  Before becoming a hard money lender be sure to understand how to securing your money with a property and be sure you understand all the risks that come with this type of loan.

If you want to be a borrower for a quick transactions with less red tape from the lender then hard money loans might be a way to borrow money to fix and flip properties.  Again understand your obligations as the borrower and educate yourself on rules that concern IRAs that borrow money.

Timothy Schubert

Are Life Settlements right for your portfolio?

About four years ago I was introduced to a new asset class, at least new to me. What if you could invest in something that has nothing to do with stock market performance, it has nothing to do with the highs and lows of real estate, and it has nothing to do with gas and oil or the economy?

The Wall Street Journal says…”The Industry’s 16 year history of annual returns of 10% to 15% has attracted European and Asian investors.

Bloomberg says… Life Settlements are the only asset which can truly be said to provide absolute returns they are not correlated to any traded stock, bond, currency or commodity markets, or political or economic upheaval. Once invested, the only variable is time.” reported that “Even Berkshire Hathaway Inc., the investments company headed by Warren Buffett, invested nearly $300 million in life settlements.”

Today I want to share with you a real case study of mine. I invested in life settlements with my checkbook control LLC and I want to share with you what that looked like.

First I found a reputable life settlement dealer. These are not viaticals that I’m investing in. A viatical is when you invest in a life insurance policy of someone that is terminally ill.  The life settlements that I invest in are with the elderly. Someone that has a life insurance policy that does not need it anymore.   Instead of letting the policy lapse they will sell it to a life settlement company that in turn sells me a portion of it. Here is a real case study of a policy that I invested in.

I invested in a policy of a 79 year old male who had a 4 million dollar policy; he was paid 2.2 million dollars for his policy. I bought ten thousand dollars worth of this policy. His life expectancy is three to five years. My yield on this is 81.82%, my ten thousand dollars is now worth eighteen thousand one hundred eight one dollars. I know how much I will get paid I just don’t know when.

The life settlement company that I buy from requires the policy holder to pay the premium for the life expectancy period; in this case three to five years worth of premiums are paid by the policy holder. The risk that we have to the amount of the return is that if the policy holder lives beyond the life expectancy period, the beneficiaries of this policy would have to pay the yearly premium. In my case in own 0.45 percent of the policy, I then would have to pay 0.45 percent of the annual premium.  That amount would be $785.00. I would have to come up with that amount if the policy goes to the sixth year. Remember the policy holder paid five years worth of premiums as part of the agreement.

The thing I like most about this asset class is that it has nothing to do with our economy, the price of oil and gas, it’s unrelated to the stock market and to the real estate market.  It truly stands alone.

I know that some investors look at this asset class and cringe. If this is a troubling investment choice then I say don’t lose any sleep over it.  Move on to other alternative asset classes.  This is not for everyone.  My intention is continue to educate our clients on the many different asset classes available to you. Good research and due diligence on your part is always encouraged.

Timothy Schubert

Investing in foreign properties

Have ever thought of owning a piece of real estate in a foreign country? I remember vacationing in Cabo San Lucas Mexico and while playing a round of golf seeing ocean view golf course properties for sale. Thinking this would be a great investment property to generate income. My only problem is, I have no cash, money, dinar, and whatever you want to call it. I didn’t have any of it.  But what about my IRA, what if I could buy a place like that with my retirement funds?  Short answer is you can. Dreaming of owning an investment property in another country can be a reality if you have enough funds in your retirement account. However, before you journey into a new world, you need to educate yourself on the ins and outs of foreign real estate investing. Also remember the rules of retirement accounts, we can’t personally use the property, it is for investment purposes only.

The first thing you need to do is find a part of the world you would like to invest in. You will need to spend some time doing some research on lifestyles and characteristics of the countries and cities you think you would like to invest in. Check official websites on the country you wish to invest in, you want to look at tourism trends, economic conditions, and political stability. You want to support your decision with knowledge and understanding of why your international property purchase is a good investment.

Every country has different laws and regulations for a foreigner to own and it is your responsibility to know those rules. In some cases there are extreme differences for example in some countries; almost anyone can be a real estate agent without being licensed. Certainly there are legitimate people that are agents, but a lack of regulation can make you more open to fraud and scams.  In the Philippine for example requires that only citizens or partnerships that are 60% Filipino-owned are allowed to acquire property. Different countries have different degrees of rules and requirements for foreigners to acquire property, but you must be familiar with those rules, even if this means hiring legal representation even it’s just to have them interpret the documents and deal with the officials. Another suggestion would be to consult a friend that had a good experience purchasing foreign real estate. Hopefully they can refer you to the contacts they used to complete their transaction. You need to be confident in your knowledge of the situation and feel comfortable with your decision.

Owning foreign real estate in your IRA can be a great investment that can give you a great return. But like every other investment decision. Do your due diligence, know the rules of that country get fully informed and become aware of your surroundings and of course have fun.