ESTABLISH, SEEK, VET AND FUND

ICOR Blog & News ,

Many extremely successful investors are realizing they need to shift their focus and priorities when it comes to funding their retirement.  More than one of these high-performing business owners admitted the need to be more diligent about getting the correct accounts opened and funded, and then getting those funds implemented into deals. Often, they face the small dollar account balance dilemma.  Here are a few principles to help with that dilemma. 


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If you want to do self-directed investing, the first step is to establish an account that will allow you to self-direct.  The establishment phase has three elements:

  1. Select the correct custodian.
  2. Select the correct type of account.
  3. Open and fund the account.

Because retirement accounts can be opened without putting money into them, it is important to make sure you fund the account so you can then seek deals in which you can invest.  You may want to consider the possibility of deploying your funds along with funds from someone else rather than trying to do deals all by yourself.  For example, instead of using your account to buy a house, fix it up and resell it, you and another investor might want to jointly lend money to someone else who is doing the buying, fixing and reselling.  I have done both, and I greatly prefer the latter. Co-lending is a great way to grow your smaller accounts.

The vetting phase is incredibly important.  Once you find an opportunity that you believe is a good deal, you must do adequate due diligence on multiple aspects of the deal.  You must first verify that it does not involve a prohibited transaction or a disqualified party.  That is only the beginning, however.  Too often, I see people who don’t take the time to make sure the deal is really a good investment because they are in too big a hurry to get their money deployed.  They feel guilty about those dollars just sitting in their account and want to be able to say they have done a deal.  It’s better, however, to let your money sit while looking for a good deal than to put your money into a questionable deal just to say you have it invested.

Once you have done the appropriate due diligence on an investment for your self-directed retirement account, it is all about arranging for the actual funding of the investment.  The best way to think of this is that the cash in your account is exchanged for a different asset, like when you go to the store and exchange a couple dollars in your wallet for a candy bar and a soda pop.  You are exchanging the dollars in your IRA for a piece of real estate, a promissory note, a tax lien, or the membership interest of an LLC or trust, to name a few possible examples.

Whatever type of investment you choose to do, make sure you completely understand how the investment will be made and properly documented to be a good deal, both now and in the future, for your retirement account. One of the best ways to do that is to do what I refer to as “rinse-and-repeat” deals, also known as “cookie-cutter” deals.  By that, I mean do the same kind of deal or investment over and over so it makes creating the paperwork (the transaction documents and direction of investment forms) much cleaner and easier to do.  When I can do a similar transaction over and over again, it cuts down on the time it takes to prepare the paperwork, and it makes it easier to explain to the parties involved what is going on because I have done it before. I have used a series of cookie cutter or rinse and repeat deals to grow my small dollar accounts.

While “rinse-and-repeat” deals are one of the key components to being a successful investor with your self-directed retirement account, another key component is reinvesting.  As the proceeds come in from your deals, try to get that money back out working as quickly as possible, keeping in mind my earlier admonition about taking adequate time to make sure a deal is good.  Don’t redeploy your funds just for the sake of making an investment.

I have lost track of the number of times I have spoken with investors who tell me they want to lend money at 3 points and 15%.  When I ask them how often they have their money out working like that, it is usually about 5-7 months out of the year.  The rest of the time, they are waiting for another opportunity to come around.  

It doesn’t take a financial calculator to figure out that when your money is only working half the time, you are making half that rate of return on an annualized basis.  That is why it is important to get your investment income redeployed as quickly as possible into another good, solid deal.  

To borrow a statement from a friend of mine, real estate investing is a thinking-person’s business.  Self-directed investing is a thinking-person’s activity as well.  Once you have thought through a system and strategy, the best thing you can do is do it again and again and again, particularly if it works out well.