By J.P. Dahdah, Founder & CEO of Vantage
Have you ever had a difficult time understanding the payout of a bond strategy?
It’s very common for investors to be confused given the difficultly in determining the actual payout they will receive from specific bonds.
Why not consider an alternative fixed income strategy and become a private lender within a Self-Directed IRA. In this post we will discuss the benefits of becoming a private lender and how it removes the uncertainty associated with bond strategies.
Bond Basics
A bond is a debt instrument used by governments and corporations to raise capital. Investors lend money to the bond issuer in return for a yield. Bonds generally have a maturity date which is a defined period when the capital that is borrowed is returned to the investor. Fixed interest payments are paid to the lender/investor at pre-defined time intervals.
Issues with Bonds
One of the issues that investors face when investing in bonds is that most bonds are purchased in the secondary market. This means individual investors do not have direct access to the issuer and instead need to purchase a bond through a brokerage firm. Although most bonds are priced at par (100), once they are issued, the value of bonds change. The changes in the price of a bond can generate a capital gain or loss to an investor which might be beyond the investor’s initial investment thesis of lending money and receiving a return.
Private Lending
An alternative to a bond strategy is direct private lending, which has become ever more popular with limited access to conventional financing. Investors earn an above market return from borrowers seeking private funds directly negotiated with the lender. Savvy Self-Directed investors can act as a bank by offering private lending through their Self-Directed IRA. Private lenders can lend at rates higher than traditional funding sources and have the freedom to structure repayment terms to their advantage. A promissory note is one of the most commonly held private lending vehicles. A note can be secured with collateral or garner higher rates as an unsecured note.
Bond strategies can be difficult to understand, and can create capital losses if interest rates begin to rise. But with direct private lending through your Self-Directed IRA there is an easy and effective alternative.
For more information on how you can discover your IRA investing alternatives, contact our team at (866) 459-4590 or Info@VantageIRAs.com.