Self Directed IRA Investing

So now you’ve read some of my Blog and see that I’m currently investing in Real Estate Notes in my Self Directed IRA and have cash flow coming in every month. 

Now your ready to open up your own Self Directed IRA to start your own investing program.  If you have an IRA already but it’s not Self Directed you can roll that over into a SDIRA if you like, or just open up a new one and try it out.   Just be aware of how much you contribute to make sure that your not going over the allowed limit for the year.  Also be aware of taxable events for example, if you roll over a traditional IRA into a Roth.  I would also take a little time to look at what each custodian offers to make the best choice for you.     

Until a few years ago there were just a few choices but today there are quite a few.  Here’s a list of the Self Directed IRA Custodians that I know of.   *****I’m merely listing them on my blog not advertising for anyone in particular or getting anything for it*****.

1. Equity Trust
2. Pensco Trust
3. GuidantFinancial
4. Sunwest Trust
5. Check Book IRA.com    
6. Viking Bank  a local bank for those of you in Seattle, WA.

The above list is certainly not all the SDIRA Custodians, just the ones I know about. Use Google to possibly find more.   All of their websites are quite complete with specific information about how to use their services.   Equity Trust is the only one I know of that has a blog as well.

 I hope this helps those wanting to get started but not sure where to start.

 Will

The 4 Step Grand Plan:

1. Use my Self Directed Roth IRA because of the TAX FREE benefits.  I’m also betting that all the rules pertaining to it stay the same.  I expect to be able to contribute 4,000.00 per year to it for the next 25 years.  If I stop adding additional money every year then I will end up with less but it will still be over 2 million.

2. Because of the Power of Tax Free Compounding, also known as reinvesting profits with the principal, my account will be able get to the 4 million mark in the allotted 25 years.  If I had to pay taxes on all my gains then it would be much harder and take much longer to attain this lofty goal.

3. I’m starting with $52,216.00 in my Roth IRA.  I rolled over several IRA’s and a 401k to get that much together in my Self Directed Roth IRA account.  You can see that from my last post   http://willsugg.com/irablog/2007/08/10/i-have-4-notes-in-my-self-directed-roth-ira/ what I had in cash, because of what I paid for the Notes I currently have in my portfolio.

4. If you throw out the highest Yield of 72% in my current portfolio, and average the rest.   I’m investing at 17%.  I expect to be able to continue to find good Note investments for that return or greater, as needed in the future. 

If this sounds too good to be true here’s the math broken down for every 5 years to prove it.  The chart below shows that I start with $52,216.00 add $4,000.00 every year and invest at 17%.

If I cannot contribute to my Self Directed Roth IRA account every year due to something like income limits, I can still reinvest the cash flow my investments produce.  Assuming that I keep the rest constant I will have $2,645,149  for Retirement.

I’m sure someone will also point out that in 25 years my account will be worth 2.6 to 4 million but it won’t all be in cash.  That is correct, but I will expect that the cash flow my Self Directed Roth IRA portfolio produces at that point will be quite welcome and I can start selling Notes when needed.  I also expect that I will have bought a Vacation Home using my IRA money along the way, as well as diversifying into other asset classes as well.  It’s going to be an interesting 25 years, that’s for sure.

Will

Currently, I have 4 Notes in my Roth Self Directed IRA plus some cash.   They are not all the same type of Notes either and are not all secured by the same type of collateral. 

Here’s what’s in my Roth Self Directed IRA:

1 Mobile Home Note

2 First Position Mechanic Lien’s

1 First Position (T-I-C) Hard Money Loan.

Plus $6,680.51 in Cash.

Those 4 Notes produce a positive cash flow of $1052.13 */ month for my Self Directed Roth IRA.  In case your wondering what the Yield is on these 4 Notes I’ll break them down for you.

As you can see by far my best Yield is on the Mobile Home Note.  When my cash accumulates enough I’ll buy another Note to increase my cash flow. 

If I can do this, you can too…..

Will

* I’ve subtracted the Note Collection fee of $10.00 / 2 notes.

Today I’ll go over how to use a Financial Calculator for investing in Notes for your Self Directed IRA.  The one I use and like is the HP 10BII like this one.  In this post I’ll show you how to calculate a straight payment for a note and also how to figure out Yield for a Note you buy at a discount.

It’s quite easy to learn since there are really 5 keys you need to memorize.  However for this post I’ll go over the main 4 and leave the 5th for another day.  Once you have those down there is no limit to the amount of money this machine will help you make on your future transactions.  Please keep in mind all the key sequences I’ll go over work on the HP 10BII, I’m not sure about others except that the 5 basic keys will be on every financial calculator.  If you don’t have the 10BII either get one or read the manual that came with the calculator you have.

The Keys you need to learn are on the top row and labeled N, I/YR, PV, PMT, FV. 

N is the number of periods that you are going to calculate for in easy terms it’s for Months.

I/YR is interest

PV is for Present Value or the amount of the Note.

PMTis for the payment / month.  Entered in as a negative.

FV is for Future Value….I’ll cover this in another post. 

Since we now know what the keys mean all you have to really do is enter in 3 and solve for the last one.  Some examples will help explain better. 

Remember, I’m no math phd. and I hated “Story Problems” in school too, but I can do this and so can you.  I’ll bet though if the story problems in my school would have been about making money instead of how fast the car is going I would have paid more attention.   Story Problems that involve making money are very interesting to me now.

