Looking to get creative with your self-directed IRA? Want to avoid some capital gains taxes while achieving a solid return on your investment? It might be time to look at one of our Vantage alternative investment strategies.
Today, we want to talk about a joint venture agreement, or what we like to call “debt-equity” (a combination of debt plus equity). This is a type of real estate transaction where you can realize a fixed interest rate of a promissory note transaction or investment, as well as profit-sharing participation on a real estate purchase and flip.
Let’s start by going over the mechanics of how this strategy works.
Say our investor, Jane, has a self-directed IRA with $100,000 cash in it—ready to invest. If Jane wants to pursue a debt-equity strategy, her first step would be to identify a borrower. Someone who is looking to purchase, fix, and flip a piece of real estate.
The flipper, Henry, is looking to borrow $50,000 to rehab a property. Maybe Henry has the funds to purchase the property outright but is looking for a private lender to back the rehab expenses. Henry would sign a promissory note—in this case, a joint venture agreement—with Jane establishing the terms of the relationship.
One of the key benefits here is that the two parties can negotiate terms.
Henry may offer a fixed interest rate return in exchange for the money (something in the ballpark of 8-15%, depending on the market). And he may also offer a percentage of the profits made from the flip. These key terms are captured in the promissory note signed by both parties.
Once the rehab funds are in place, Henry gets to work. And he’s able to sell the property for $125,000 more than he paid for it. He would then use those proceeds to pay Jane back. She would receive the principal from her loan. The interest payment. And any agreed-upon profit-sharing. All of that money would go back into the self-directed IRA for future investment.
Maybe she’ll invest in another property with Henry soon.
As you can see, this is a great strategy to put Jane’s money to work outside traditional stock market investment. And better still, investors who use this strategy can often avoid capital gains tax on their profits.
If you’re interested in learning more about debt-equity and other investment strategies powered by the Vantage team, please contact us today.