February 01, 2010

5 Reasons Self-Directed IRA's Should be Your Best Friend When Raising Private Money

The article below was written by Adam Davis of Ultimate Private Money and is being republished with permission.
If you are a real estate investor, especially in this market, it pays to know how to raise private money for your real estate investing deals.  Not only does private money solve a key problem in today's market of obtaining bank loans, it gives you the power to confidently make 'all cash' offers and know that you can indeed close in 10 days or less.  Both are strong motivators to sellers to accept lower than "normal" offers on their properties.
If you're a real estate investor looking for properties in the Hickory NC real estate market area, be sure to contact Roger Johnson today.  I'm an knowledgeable REALTOR® with experience both dealing with, and as an, investor, so you can count on me for solid, professional service.
There are easy ways and there are hard ways to raise private money. One of the easiest of the easy ways to raise private money is to incorporate self-directed IRAs each time you talk to a prospective private investor. 
Self-directed IRAs are still relatively unknown outside of the niche real estate investor world, which means you have some huge advantages - you're not just a face in a crowd saying the same thing everyone else is saying. Lest you forget that there are a lot of other forces out there competing for your private investors capital (financial planners, stock brokers, banks) it is critical that you have a unique proposition for them.
As soon as I began showing potential private investors self-directed IRAs - which meant
educating some of them on what they were and the benefits - the floodgates really opened up. Soon, some of my biggest investors began developing in the process of converting their old 401(k)s and SEP/SIMPLE IRAs into self-directed accounts and then placing those funds into my real estate investment projects.
At their core, self-directed IRAs are simply Individual Retirement Accounts that allow the account owner to make decisions about where the funds go. The funds can be invested in real estate, promissory notes, private placements and more.  The accounts we're talking about aren't offered by most financial service companies (like Fidelity or T. Rowe Price). There are special custodian companies that handle these accounts. Per IRS rules, a custodian or trustee must be involved and all the same tax rules apply for early withdrawals, roll-overs and treatment of distributions/RMDs (required minimum distribution).
Here are 5 Reasons that Self-Directed IRAs should be your best friend when raising private money for real estate investments:
  1. Tax-deferred growth - The basic benefits of a traditional IRA apply to self-directed IRAs: investors can contribute money to an account on a "pre-tax" basis and defer income taxes on those gains until the funds are withdrawn, at which point distributions are taxed at ordinary income tax rates. This is great because it allows the private investor to compound larger sums using what would be tax money owed to the government. Deferring income taxes alone can lead to huge percentage difference in investment value after just a few years.
  2. Tax free growth - Self-directed ROTH IRA's can be used to place funds into your real estate investments as well, whether for private placement of equity capital or a promissory note. With a ROTH IRA, the investor contributes after-tax dollars and does not pay any taxes on the gains after a 5 year minimum holding period if over 59.5 years old. Principal funds can be withdrawn without tax consequence if the account has been open for at least 5 years. ROTH benefits may be even bigger for your private investors, because they have the potential of big gains long term without yielding anything to Uncle Sam.
  3. The 'wow' factor - Since most people, accredited and non-accredited investors alike, are unaware of the fact that they can invest in real estate with their IRA, you have what I call the 'wow' factor going for you. You can take on the role of educator and provide valuable information to investors who never knew this option existing for their money. Most private investors are quite receptive to learning about new ways to make money and grow their retirement accounts.  Who better than you to tell them.
  4. Ease of use - Self-directed IRAs are quite easy to work with. The paperwork process is really no different than opening up an account with a large financial institution or bank. The private investors mind is put at ease because their custodian will handle all of the tax reporting requirements and account maintenance.
  5. Access to more capital - Your investment pool widens significantly with self-directed IRAs. Private investors can roll over or transfer funds from an existing IRA/SEP/SIMPLE/401(k) or they can contribute funds from another source. In many cases, private investors have investments that are under performing or languishing and will happily move them to a new account for a few percentage points more in return.
There are many more reasons why Self-directed IRAs should be your best friend when raising private money, but the preceding 5 reasons should suffice in lighting a fire under you to incorporate these awesome tools in your business right away. Creating information sheets, brochures or other materials to show private investors these benefits and how they can take advantage of them by investing with you is a great start. Uncle Sam doesn't usually hand out a lot of breaks, so when he does (and it can actually result in a truckload more private money) you should take full advantage.

Roger Johnson is a Realtor with CENTURY 21 American Homes in Hickory, NC.
I service the Catawba and surrounding counties, and the Hickory, Newton, Conover, Taylorsville, Claremont, Statesville and Charlotte, NC real estate markets.
You can contact me via Email or give me a call at 828-381-9245 or 828-568-2121 ext 310
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