Before we begin make sure that your calculator is set up to figure out a monthly payment.  To do that turn it on and press 12 then the orange key then the PMT key.

Here’s a simple example.

1. Note:         10,000 ( Key in 10,000 then press  PV)

2. Term:        60 months (Key in 60 and then press N)

3. Interest:  12% (Key in 12 and then press I/YR )

4. Payment: ?????  ( now just press PMT)

The Result: is 222.44 per month.  Congratulations you just figured out what the monthly payment would be for a 10,000 Loan or Note for the above terms.  Notes are simply that easy.  This is one way to find Notes, is to create them.  The next time someone you know & trust needs to borrow some money you can now figure out the math to write on the a Promissory Note you either buy, or write up your self.  I would suggest that if you do, do that and create your own Note you that you secure it with some type of collateral that the borrower wants to keep and get back. 

Now that you can figure a Payment, try adjusting the Interest Rate to 20% and then Solve for Payment.

1. Key in 20 and press I/YR

2. Press PMT and you get 264.94

Go back to the original example by entering in 12 into I/YR,  and change the Months to 15 to see what happens to the payment.

1. Key in 15 and press N

2. Press PMT and your result is 721.24

Now you’ve see where once you enter in the 4 values you can change 1 and solve for another without having to enter in everything every time.  It saves you time and you can quickly see what different values can do for different scenarios.  That can be helpful when you are evaluating a Note to Buy.

For the next example I’ll get a little more complicated and show you how to figure out Yield.  Yield as I describe in another post, is your ROI or Return On Investment expressed in %.  We’ll use the same terms as above however we’re now BUYING the NOTE from someone else who needs to sell it. 

Let’s say we negotiate a good price for the Note because they have 5,000 in Credit Card debt they want to pay off, we offer 5,000 and they take it.  You already have the above example keyed in and see 222.44 for the Monthly payment.  You only have to now enter in the price you are going to PAY for the 10,000 Note into the PV and solve for I/YR. 

1. Note:         10,000 ( Key in 5,000 then press  PV)

2. Term:        60 months

3. Interest:  ??? (Now Press  I/YR, This is going to be your ROI)

4. Payment: 222.44 

 Result: you get 48.41 % that’s going to be your Yield or ROI.  It’s going to be hard to top that Yield in the stock market or any market for that matter!

If you don’t think you’ll be able to find ones like this go more conservative and enter in 8,000 in PV and you will get 22.33% for your Yield.  If you understand the Value of what the 10,000 is secured by you can then become a shrewd investor offering what you think is the best deal for the risk you understand.  These are the basics of using a Financial Calculator and in a future post I’ll write about how to Calculate Future Value or FV. 

 If you do this type of investing in your Self Directed IRA, as I do, it will no doubt grow.  With compound interest it can grow faster, and if you use a ROTH IRA your harvest will be TAX FREE!   For me that’s what it’s all about!

Will

For my first book review I decided to read Patrick Rice’s “IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment”.   I had heard about the book from some friends and wanted to add it to my RE book collection. 

The begining of the book starts out with 7 Rules that are easy to follow.  Some are common sense but nevertheless it’s good to remember them.   They are:

1. Set -up Self Directed IRA
2. Transfer 401k money if possible to it.   
3. Learn the IRS rules that govern IRA’s
4. Learn all you can about RE Investments
5. Do your Homework
6. Be Prepared to Act
7. Invest new money into your IRA every year.

I followed them before I knew them all as rules and I’d argue there needs to be 1 more.  Number 8. Use a Roth IRA whenever possible for tax free distributions. 

Rice’s analogy of an investor being the Captain of your own ship really hits home with me.  I can completely identify with that by having my own “Crew” help me navigate the RE Investment waters.  He keeps this theme through out the book and to me that helps make the book easy to read and not become a tired and boring book of IRS regulations.

He describes when to use the different people in your team, which is helpful to remember that it’s easier to do this with the help of others than by yourself.  One Team member I think he may have left out is a good “Note Servicing Company”.  They help collect payments and send it directly to my IRA which makes this more of an automated process.  When a payment is late they tell me.

Rice goes in to some decent details about how you can work with family members while investing the funds of your self directed IRA.  His descriptions of what makes a true Prohibited transaction is very helpful in figuring out who in your family is eligible to invest with.  I think that part of the book is the best explanation I’ve read to date and one of the most useful parts of his book.  The chart is on page 132 fig 7.1.

Another technique that I am actively seeking to use with my next few Note purchases is T-I-C or Tenancy in Common.  On page 71 Rice describes how this could help get bigger deals done by partnering up with others.  With this the partners are in the same Position in the Note but hold a percentage of it based on how much they contributed to buy the Note.  You could then split the cash flow based on the percentage of ownership or in the case of buying a Rental Property on the sale the profit would be split in the % each T-I-C has.   

To me the single most important reason I like this book is that it opened my eyes a little wider.  I have to confess I buy Notes for my Self Directed IRA for the cash flow they provide because I’m building up reserves right now.  However Mr. Rice describes a way for someone to Buy a piece of property for retirement not just cash flow.  You buy a piece of property that you will want in your retirement years, like someplace in Sanibel Island Florida, Jackson Hole Wy, Seattle, WA with your IRA funds.  Rent it out until you retire for the cash flow and then on retirement take the property as a distribution.  Now you have your vacation home paid for and can use it as you like without any worry of prohibited transactions. 

To me understanding this and reading it is worth the price of the book and why I think everyone should get Patrick Rice’s IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment.  Today!