As the saying goes, “It takes money to make money.” Nowhere is this truer than with high-value—and potentially quite lucrative—alternative investments. Private assets like real estate, private loans, and private equity have the potential for meaningful appreciation, sometimes in short periods. Further, in real estate and certain private equity investments, your dollars can be paired with debt to increase the equity return.
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In addition to leverage, what else can you do to maximize your investment dollars? First, you have the option of partnering your account with other investors on the same asset. For instance, your self-directed IRA, 401(k), or Health Savings Account can purchase a percentage of an investment. By doing so, your account will receive a proportionate percentage of the returns while covering a proportionate percentage of any expenses.
Below we present three ways your self-directed plan can increase its buying power and potentially expand the range of investment assets available for you. You are limited only by your creativity in assembling your financing sources.
As mentioned, your account can partner with others on an investment. For example, if you have your eye on a $250,000 piece of real estate but only have $25,000 in cash, you can buy 10% of the asset and other investors can fill in the remainder. Whether you have one partner buy the remaining $225,000 or nine other investors chip in for $25,000 apiece, there is no limit to the number or scope of partners that an investment can have, provided the money is accounted for separately and the percentage of the earnings is proportional to the percentage of investment. In many instances, you may also be able to sell your stake without affecting the other positions.
Just as you can partner with another person, you can also partner with other self-directed accounts as well. In our prior scenario with ten investors chipping $25,000 each, any one of them can join you in using their tax-advanced plans to buy their stakes. Nothing would change from your standpoint except you would be in good company with a fellow self-directed investor!
Keeping with our $250,000 property example, let us say your self-directed IRA has $25,000 and you have $50,000 in personal money. Your self-directed IRA account can buy a 10% stake and you can separately buy a 20% stake as a personal investment. You can even partner with your own self-directed accounts if you keep the money and earnings separate for each respective account. You cannot retain earnings attributable to either account’s investment, nor may your account benefit from your personal investment or the other account’s investment.
“Aren’t there a series of IRS rules that prohibit me from self-dealing?”
Yes, these rules exist, but they are designed to prevent an account holder from deriving direct benefit from or providing direct benefit to the account itself. They do not, however, prevent you from partnering with other accounts you own or others, even disqualified persons, in the context of receiving benefit through usage. Importantly, because each investor has their own independent position in the asset, an account holder and his or her account can work side by side rather than one benefiting illegally from the other. As partners, you and your account(s) would be regarded as individual investors even if you share an asset.
Don’t hesitate to access your client portal at portal.ndtco.com and send us a message with any questions we can help you with. You can also give us a call at 877-742-1270.