Archive for Saving and Investing

Investing in Teak Wood Forestry

I have a client that has checkbook control of his IRA funds and he was explaining to me an investment strategy that I had never heard of. And that is investing in Teak wood forestry. I find this to be another fascinating investment strategy; one that I’m sure most investor don’t even know is possible to invest in teak wood forestry.
Here is how he explained to me.
This investment has outperformed all major stock indexes during the past 25 years; it has an annual growth of 15%. Teak is a perfect investment that hedges against a falling US dollar. It also is a green investment that slows the greenhouse effect and to a lot of investors this is an important factor. Of all the hardwood species it is seen somewhat like gold among the precious metals. It is used in shipbuilding, fine furniture, door and window frames as it is a strong durable stable wood.
Now that the supply of Teak from natural forests is diminishing and the demand continues to increase, the trend now is the use of plantation grown teak. It is simple to grow in comparison to other hardwood species. Given the growing demand for teak wood and the likelihood that natural forest sources will soon be unable to meet it, investing in Teak plantations can yield high, long term returns on his investment.
Teak plantations date back as far as 150 years in India and Myanmar, plantation establishment has accelerated over the past 20 years. In the future, plantation will probably be the most important sources of teak. As demand for plantation grown Teak grows, so will the value of your investment. Proper due diligence on plantations is critical just like it is for any investment.
This is just another example of the type of alternative asset you can hold in your checkbook control IRA. True diversification is key to our retirement accounts success. Remember true diversification isn’t just large cap, mid cap, small cap and bond funds. That’s 100% stock market based investing. There are so many investment strategies available to us outside of the stock market. There is just no reason to be 100% in one asset class.
Remember to continue to educate yourself on the power of IRA owned LLCs. And as always contact us if you would like more information.
Timothy Schubert

What is an IRA owned LLC?

I recently interviewed a couple that used their IRA to invest in a limited liability company to take checkbook control of their retirements funds. His IRA invested $60,000 into the LLC and her IRA invested $40,000 into the LLC. So the LLC had $100,000 in the LLC checking account. Remember these funds came out of their IRA accounts into this newly formed LLC without paying taxes or penalties because the LLC is the investment of the two IRAs and it is an LLC that they manage and control.  After doing good research they identified a property for $150,000. This same property sold three years ago for $360,000 they realize that that was probably an inflated price as most properties were three years ago.  None the less they were confident in this 2500 square foot home in a nice neighborhood that is less than six years old.

They contacted a non-recourse lender to apply for a loan on behalf of their IRA LLC. The lender told them that they will require an appraisal of the property and would need an analysis of what the property could yield in rental income this is part of the appraisal process. The lender would also need to verify that they have enough funds in the LLC checking account for 50% down and at least 10% cash reserves.  After the appraisal came back the property appraised for $174,000 and the rental analysis came back with estimated rent at $1350.00 per month.  The lender agreed to lend the LLC $75,000 and the monthly mortgage payment would be around $750.00 per month and that includes the escrow account to pay the insurance and property taxes.

After closing on the property the LLC now has a property with a mortgage that needs some minor repairs and cleaning.  They spent around $10,000 to get the house in rentable condition this means that their IRAs total investment into this property is $85,000. They hired a property manager to oversee and rent the property. It takes the property manager three weeks to find a tenant to rent the property.  They agree on $1300 per month with a $1000 as a deposit.  The realtors cut is $130 per month for property manager fees that leaves a balance of $1170 that is sent to the LLC manager to place in the LLC checking account. After the mortgage payment of $750 that leaves a profit of $420 per month in the LLC that’s a little more than 5.5% annually.  But as they stated they are in this investment for the return when they sell the property not the rental income.  The goal was to make enough rental income to pay the mortgage and pay for any upkeep the property might have and with $420 per month of profit they accomplished that. 

They are very happy with their decision to take control of their retirement accounts and invest those funds into an asset that they control and that is a tangible asset something they could touch and feel. They stated that they have had their retirement accounts in the stock market for years and felt helpless and hopeless, their stock market based retirement accounts were out of control.  They are excited about the future of their retirement accounts and will never give up the control again. 

