Getting the Most Out of Your IRA Options

Posted By: Sarah Shellam ICOR Blog & News,

You've taken the first step! You have opened a Self-Directed IRA, a type of individual retirement account that allows you to invest in a wider range of assets beyond the traditional investment options, and you are now ready to do your first investment. Where do you start and what are your options? 

While Self-Directed IRA custodians like Quest do not sell investments (they simply allow you the possibility to find
the investment yourself), we provide education to help you make the best decision for your situation. If you have recently opened your account or are considering what diversification possibilities are out there, Quest wants to provide you with ideas of your investment options. While you are not limited to any of these, below are the most common categories of alternative investments we see in self-directed accounts.

Single Family Real Estate Investments
Single-family investment options refer to investments in residential real estate properties consisting of a
single dwelling unit, usually designed to house one family. They can be great investment options for active investors, such as the following:

  • Property Rentals: You can purchase a single-family home as a rental property and generate income by renting to tenants. You can either manage the property yourself or hire a property manager to handle the day-to-day operations. 
  • Fix-and-Flips: You can purchase a distressed single-family home, renovate it, and then sell it for a profit. This strategy requires a higher level of expertise and experience in home renovations and real estate market trends.
  • Subject-to and Lease-to-Own Property: You can purchase a single-family home and offer it to
    tenants under a lease-to-own agreement. This option allows tenants to rent the property for a
    specific period with an option to purchase the property at the end of the lease term.

Commercial Real Estate Investments
You can use your Self-Directed IRA to purchase real estate, such as commercial properties and even land. When considering commercial investment options, it's important to evaluate the location, condition, and potential investment, like any associated costs such as maintenance, repairs, and property management fees.

  • Multifamily/Apartments: You can invest in an apartment building that contains multiple units, ranging from a few to hundreds of units. With direct ownership of a multifamily property, you can receive steady rental income, and a property management company can be hired to manage it.
  • Duplexes, Triplexes, and Condos: You can purchase an investment property that contains multiple units, such as a duplex or a triplex. Smaller than apartment buildings, duplexes still offer the potential for rental income. It's also possible to invest in a building that contains multiple condominium units, which can be rented out to generate income and typically require less maintenance and management than other multifamily properties. 
  • Vacation Rentals: You can purchase an Airbnb, VRBO, or other vacation rental home in a
    popular vacation destination to rent to vacationers. This investment option can generate higher
    rental income during peak vacation seasons. Remember, you must abide by all rules involving
    prohibited transactions and disqualified persons. If your IRA owns the vacation rental, you
    cannot stay in the vacation rental personally, nor can anyone who is disqualified. You must also
    check local laws to ensure there are no restrictions to prevent the property from being used as a
    short-term rental.

Private Entities
You can invest in private companies or startups with your Self-Directed IRA. These types of investments can have a higher degree of risk, but they also have the potential for high returns.

  • Multifamily/Self-Storage Syndications: A syndication is a strategy commonly used by real estate investors that allows multiple people to pool their resources and invest in large real estate projects, like an apartment building or self-storage facility. This type of passive investing gives the investor the benefits of direct property ownership without the hassle of managing or maintaining the property themselves. 
  • LLCs (Limited Liability Company): An LLC is a type of business entity that combines the liability protection of a corporation with the tax benefits of a partnership or sole proprietorship. One of the key advantages of an LLC is the protection it provides to its members. With LLC investments, members are not personally liable for the debts and obligations of the business, which can help protect their assets.
  • Limited Partnerships: A limited partnership is a type of partnership in which two or more individuals or entities come together to invest in a real estate project. There are two types of partners: general partners who are responsible for managing the partnership and making the day-to-day decisions related to the real estate project and limited partners who do not participate in the day-to-day management of the partnership but instead, they receive a share of the profits and losses of the partnership based on their percentage of ownership.

Private Loans
You can lend money using your Self-Directed IRA. This type of investment can generate regular income through interest payments without requiring the investor to be very active. These are passive loans in which an investor lends money to a borrower who uses the funds to purchase a property. There are secured loans and unsecured loans that can be done at Quest. 

  • Secured Loan: A secured loan is backed by collateral, typically the property that is being purchased by the borrower. Generally, it will mean if the borrower defaults on the loan, the lender has the right to foreclose on the property and recover their investment. Secured loans are generally considered less risky for lenders than unsecured loans because the collateral provides a way to recover their investment in the event of default. This makes secured loans more attractive to lenders and can result in lower interest rates for borrowers. 
  • Unsecured Loan: An unsecured loan, on the other hand, is not backed by collateral and is based solely on the borrower's creditworthiness, income, and other financial factors. Because there is no collateral involved, they are considered riskier for lenders than secured loans.

Real Estate Notes
Notes can be created from scratch, or they can be bought after the agreement was created. As mentioned above, real estate notes, also known as promissory notes or simply are a type of passive investment option that allows an investor to loan funds to someone with set terms.

  • Performing Notes: A performing note is a loan in which the borrower is current on their payments and is paying back the loan according to the terms of the agreement.
  • Non-Performing Notes: A non-performing note is a loan in which the borrower is delinquent on their payments, and the loan is in default. These notes can offer the potential for higher returns but also carry a higher level of risk.
  • Owner-Financed Notes: An owner-financed note is a loan in which the seller of a property provides financing to the buyer. The buyer makes payments directly to the seller, who acts as the lender.
  • Wrap Notes: A wrap note is a loan in which the buyer takes out a new loan that wraps around an existing loan. The new loan combines the existing loan with additional funds and is paid to the seller, who acts as the lender.

Now that you know some of the most common Self-Directed IRA investment options, we hope this gave you some ideas on what to pursue for your first investment. Of course, investing requires due diligence, research, and knowledge of the investment you are considering. While Quest cannot offer investment advice, we do offer educational webinars on different types of alternative assets and investment strategies, so check out our event calendar to see our upcoming webinars. Our IRA Specialists are always here to help, so give us a call if you have any questions or schedule a free 1-on-1 consultation today!