By J.P. Dahdah | VantageIRAs
The amount of money you need to invest in alternative assets with a Self-Directed IRA can vary widely depending on the type of alternative asset you’re interested in and how you choose to structure your investment. Alternative assets include investments outside the stock market, such as real estate, private equity, promissory notes, private funds, and more.
From a structure perspective, there are three ways you can invest in real estate with a Self-Directed IRA: Cash, entities or by obtaining a loan.
Each strategy outlined below has distinctive features and benefits. The good news is that you are in control of how you structure any transaction within your Self-Directed IRA to best fit your overall investment objectives.
1. Cash
- Your Self-Directed IRA pays 100% of the purchase price of the investment property.
- Your Self-Directed IRA owes 100% of all expenses due for the property.
- Your Self-Directed IRA collects 100% of all the income – tax-free!
2. Entities
- Accomplished using private entities such as Limited Liability Company (LLC), Private Funds, Syndications, and Limited Partnerships (LPs).
- Your Self-Directed IRA purchases a fractional interest of an entity alongside other investors by pooling monies to buy more real estate assets or bigger deals that your Self-Directed IRA may not be able to afford on its own.
- The other investors can use their personal money or their IRA funds to partner with your Self-Directed IRA
- Your Self-Directed IRA owes pro-rata interest for all expenses within the entity.
- Your Self-Directed IRA collects pro-rata interest for all investment income – tax-free!
- Investing through entities can also offer an additional layer of asset protection which is a desired benefit for savvy investors.
3. Mortgage
- Buying alternative assets like real estate in your Self-Directed IRA with a mortgage:
- The mortgage must be a non-recourse loan (no personal guarantees).
- Your Self-Directed IRA is the borrower, not you personally (Your personal credit score is not used to determine underwriting. It is strictly an asset-based loan).
- The typical down payment for an IRA non-recourse loan is 35%-50%.
- The property must have sufficient rental income to pay the mortgage held by the IRA.
- Your Self-Directed IRA will own 100% of the real estate property subject to the mortgage.
- Your Self-Directed IRA collects 100% of all income.
- Your Self-Directed IRA pays 100% of expenses including the mortgage payments.
Here are some additional factors to consider when determining how much to invest into real estate within a Self-Directed IRA. Keep in mind that your evaluation isn’t only on whether you have enough money to purchase the asset, you must also consider how much money it may cost to maintain the asset through the entire life cycle of the investment.
Investment Type: Different alternative assets have different minimum investment requirements. For example, you may need a substantial amount of capital to invest in a private equity fund or purchase a piece of real estate, while you can start with a smaller amount in certain crowdfunding platforms, private entities or peer-to-peer lending.
Risk Tolerance: Your risk tolerance should be a significant factor in deciding how much to invest in alternative assets. Any type of investment carries risk, so it’s essential to allocate an amount you’re comfortable with.
Diversification: Diversifying your investments is generally a wise strategy. Consider how much of your overall investment portfolio you want to allocate into any individual holding. Financial experts often recommend a diversified approach to minimize risk.
Financial Goals: Your financial goals and timeline will also impact how much you should invest. If you’re saving for retirement, you may have a different investment strategy than if you’re looking for short-term gains or income.
Investment Opportunities: Keep an eye out for investment opportunities that match your budget. Some alternative investments may have lower minimums than others.
Due Diligence: Conduct thorough research and due diligence on any alternative investment opportunities you’re considering. Make sure you understand the terms, fees, and potential risks associated with each option. Most importantly, be sure to perform adequate research on any individuals you are entrusting with your retirement savings.
Ultimately, there is no one-size-fits-all answer to how much you should invest in alternative assets. It’s a decision that should be made carefully, taking into account your overall level of investable assets, risk tolerance, and investment objectives. Self-Directed IRAs offer a tremendous amount of freedom and control, but with that comes an equal level of responsibility over your retirement funds.
To learn more about how to invest in real estate with a Vantage Self-Directed IRA, visit www.VantageIRAs.com.