It’s critical that you know the in’s and out’s of self-directed IRAs when you are raising private money. I often teach this as part of the seminars and webinars because it’s so critical. After all, what better way to pull in capital than to tap into underperforming IRA assets? (if you’re not doing this right now you should be)
While this may seem a little bit simplistic, I assure you it is not.
Why?
Because working with self-directed IRAs can be a real challenge. And, depending upon the IRA company you are working with, it can be a total nightmare.
The reason is this: your private lender is going to need a certain level of involvement. The more involvement they have, the more the timing of the fund movement is out of your control. Not much you can do there. However…
Problems emerge when all does not go smoothly in the IRA setup, transfer and funding.
You see, SD IRA’s are a 3 part process.
First the investor must establish an account to receive funds into. Then, they must transfer/rollover/fund the account. Next comes the placement of the funds into your deal (note or equity, depending).
Usually the opening of the account is the easiest part. Simple application and pay a processing fee.
The next two parts are where it can get tricky….The rollover/transfer/funding of the account comes next. I always try to get my private investors to liquidate the necessary funds at their current custodian and transfer the cash proceeds to the SD IRA company. Try to avoid ‘rollovers’, where the private lender is cut a check from their old custodian and they have 60 days to reinvest it in a tax-deferred account. This is a real pain because it takes long (for the mail to arrive and the check to clear the new SD IRA company). Plus, the old IRA company might withhold 20% of the proceeds in taxes, which further compounds problems.
If the investor is funding their account brand new, fine. The only (potential) problem with this is the amount. For new funding, the annual contribution amounts will apply and you won’t be looking at very much capital.
But I can’t stress enough the importance of learning how this whole process works. It will do wonders when you sit down to present your opportunity to the private investor and you will further establish your positioning and credibility. Incidentally, if you read my last post about Positioning, where I encourage you to position yourself as an expert to your private investors, SD IRA’s are a huge opportunity where you can do this. Very few people know about this and you can use it to your advantage.
One way to learn on the fly – baptism by fire – is to set up your own self-directed IRA account. Go through the entire process yourself. Even if it is just $1,000 (or less) and you loan your money to another (trustworthy, of course) real estate investor. You can get a good return on your money and you’ll know first hand what it’s like to go from start to finish.
Frankly, I think this is the best way.
The other way is to go through the process with your private investor. You must know some of the in’s and out’s, but you’ll just be taking it one step at at time. You’ll want to call the IRA company in advance of the next step and speak to an actual rep about what needs to be done. Don’t rely on webinars or the online/paper instructions. These are never adequate and all I have seen fall woefully short of giving you the info you need for a good and seamless transaction.
Another thing you should be conscious of doing is managing the private investors expectations of the process. They are going to have slightly more involvement in getting things going than they would if they were opening up an online stock trading account (b/c the paperwork for that set up is largely automated and the SD IRA is not).
I often get asked to recommend self-directed IRA custodian companies and I have, in fact done this in my book and private money getting system. However, I have stepped away from this in recent months as the service levels have deteriorated horribly at one prominent self-directed IRA custodian. In two weeks I had two major private investor issues to resolve with them and it was a complete breakdown of communication. Nothing was done on the custodian company’s part to provide anything resembling good service. The reps were ignorant of even the most basic of investment concepts. Seems as though they are trying to become more profitable by skimping on good help. Never a good idea.
I digress…
I’m looking at new IRA custodians and I will be trying a few one’s out in coming months. Of course, I’ll keep you posted on any breakthroughs.
Leave A Reply (No comments So Far)
No comments yet