Self Directed IRA Investing

Besides your Brain, Financial knowledge, and some Common Sense, the most important tool is a Financial Calculator. 

To know how to use one, understand what it does, and how it can help you, a financial calculator will be the single most important thing you can have in your Toolbox.  My calculator has made me more money than any other thing I use to Find and Buy Notes for my self directed IRA.  A financial calculator can save you money once you have mastered it’s use.

There are many different kinds of Financial Calculators out there.  I have an HP 10bII like this one.

This calculator is very easy to learn how to use. It comes with a good manual to learn more than just the basics as well.  I recommend it to anyone who needs a financial calculator and it will pay for itself over and over again. 

I’ll write another post soon on how to use it to calculate Yield, Monthly payments, etc.

Hands down my favorite type of Investment for my Self Directed IRA (SDIRA) are Notes.   I like Notes for 3 reasons mainly.

1. Cash Flow
2. Safety
3. Less Management problems 

Cash Flow is King for me because I can take the cash and buy another Note to make my monthly total cash flow grow bigger. 

Safety to me is having a first position Note, however if the LTV is right for me I’ll invest in any position.  The word Safety to me means that I can, at the minimum get my original invested money back.  I’d rather be in the position of having someone owe a payment to me than owing the payment to someone else as in owning a property.

Managementof Notes for me is usually less time consuming that finding renters and fixing and painting the property so I choose to own the Note on a property.  A lot of the problems can be avoided by screening what Notes you buy.

Will

A Note is short for Promissory Note.  

A Promissory Note is nothing more than a document between parties describing a payment obligation that someone signs because they received financing for something.  Here’s and example, I go out and buy a new Gas Stove from a store and I don’t have all the money.  They offer to finance it for me and I sign a document that says I now owe the Store X amount of dollars for Y term at Z Interest rate.  It also describes what will happen if I pay early, stop paying, etc. 

Here’s another defininiton from en.wikipedia.org/wiki/Promissory_note

“A promissory note is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). The obligation may arise from the repayment of a loan or from another form of debt. For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance. “

Notes are created for just about any service or thing that is sold today:

Real Estate, Mechanic Liens, Yachts, Airplanes, Motorcycles, Cars, Appliances, Businesses, Mobile Homes, Private education companies, etc. 

Will

When I look at an opportunity to invest in something the first thing I want to know is.  What is my Yield going to be?

  I want to know for X amount of dollars I put in I will get back Y amount in return.  It’s not hard to figure out but you do need a tool like the HP 10bII.  The Yield on your investment is not the same as the Interest Rate.  I normally invest in Notes for my Self Directed IRA because they return a cash flow that I can collect and then re-invest it again.    When a bank loans out money, they do this to gain an interest rate in return, or their rent on their money.  To the borrower, it’s the cost of borrowing the money from the bank.  The banks return is the Interest Rate they charge. 

Here’s an Example:

You borrow $10,000 at 10 % interest.  The payment will be $200/mo for 65 months. The Lender or bank gets $13,000.00 in total by the 65th month.  A $3,000.00 gain in profit.

Yield is different, it’s the Return on Investement or ROI. 

When I buy a Note, I buy it at a discount to the Face Interest Rate and Face Value.  The Face Interest Rate is the same thing the bank charges, but when I buy that Note for less than Face Value I’m creating a higher Yield.  The Seller of the Note will sell to me for  a discount because they need cash today instead of next year. 

 Here’s an example using the same numbers as above to help illustrate my point.

You pay $7,000  for the $10,000.00 Note with a Face interest Rate of 10 % interest.  The payment will be the same $200/mo payment for 65 months.   The Yield is 25% because you paid less than the $10,000.00.  The Lender or bank gets same $13,000.00 in total by the 65th month but now you have a $6,000.00 gain in profit because you invest only $7,000.00 not $10,000.00.

I’ll make a post soon on how to use a Financial Calculator to plug these numbers in so you can do this for yourself.

