Increase Your Private Investment Allocation With Your Self-Directed IRA

Estimated reading time: 3 minutes

Individual retirement accounts are perhaps the single most powerful tool you have in your retirement planning arsenal. You have greater control and flexibility over your retirement funds as compared to an employer-sponsored 401(k), and a Roth IRA can provide significant benefits for tax savings and estate planning purposes.

Self-directed IRAs take things a step further. Having an account with a custodian such as Quest Trust Company will allow you to invest in an even wider range of asset types, including a variety of private investments. Here are some ways to increase your portfolio allocation into these investment types by using a self-directed IRA.

Private Mortgages. Regardless of the state of the economy, people are always going to want (or need) to buy and sell homes. The IRS regulations permit you to use a self-directed IRA in order to issue private mortgages. Provided you understand the process fully, follow all legal requirements and evaluate your risks accordingly, you may find this to be a significant boost to your portfolio.

In fact, when prevailing interest rates increase and it becomes more difficult for the average home buyer to get a loan from a bank, you may have even more opportunities for making private mortgages.

Private Equity. Similarly, a self-directed IRA can be used to make private equity investments as well. Depending on the size of your portfolio and your overall financial situation, this can be a way to gain a completely unique risk/reward exposure that wouldn’t be available in any other investment you could make.

Some private equity investments will require that the investor be a so-called “accredited investor”. This is a legal term defined by the SEC to mean a person who either (1) has a net worth of at least $1,000,000 (not including the value of their primary residence), or (2) has an annual income of at least $200,000 over each of the last two years (or has a joint income of $300,000 in each year with their spouse) and a reasonable expectation to achieve the same income this year.

Note that even if you’re looking to invest with your self-directed IRA and your account meets these standards, you’ll still need to meet those standards individually.

Private Partnership Interests. You can use your self-directed IRA to invest in various types of private partnerships. These may include traditional businesses as well as natural resources development opportunities such as those that can be found in the oil and gas industries.

Remember that when you invest your self-directed IRA in a private partnership, you’re prohibited from benefitting from it individually while the investment is still held within your account. So if the partnership invests in vacation real estate properties, neither you nor your family or any other related parties can stay in the property while you’re still invested.

Regardless of the private investments you’re considering making, be sure to do your research and understand all the risks before you commit your account funds.

Real Estate Alternatives to Consider With Your Self-Directed IRA

Estimated reading time: 3 minutes

Real estate is one of more popular types of investments that retirement savers choose to make with their self-directed IRAs. Custodians who offer self-directed IRAs, such as Quest Trust Company, offer also offer many other legally permissible investment options that other traditional custodians don’t offer, and which allow individuals the greatest ability to apply their investment philosophy to their retirement savings.

But direct investments in real estate might not be suitable for every investor’s portfolio or investment profile. The key to successful investing, whether in the context of retirement planning or even general investing, is to find investments that are suited to your needs and to your investment approach. Fortunately, there are ways to invest in real estate assets without having to meet the administrative challenges of managing direct real estate holdings.

Real Estate Investment Trusts

One option for being able to invest in real estate without having to take on the risk of doing so directly is to purchase shares of a so-called “real estate investment trust” or “REIT.”

A real estate investment trust is an actively managed trust that itself invests in real estate of various types. Shares of a REIT are generally traded like shares of stock on the major exchanges, and are typically structured and operated in order to receive special tax breaks – the most significant of these is that the REIT offers high yield to investors. For investors who are looking for current income, REITs can be a great option.

Most REITs are generally focused on a particular type of property (such as multifamily residential or commercial) or real estate mortgages. But there are some REITs that try to take a hybrid approach by investing in physical properties as well as mortgages.

Investment Partnerships

Another way to invest in real estate without having to hold property is to commit a portion of your portfolio to private investment partnerships that focus on real estate investments. Rather than buying property yourself, you are buying an interest in an investment partnership that has its own administrative structure in place to buy and manage properties for the benefit of the partners. While you’ll likely be able to vote on many of the decisions he investment partnership makes, it’s vitally important that you are comfortable with the partnership management structure that’s in place.

Private Mortgage Lending

When you have a self-directed IRA you can make private loans as another type of investment. You’ll probably want to stick to loans that are secured (meaning that the borrower pledges collateral that you can take possession of if they fail to meet their loan repayment obligations), and this includes private mortgage lending. This is yet another way to invest in real estate alternative investments and not have to hold property directly.

The term “real estate” means a specific type of investment class to many investors. There are in fact a wide range of real estate alternatives that you can invest in with your self-directed IRA without having to hold property directly.