fbpx

5 Reasons to Invest in Private Lending with Your IRA

By J.P. Dahdah, Vantage CEO

The 76 million people born in the United States between 1946 and 1964 are considered the Baby Boomer generation. They are the second largest generation. And by the year 2030, they will all be at least 65 years old. Which means retirement is on the horizon.

When it comes to their retirement, Baby Boomers are advised to have between 45-65% of their retirement account balance in a fixed-income asset allocation. Because the closer you are to retirement, the less risk you want to take with your money. Therefore, it is strongly recommended to avoid high-risk stock market-based investments.

This traditional fixed-income asset class is dominated by individual bonds of varying types, such as Municipal Bonds, Corporate Bonds and bond mutual funds. But the problem is that today’s bond market isn’t very promising, leaving Americans that depend on that fixed income concerned about their diminishing returns. Hence, they are seeking alternative asset solutions that achieve higher yields.

Enter the concept of private lending, the most popular alternative fixed-income strategy. One that has been around for centuries. Higher returns than bonds without playing the stock market.

It’s not just private investors who are taking advantage of private debt. Institutional investors, like the $50 billion Arizona State Retirement System, are leveraging private debt as part of their investment strategy. To quote Deputy Chief Investment Officer Al Alaimo, “[Private debt] has proved to be a better source of returns” than publicly traded debt instruments.

As an entrepreneur and private lender, myself, I appreciate the passion that some of our clients have for lending money through their IRAs. There are many reasons that individuals choose this alternative fixed-income strategy for their retirement plan investments. Below are 5 reasons to invest in private lending with your IRA:

1. Easy to Manage: Unlike most real estate purchases, lending generally requires minimal management once the loan is in place.

2. Provides Liquidity: While some LLC, Private Placement or Real Estate investments may have a long gestation period, loan payments can be structured monthly, quarterly or annually, providing cash balance that are especially important for individuals that require routine withdrawals or those facing required minimum distributions (RMDs) after reaching the age of 70 ½ years.

3. Permits Flexibility of Terms: The IRA holder can create the terms of the note to properly reflect the amount of risk he is willing to take vs. the amount of interest that the borrower is willing to pay. For example, the down payment or interest rate can be increased based on the strength of the borrower’s financial statement or credit rating.

4. Provides Security: Loans can be secured by first or second mortgages, providing the IRA recourse should the borrower default. In the unlikely event that foreclosure is required, the IRA should pay any expenses in obtaining payment or collection on the loan.

5. Can Result in Significant Returns: Our account holders issue first and second mortgages from their IRAs at rates from 8% – 16%, with many charging loan origination fees (points). While some clients locate their own mortgages, many rely on local companies that will match their funds to borrowers or will aggregate several IRAs into one mortgage.

As with all investments you make, we suggest you speak to your legal counsel regarding the structure of any loan that you would issue from your IRA. Title companies are typically happy to provide the basic note and mortgage forms in order for you to get started.

Sound interesting? I encourage you to contact our team at Vantage Self-Directed Retirement Plans for more information as to the basic process by which your IRA can become the “bank” and fill the void currently felt due to the lack of capital being lent by traditional lending institutions.

We also offer virtual workshops every month on this topic. Visit our events calendar and sign up to attend at your convenience.