So why are you not in control of your retirement? Are you tired of looking at your quarterly statements and feeling that you have given the control of your IRA to some stockbroker or financial planner? It is your retirement future, take control of it. For more information on how to get checkbook control of your retirement funds contact us today.

Timothy Schubert CISP

When should I start saving?

Over the past sixteen years of working in the retirement industry I have come across people in every stage of life, from 25 years of age to people on the verge of retirement.  And a common question continues to arise, at what age should I start saving for retirement?  Most Americans have trouble planning  a year ahead for summer vacation much less having the ability to plan for 30 years down the road for retirement.  So how do we deal with something that is so far in the distance but so important to our future.

If you think back about 35 years, Individual retirement accounts (IRAs) were just being created. There was no 401k, 403b or 457 plans. Retirement for people back then meant the three leg approach: Social Security, pension checks, and savings. Retirement didn’t last too long because life expectancy didn’t go far beyond the age of 70. The average male didn’t even make it that far.

Our retirement will be very different. You will live longer, and you’ll have a more expensive life style than your parents.  Let’s look at the three leg approach to retirement. First is Social Security: The average annual Social Security benefit is around $12,000. In other words not enough to live on.   Second is the Defined benefit plans also known as traditional pensions:  first of all do you even have one? Only 20% of Americans even have such a benefit.  If you are among the lucky few, the benefit is based on your salary and the number of years you worked for that employer.  But we are a mobile society and people just don’t stay with the same employer for 30-40 years like dad did.  Most of us cannot even count this as part of our income because we are part of the 80% that doesn’t have a good old fashion pension plan.  And the third leg is our savings:  of the three this is the one you have most control of.  So while two of the three have some serious problems you want to make this leg as strong as possible.  To save or not to save will have the biggest impact on the quality of your retirement years.  Let’s look at what our retirement accounts would look like if we started at age 25, 35, 45, and 55.

If at age 25 you invested $5,000 for 10 years and didn’t save another dime and you averaged 11% return at age 65 you will have $800,000 in your retirement account.

If you wait until you are 35 and you saved the exact amount and earned the same return your retirement account at age 65 would be valued at $364,615.

If you wait until you are 45 and you saved the exact amount and earned the same return your retirement account at age 65 would be valued at $168,887.

If you wait until you are 55 and you saved the same amount and earned the same return your retirement account at age 65 would have a value of $83,227.

You can see the power of compounding and the importance of starting early, each saved $50,000 but the returns that compound are significant if you start early. So when is the best time to start saving?  NOW!

If you want to know more about self directed IRAs and how to take checkbook control thru an IRA owned LLC call us today.  Now is the time for you to take control of your retirement future.

Timothy Schubert

Simple questions before investing

 There are simple questions that you should ask if you are considering investing in a private venture? The old saying that “if it sounds too good to be true then it probably is”. If this is the only way we  judge an investments worthiness we are not doing a good job in our due diligence.   We should be wary of promises of high returns with little or no risk. Let’s look at some simple questions that we want answered before we give our retirement money to anyone.

  1. What is my risk? All investments carry some risk, but higher returns typically mean higher risk. Be careful of misleading information telling you that there is little or no risk in these high yield investments.
  2. Is the firm selling a product that is regulated by local or federal regulators? You want to deal with firms that have full disclosure of their financials and report to some government regulator. If often pays to check the public record for recent documents that the company has filed.
  3. What are the fees? What are the total fees for this investment? Ask about entry and exit fees. What is the commission for the sales person?
  4. What is the exit strategy? Can I get my money back when I ask for it?  Are there fees or penalties for cashing out?
  5. Do I have security in real property with this investment?  If not, you may not have the comfort level that you desire with this investment. It may carry more risk than you want. Be careful with terms like secured and guaranteed.
  6. How much debt does this company have? And does it have loans to other related companies? Some companies have been found to be lending to related parties or related companies. These conflicts should be fully disclosed as well as the risks of these associations.
  7. Do you understand the investment? You should know your investment and this includes the company’s financial statements.  What sectors is my investment in? How long has the company been in business? You should know the history of the management team and the company.

These are just a few questions that you want to discuss with anyone selling you an opportunity in a private venture.  There are many other questions you could ask, but this is a good start for you.  Do your good due diligence on any investments you are considering.

Timothy Schubert

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.”

Insurancenewsnet.com 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.