Gary’s self-directed investments are fueling local real estate and his family’s financial future. His only regret: not starting sooner.

It took 30 years of working in the real estate industry for Gary to finally “wake up and smell the coffee.”

Gary, a real estate attorney in New York, regularly encounters clients who are using self-directed IRAs to receive tax-advantaged real estate returns. It wasn’t until recently that he stopped and took notice.  

“After three or four transactions where the buyer or seller was utilizing an IRA custodian, it finally hit me…it is time for me to look further into it,” Gary says.

Venturing into new territory

Though Gary has hands-on experience as a real estate attorney and investor, his self-directed IRA investing has allowed him to go in a new direction.          

“I sold many properties taking back owner-financing, but I did not give private hard-money loans, so using a self-directed IRA was the perfect vehicle to start my journey,” he says. “My wife’s and my Roth IRAs are not large enough where we could invest these funds to buy a property; however, we could partner up on a fix and flip if we wanted to.”

Gary decided that holding private notes and mortgages would be a fitting strategy for his Roth IRA. His funds enable borrowers to invest in additional real estate projects, providing a benefit to the community as well as his retirement account through interest earned.

He learned of an investor who was buying a property on a land contract and needed $140,000 to pay it off. He did not want to go to a traditional bank due to timing and the upfront costs the lender required.  The borrower backed the loan with a four-family apartment worth approximately $200,000 as collateral.

Gary sourced the funds from three different accounts: his wife’s Roth IRA, his Roth IRA, and the balance from his LLC. He submitted a request to have the appropriate proportion of funds sent from the accounts to the borrower.

“The procedure to have the note approved was fast and seamless, and to date everything has worked out very well,” Gary says.

He allocated percentages to each lender so that the borrower makes out three checks per month instead of one. For the portions that came from the Roth IRAs, the monthly income is then deposited directly into those accounts, per IRS rules.

He does not require any appraisal or title insurance since he can review the property history himself as a real estate attorney. He also does not charge points or any prepayment penalty that many other lenders charge.

The terms of the loan are 14-percent interest-only payments, no prepayment penalty, and it included a call (lender can ask for repayment of the loan after five years).

“I have noticed that many borrowers will pay a bit higher interest for the ease of borrowing with our terms,” Gary says.

While Gary’s expertise in the real estate field has helped him quickly grasp the concept of real estate note investing in an IRA, he points out that he never uses his knowledge and contacts to improperly benefit his personal investments or savings.               

“A no-brainer”

Investing in real estate in his community through private lending brings Gary personal benefits he doesn’t believe he’d achieve with other types of investments.

“I am currently averse to the stock market, so I am generating minimal returns in money market funds – a far cry from the 10-14 percent I can generate by note and mortgage funding.” 

Gary’s only regret is that it took him this long to jump on board with self-directed note investing.

“I should have started much earlier using alternative Roth IRA investments,” Gary says, adding, “In the near future, I intend to move my 401(k) and my wife’s 403(b) to Equity Trust Company so we can fund larger transactions. To me, it is truly a no-brainer.”

Lasting benefits

Gary’s goal is to continue with this strategy, creating generational wealth so his family can continue to benefit from similar investments long down the road.           

“The beauty of notes and mortgages is that the majority of the payment, especially in the early years, is mostly interest so that the principal goes down rather slowly,” he says. “This means that you can lend for decades. I have children and grandchildren who will certainly benefit from this wise investment. It is time for me to discuss with my children putting their toes in the water as well.”

Where to start

Gary’s advice to anyone who has not yet begun self-directed investing is to “wake up and smell the coffee,” like he did. He adds, “Where else can you earn a great rate of return and – if you utilize your Roth IRA – receive tax-free interest? The stock market has its place (in a portfolio), but so do notes and mortgages.” 

“As with other types of investments, private lending carries risk, so doing your due diligence is also important,” he adds.

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Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.

Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.