Having the flexibility to consider alternative types of investments is one of a self-directed IRA’s most attractive features. IRA custodians such as Quest Trust Company allow individual savers to invest in the full range of investments that are legally permitted, rather than just the publically traded stocks and bonds that other IRA custodians limit their customers to.
But even within the range of permissible investments, some types of alternative investments aren’t quite as widely known as the others.
Other types of real estate. When you think of using your self-directed IRA to invest in real estate, you may generally think of investing in residential and commercial properties. But you can also use your self-directed IRA to invest in farmland, industrial properties and even undeveloped pieces of land.
Tax liens. Another type of alternative investment relating to real estate is tax liens. A tax lien is a lien (a secured debt that’s similar to a mortgage) that a local government entity places on a piece of residential or commercial real estate when the owner does not pay his or her taxes. The local governments often sell these liens to investors who earn above-market interest rates until the property owner pays his or her taxes.
Mortgage loans. You can participate in the real estate market without ever buying a piece of property. The IRA rules permit you to make private mortgage loans, which means that you can take the role in a real estate transaction that a bank or finance company would normally fill. If you decide to pursue this investment opportunity, you’ll want to make sure that you have adequate legal advisers to assist you. These types of transactions are highly technical and you’ll want to be comfortable that your funds are adequately secured by the underlying property.
Precious metals. Self-directed IRAs can be used to purchase investment-grade precious metals. This can be an attractive option if you are looking for a reliable inflation hedge in your portfolio. But hobbyists take note: The authorization to use IRA funds to invest in precious metals does not include investments in collectible coins.
Franchises. One reason that franchises are a particularly suitable investment for self-directed IRAs is that the total investment amount is relatively clear at the outset (unlike investing in some other types of businesses, where there can be unexpected needs for additional capital).
Whenever you’re considering investing in some of these lesser known assets, there are a few basic caveats to keep in mind. First, make sure that you understand and plan for any illiquidity that’s inherent with the investment. Second, be sure to understand the prohibitions on self-dealing and follow them. Finally — and this guidance should apply to any investment you make, whether in your self-directed IRA or otherwise — make sure to conduct an appropriate level of due diligence before committing any of your funds. If you don’t understand the investment you’re considering, then you probably shouldn’t be investing in it.
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