Real estate investment provides an excellent way to build wealth, but we understand that some investors don’t like to go through the process of vetting deals, securing financing, buying, making repairs, managing and marketing the investment properties.
For those who are interested in RE investing but don’t want to follow traditional real estate routes, investing in private funds with a self-directed IRA can make a great deal of sense.
Self-directed IRA accounts are great way to invest in private funds, due to the ability to defer taxes and create a reliable stream of passive income. Investors who are new to the RE investing or who want to invest only a limited amount of money are well positioned by considering Private Funds. When you use private funds income to build your IRA, you create a stream of tax-free, passive income.
For many RE investors, the concept of trust deed investing through a single borrower in only one trust deed may seem too risky. While you might be able to get (some or all) your investment back if the borrower defaults, it’s important that you take time to do a due diligence and evaluate the security of your investment when investing in trust deeds using a self-directed IRA. Choosing a private fund can help to diversify the RE investment risks and to increase the potential returns.
What’s the benefit of a Fund?
Private funds are professionally managed. Fund managers use a wide-base of diversification, and the principle of diversification doesn’t stop at the point of geographical areas; it also applies within asset-type, asset-class, investment strategy, business plan, financial structures, sponsors, etc. Diversifying real estate portfolios helps managers to hedge against risks. In a fund, the default of one borrower has a small overall effect on the investments of all fund participants, and when a borrower defaults, investors won’t be individually responsible for taking over and selling the property.
Investors who want to use their self-directed IRAs can leverage fund manager’s diversification to create a stronger blend of balanced portfolio that can offer them both; passive cash flow and equity upside.
Since the manager’s blend portfolio is focused on diverse investments rather than managing individual investments, they keep away themselves from a single-event types of risks, and by investing in different funds , investors can get a pre-targeted monthly income (cash flow) and realize a back-end upside (growth) that can provide them a higher probability of meeting or exceeding expectations!
Private funds make a great deal of sense for investors who want to use their self-directed IRAs to make the most of their investments.
Liquidity in private funds are usually generated either by the sales or maturity of mortgage loans purchased or originated by the fund. Investor’s distributions may only be made to the extent that the fund has liquidity to make those distributions. Most funds cannot use new investor’s money to pay back previous members’ return of investment or preferred returns.
Sums invested in private funds are usually subject to restrictions on withdrawals and transfers. Investing in private funds should be considered only by investors who have no need for liquidity in their investments.
When analyzing investing in private funds, investors should carefully consider business risks, investment risks, fees, conflicts of interest, income tax related matters, and ERISA considerations to name a few.