Investors have the ability to further diversify their IRA portfolios by self directing investments in real estate, promissory notes, trust deeds and privately held companies (also referenced as private offerings or private placements). These types of non-publicly traded investments are frequently referred to as "Alternative Investments".
It is important to note that Alternative Investments usually involve higher risk, are less liquid than publicly traded stocks, bonds, mutual funds and ETFs and have rules and regulations that self-directed IRA investors should observe.
IRA funds can be used to invest in a wide variety of real estate to grow retirement savings or turn savings into income during retirement, including:
- Residential property
- Timberland, farmland, vacant land
- Commercial real estate
- Boat slips
- Private real estate funds (non-traded REITs)
Restrictions do exist. For example, you cannot use IRA funds to purchase property intended for personal use. Self-directed investors should know the Rules regarding Prohibited Transactions prior to self-directing any IRA real estate investment.
Single Member LLCs
Active self-directed IRA investors may choose to establish an entity to streamline their ongoing investment purchases, sales and asset-related expenses. This type of structure is frequently referred to as a Single Member LLC, IRA LLC or Checkbook Control IRA. In most cases, the LLC is funded entirely by the IRA with the IRA account owner acting as the manager.
The LLC's operating agreement must address prohibited transactions with disqualified persons and the manager should take care in maintaining detailed books and records regarding the activity of the LLC.
A promissory note is a form of debt where the borrower promises to return the IRA's funds by making principal and interest payments on an agreed upon basis over an agreed upon period of time.
An Unsecured Note is not backed by any collateral and it may be made negotiated with an individual, entity or through an online platform. Self-directed investors should consider the higher risks involved in lending money with no recourse if the borrower fails to repay the loan.
A Secured Note is backed by some form of collateral (real estate, equipment, vehicle, private stock or other collateral). Self-directed investors should investigate the ownership of collateral tied to the loan and insure that it is properly assigned to IRA.
A trust deed, or deed of trust, is a security instrument for real estate loans.
The details of the loan are spelled out in a separate promissory note, and the trust deed is recorded at the County Recorder’s Office. The trust deed serves as legal notice to the world that the subject property is pledged to secure a loan and also provides for a rapid method of foreclosure should a borrower default on a loan.
A Private is an investment in a company that wishes to raise capital but chooses not to publicly register the offering with Securities Exchange Commission (SEC). Private Placement investments are usually structured as Limited Partnerships (LPs) or Limited Liability Companies (LLCs) and are, most often, offered on a limited basis to accredited investors.
Private Placements may be referred to as:
- Hedge Funds
- Venture Capital Funds
- Private Equity Funds
- Real Estate Funds or Syndications
A private stock offering is generally outlined in a private placement memorandum, prospectus or stock purchase agreement.
These offerings are not usually available to the public on the open market but may be available on secondary markets. Private stock can be offered in any class of stock as described in the prospectus. These offerings must comply with both Federal and State securities laws.