High Yield Income Investment Strategies for Self-Directed IRA Investors
J.P. Dahdah | CEO & Founder of Vantage IRA
Real estate investors looking to diversify their retirement savings beyond the stock market are increasingly turning to Self-Directed IRAs to grow their nest eggs. Why? Because a Self-Directed IRA offers total control over their retirement savings and the ability to invest directly in private market strategies they know, understand, and feel more confident in. For AZREIA members, the attraction to having a Self-Directed IRA is deeply driven by being able to align a love for real estate to the power of a tax-favored retirement account. While Self-Directed IRA investors enjoy the control and freedom the account gives them, they still have the responsibility of evaluating and selecting the best mix of equity and fixed-income asset strategies to help them achieve their financial goals. Prudent investors know that before the right asset strategy can be selected, a clear understanding of one’s risk tolerance, time horizon, and investment appetite is fundamentally important. In this month’s article, we delve into the top three most commonly used fixed-income asset strategies and entity types used by Self-Directed IRA investors looking for high yield-low risk investment options for their retirement portfolio.
Joint Venture Agreements
What Are Joint Venture Agreements?
Joint venture agreements are a type of legally binding contract used to govern and define the terms of the investment relationship between multiple parties. A big benefit of joint venture agreements is the vast flexibility the parties have in establishing the structure, dispute resolution, parties’ duties, obligations, and financial terms. If the parties agree, joint venture agreements can offer a hybrid investment approach, providing the fixed income characteristics of a bond with the potential upside of equity conversion, which I like to call “dequity.” We see a lot of fixes and flip investors utilize joint venture agreements to secure capital for their flips.
Why Use Joint Venture Agreements?
Joint venture agreements are favored among self-directed IRA investors for several reasons:
Pooling of Assets: Joint Venture Agreements allow parties to combine their assets, resources, and expertise, which can lead to more significant projects than each could achieve individually. The networking available as a member of AZREIA opens up a lot of Joint Venture Agreement opportunities to create win-win outcomes.
Cost Sharing: By sharing costs, parties can undertake larger projects with reduced financial burdens.
Risk Mitigation: Entering into a Joint Venture Agreement can spread risk among the parties, reducing the impact of any single participant. It is also common to combine different areas of expertise amongst parties which can help mitigate operational risks through better decision-making.
TRUST DEEDS
What Are Trust Deeds?
Trust deeds, also known as deed of trust investments, involve lending money to a borrower for real estate purchases. The investment is secured by the property, making it a relatively safe fixed-income option.
Why Use Trust Deeds?
Trust deeds are popular for their:
Collateralization: The loan is secured by real estate, providing a tangible asset backing the investment.
Regular Income: Investors receive regular interest payments, offering a predictable income stream. It’s a great investment option for passive investors that enjoy getting “mailbox money.”
Capital Preservation: With lower default rates and the ability to foreclose on the property if the borrower defaults, trust deeds can help preserve capital.
PRIVATE CREDIT FUNDS
What Are Private Credit Funds?
Private credit funds pool investor capital to provide loans to businesses or individuals. These funds are managed by professional investment firms and target higher yields than traditional fixed-income securities.
Why Use Private Credit Funds?
Private credit funds are attractive for several reasons:
Higher Yields: These funds often provide higher interest rates compared to public bonds or CDs.
Diversification: By investing in a pool of loans, investors can spread their risk across multiple borrowers and industries.
Professional Management: Experienced fund managers handle the due diligence, loan origination, and collection processes, offering a hands-off investment approach.
Alternative fixed income investments offer Self-Directed IRA investors opportunities to diversify their portfolios and achieve higher yields compared to traditional public market options. Convertible notes, trust deeds, and private credit funds are among the top strategies used by savvy SDIRA investors. If you are unhappy with the low performance on bond mutual funds or other traditional fixed income options, don’t stay stuck. Stay curious and keep your mind open for alternative fixed income assets you can have total control over.