Self Directed IRAs: ROI Assessment

I’m a big fan of the self-directed IRA. We’ve set them up for quite a number of clients, partners and investors. It’s a great way to further diversify tax-sheltered investments and–if you play your cards right–you can really make some outsized returned without having to pay the taxes associated with any gains. Fifteen years ago these types of accounts were really only accessible by the financial elite–like the Mitt Romney’s of the world. Now, the cost to set-up, maintain and invest with such accounts has been drastically reduced. Unfortunately, most main street investors don’t come across the number of opportunities Bain Capital had. That doesn’t mean that the occasional “great deal” won’t come along. Having a self-directed IRA means it’s that much easier to pounce when the timing is right. The structure of self-directed IRAs and solo 401(k)s can differ greatly depending on the goals of the individual investor, but that doesn’t change some of the excellent returns that can be had from using these types of accounts as investment vehicles. For instance, a self-directed IRA can provide investment opportunities in the following:

  • Silver and gold bullion
  • Private equity and private business
  • Financial paper like notes, loans and deeds
  • Mortgage notes, tax liens and tax deeds
  • Physical residential and commercial real estate

One of the biggest issues with the self-directed IRA is not the power that the account provides, but finding truly unique opportunities for putting capital to work. Ask any private equity group looking to invest and you’ll find out the same thing is true in the corporate world. The world is more awash in capital than ever before. It’s really what America has been producing for the last 50 years: dollar bills. Luckily, if you keep your eyes open great deals in real estate and private business you may find a great opportunity come along.

Here’s the story of a client we know who’s doubling his IRA year-over-year by using an associate’s private business. 

For the sake of the story, let’s call our friend Jim. Jim’s good friend runs a business that requires accounts receivable factoring for things to run properly. For nearly seven years, Jim was using his self-directed Roth IRA to provide A/R financing to his friend’s business. His IRA thereby provided him a monthly return of roughly 8%. In essence, Jim was doubling his IRA every year for seven years. It doesn’t take a rocket scientist to understand that that’s a great deal.

Not every self-directed IRA will have this type of outlandish returns. However, I’ve noticed a couple of key features of people who’re able to get great ROI with their IRA. First, they setup the IRA before the idea or opportunity arises. In the case of a good deal, there’s often only one shot to snap up a great deal. Second, a majority of the most successful IRA returns come from folks who already own their own business. They’re well networked and know the people who’ll open the doors that need cracked. Opportunity is more frequently found in the lives of the entrepreneur, not in the working man or woman. That’s just a personal observation. Finally, the best ROI producing IRAs come from non-traditional and creative means. Creativity is okay, but must be exercised with extreme caution as it can be very bad if you nullify the entire account with a prohibited transaction.

When you do begin to amass IRA funds, it’s a no-brainer to setup an account, but the returns come from investing it. Not everyone is a Warren Buffet, but it helps to be street savvy when, especially when you’re not intent on simply investing in an indexed mutual fund or something.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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