Do I Have Enough Money in My Self-Directed IRA to Invest?

 |  General Self-Directed IRAs

By J.P. Dahdah, CEO

When it comes to alternative investing, there’s no one-size-fits-all approach.

The amount of money you need to invest in alternative assets with a Self-Directed IRA varies widely. It depends on the type of alternative asset you’re interested in, such as real estate, private equity, promissory notes, and private funds. It also depends on how you choose to structure your investment.

From a structure perspective, there are three ways you can invest with a Self-Directed IRA: cash, entities, or with a mortgage.

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.

Invest with Cash

At any point, your Self-Directed IRA (SDIRA) can invest using cash. This works best when you have enough cash in your SDIRA to easily cover the cost and ongoing expenses of the entire investment.

Under this structure, your SDIRA pays 100% of the purchase price for the asset. Further, your SDIRA is responsible for all expenses due for the asset throughout the life of the asset.

The primary benefit of investing with cash is that your SDIRA collects 100% of the income tax-free. This saves you interest costs over the length of the investment.

Invest with Entities

To invest with a private entity, such as a Limited Liability Company (LLC), private fund, syndicate, or Limited Partnership (LP), your SDIRA must purchase a fractional interest in the entity. This is most often accomplished by pooling money with other investors to buy other assets your SDIRA may not otherwise be able to afford. The other investors can use their personal money or their IRA funds to partner with you.

Under this structure, your SDIRA owns a pro-rata interest for all expenses within the entity. Your SDIRA also collects pro-rata interest for all investment income-tax-free.

The benefits of investing through an entity include additional protection for your personal assets, as well as access to larger investment options.

Invest with a Mortgage

Your SDIRA can also take out a mortgage to purchase alternative assets, such as real estate.

To take out a mortgage, there are several rules your SDIRA must follow. For example, the mortgage must be a non-recourse loan (no personal guarantees). Additionally, your SDIRA must be listed as the borrower, not you personally. Your personal credit score is not used to determine underwriting.

As part of your financial planning, keep an eye on the total cost of the mortgage. Typically, down payments for an IRA non-recourse loan are 35%-50%-significantly higher than a traditional mortgage. The property must also have sufficient rental income to pay the mortgage held by the IRA.

Under this structure, your SDIRA owns 100% of the alternative asset subject to the mortgage. Your SDIRA is also responsible for paying 100% of the expenses included in the mortgage payment and collects 100% of all income.

The primary benefit of investing with a mortgage is the ability to alternative assets without requiring the full amount of cash on hand.

Additionally, here are some factors to consider when determining how much to invest in alternative assets within a Self-Directed IRA. Keep in mind that your decision shouldn’t be limited to 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 to 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 single 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.

Contact Vantage today to talk with one of our Client Service Associates about investing with your Self-Directed IRA.