In this client success story you will discover that sometimes the perfect place to start is as simple as scanning your local newspaper.
Reframe Your Thinking: From Finding an Investment, to Filling a Need
Consider all of the people you know. Consider all of the businesses you frequent or come in contact with. Do you see a need for funding anywhere?
One of the beauties of self-directed IRAs, other than the tax-exempt profits compounded over time, is the ability to invest in almost anything you’re knowledgeable about. While this may overwhelm new investors who do not know where to start, it also provides the investor the ability to identify needs and opportunities in the marketplace that their self-directed IRA capital can fill.
Self-directed IRA investment flexibility has positioned investors to grow their retirement wealth while also filling a need they identified in industries such as medical technology (repairing and leasing X-ray and other machines), musical instruments (renting to students for music lessons), and transportation and logistics (investing in FedEx delivery routes or financing new trucks for a shipping company).
These investors decided to think outside of the box, beyond the most popular asset of real estate, and realized that they can fill a void in the marketplace with funding from their IRA – and earned a tax-exempt profit in the process.
What voids can your self-directed IRA fill?
Deals on Wheels – Helping a Local Business and Building for Retirement
Small businesses (most often defined as those having fewer than 500 employees) are a vital component of the American economy – representing half of the country’s GDP and generating almost two-thirds of all new jobs.
Unfortunately, a myriad of recent regulatory developments and the consolidation among banks has left fewer, and larger, lending institutions for small businesses to turn towards. According to the Small Business Administration
, there was $580 billion of outstanding loan balances at the close of 2013. Furthermore, a recent report released by the Federal Reserve Bank found that more than 50 percent of small businesses reported they were unable to get the capital for which they applied.
Enter self-directed IRA capital.
Equity Trust client, Matt from Pittsburgh has been investing in the stock market from a very young age. Yet despite some success, he wasn’t thrilled with this investment strategy. “I was putting trust and money into people who weren’t doing such a great job,” he says.
A few years ago he discovered self-directed IRAs, opened an account, and transferred his retirement savings. He wasn’t sure what direction he wanted to take, but he took an interest in buying and selling homes.
Matt’s investing started going in a slightly different direction after he began scanning local classified ads. He came across a local used-car dealer who was seeking funding to repave his parking lot. He met with the dealer and worked out a private lending agreement with him.
That wasn’t the end of Matt’s dealings with the car dealership. Through his IRA, he has since provided floor-plan financing to this dealer and other non-franchise dealership owners. The loan was structured as a 1-year, interest-only note with monthly interest payments. The car dealer was required to provide car titles to secure the loan.
Every time the dealer sells a car, instead of paying down the line (since the funds are in an IRA, he doesn't need the principal payments) the dealer pays a title exchange fee of $250 and sends a new title to secure the line. The more cars the dealer sells, the better the returns can be for Matt’s IRA. The model can be tweaked depending on what type of cars (expensive vs. inexpensive) the dealer sells. The principal value of the investment remains the same until the loan is due or the dealer pays it off.
The model works better with low-priced cars, remarks Matt, adding the returns from the loans have remained around 30-35 percent per year.
Here’s a breakdown of one of his loans:
10% interest → $1,500/year
22 cars sold x $250 title exchange fee→ $5,500
$5500 + $1500 = $7,000 yearly income
$7000/$15000 = 46.66%
This type of investment can be ideal for investors without a lot of capital. Many car dealers can buy two to three cars at wholesale pricing for $5,000, Matt recalls.
On top of that, the returns can be perpetual. “As long as the dealer keeps selling cars, the IRA continues to prosper,” he says. “Anyone can do this type of deal; most people know at least one small car dealer that would love to add cars to their inventory.”
The beauty of this type of private lending is that the need exists in every industry.
“For new people who are just getting into self-directed investing, there are a ton of opportunities to do stuff like this,” he says. “It doesn’t have to be cars. There are probably safer or better deals out there, but I happen to be comfortable with the dealers I’m working with.”
Matt suggests looking around the neighborhood for owners of smaller businesses who might need some capital to get up and running or make some improvements.
“Dealing with banks and lenders can be such a pain in the butt; small business owners would do back flips to pay someone 10-12 percent interest if they didn’t have to go through the process of qualifying for a traditional loan,” he says.
This example demonstrates the democratization of capital at work. It’s an example of how self-directed IRAs can help position investors like Matt to profit in their retirement investing beyond the stock market, while also contributing to the well-being of small businesses, their communities, and the American economy.
It also demonstrates the outside-the-box thinking that can lead to investing success. Matt initially wanted to invest in real estate but realized there were other opportunities to grow his self-directed IRA while still having control of his retirement funds. He found a void in the marketplace and used his tax-exempt money to fill it.
Sometimes investment opportunities are less about what you need to learn and more about finding ways to help.