 Will

The words “Self Directed IRA” to me has many different meanings.  On a purely Functional level Self Directed means that after you have identified and done your due diligence for an investment.  You “Direct” your IRA custodian to send money or “buy” it from person X.  Most often using an Escrow company or something like it.  Then in return you get the Documents and either wait for appreciation as in the case for a stock or get monthly payments in the case of a Note or Loan.  Another meaning for “Self Directed IRA” would be that you have the Choice of the types of things you can invest your money in.  As long as it’s not a Prohibited Investment or Investment in Collectibles like these:

• Artworks
• Rugs
• Antiques
• Metals
• Gems
• Stamps
• Coins
• Alcoholic beverages
• Certain other tangible personal property

You can invest in it.  The pool of available investment options just became almost limitless, but most definitely larger than stocks, bonds, mutual funds, stock options, etc.    The best part is that you can use your own creativity to find things that you already know about to invest in your retirement.  I’ll bet that some of those ideas could be pretty cheap to start with and even if you only had $4,000.00 or less to start with you get started right away. “Self Directed IRA” can also mean Freedom.  Not only is it the Freedom of choice as I mentioned just above but also it could mean freedom from fees or at least making sure the fees you are charged are less than traditional investment options.  For me one of the biggest draws was reducing management fees to a yearly fee based on the amount in my account and ultimately capped at what I think is reasonable.  No more 1-2% per year plus transaction based fees, etc.  This is not the biggest cost but every little thing helps and I want IRA funds compounding tax free as much as possible.  If I can save a little now and put it to work at a good interest rate, like 10-12% or more, I know I’m getting ahead.   Another way this is Freedom is of course at the end when you’re in harvest phase.  The work now will be Freedom later.  Compared with just a Savings account below, see what $4,000.00 IRA could be if you added that much to it every year for 35 years.  I’ll let you figure out how much $4,000.00 is per month or even daily.

Years

1

10

20

30

35

Savings

0.0%

$8,000.00

$44,000.00

$84,000.00

$124,000.00

$144,000.00

SDIRA

10.0%

$8,800.00

$80,499.64

$278,920.00

$793,571.31

$1,304,916.97

SDIRA

12.0%

$8,960.00

$91,041.73

$361,380.11

$1,201,010.11

$2,145,050.94

Lastly, “Self Directed” to me means, that after doing all the diligence in looking at an investment and making sure that it’s good for me, that I reap the rewards of it.    I’m responsible for it and I also get the benefits of that work.  The Yield, on the type of investments I have in my Self Diredcted IRA, above 15% are common and it can be even more.  Will

A lot of people contribute blindly to their IRA’s hoping that the 8-10% in interest they earn from a mutual fund over 30-35 years will make their retirement years golden.  To me there is too much chance in that idea. Why give someone else the responsibility and control over your retirement funds?   Don’t get me wrong, I really think folks that are saving in IRA’s and other qualified plans, for their retirement are on the right track.  However I’ve learned first hand over the past few years that there is a better way.  My view is to take the control back and open a self directed IRA and invest in the things that you already know about and or are willing to learn.  That way if you have specific knowledge about a certain sector or busieness you can leverage that.  In a self directed IRA you can invest in just about anything that you want.  Here’s is a short list but not limited to:

1. Real Estate 
2. Real Estate Notes 
3. Private Placements
4. Private Loans to individuals 
5. Of course Stocks, Bonds, and Mutual Funds.  

There is a list of “Prohibited Investments” but that list is quite short and most I wouldn’t consider all that great anyway. 

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

There is more detail in the IRS 590 publication that you may want to read.  I would expect that your IRA custodian would also have more info.  Will 

http://self-directed-ira-bookshop.com/ is now alive.  Stay tuned for how I use my Self Directed IRA to invest for my retirement.  I’ll share with you what I’m currently doing, ideas I have and how you can do it too.    Along with that I’ll write some reviews of books on the subject. Will