Self Directed Individual Retirement Accounts, IRAs, and other Retirement Investment Options allow the investor a wide array of traditional and non-traditional investment opportunities. The following are some of these offerings. (If information about other investments of interest is not included, please contact AmeriTrust at 1.877.539.7247 to discuss.)
Real Estate
The first thing to know about real estate purchases is that property acquired is for investment purposes only. This means your IRA takes title to property and any income from that property, i.e. rent, goes directly into the IRA that purchased the property. Likewise, any expenses, such as property management and maintenance fees are paid from that IRA. If and when said property is sold, those funds also go back into the IRA and remain tax-deferred or tax-free if using a Roth IRA. Your IRA can purchase property from anyone that is not related.
Utilizing your IRA, there are a number of ways to make real estate purchases. One method is to form a LLC, Limited Liability Corporation, and then pool together different funds to purchase real estate. An example of this method would be combining your IRA funds with personal funds, and/or a non-recourse loan, and/or with funds from other investors. LLC formation partners each own a part of the LLC with percentage of ownership being determined by the amount invested.
Securing a non-recourse loan to purchase property typically requires a down payment of 30 to 40 percent. Guidelines for these loans tend to be less stringent and do not normally use credit scores or income as loan qualifications.
Types of Real Estate that can be purchased with an IRA are:
- Residential--houses, condominiums, duplexes, four-plexes
- Commercial--retail property, apartment complexes, business/office property
- Industrial--manufacturing sites, warehouses and plants
- Land--developed and undeveloped
Mortgage Notes and First Deeds of Trust
Types of Mortgage Instruments
Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.
The Mortgage
In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.
The Deed of Trust
The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.
Tax Liens
Payment of a tax lien may occur through various methods:
- Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage company will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
- If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
- Procedures vary from State to State. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).
TICs (Tenants in Common)
TIC ownership is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Through TIC ownership, the average qualified owner of investment real estate is able to enjoy ownership in an institutional-type property with a lower or smaller investment.
Private Placements
A private placement is a direct private offering of securities to a limited number of sophisticated investors. It is the opposite of a public offering. Securities issued as private placements include debt, equity, and hybrid securities.
An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits.
A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.
IRAs can own stock or membership interests in a company. It is important to note in these situations that compliance will scrutinize the investment for any violations of prohibited transactions (i.e. self-dealing, related-party transactions, etc.)
As with any Retirement Investment Options, you should consult an attorney, tax professional or your financial adviser to determine if investing in any of these items is right for you.
Our knowledge and expertise provides an avenue for you to use this innovative way of investing. You may avoid capital gains taxes and defer (or optimally eliminate) paying taxes on your self-directed retirement funds.
Through years of expertise, combined with our professional affiliates, AmeriTrust Retirement Services, Inc personally guides you through a successful process of diversifying and redirecting your retirement funds into real estate and non-traditional investments in a tax-sheltered environment.
With a vast array of various types of Retirement Investment Options, it is difficult to know the proper method to complete each one. There are instances that an LLC may not be necessary. Each investment scenario brings with it a diverse need. With our expertise, we will help you navigate through the maze and make your experience smooth and uncomplicated.
