Real estate investment provides an excellent way to build wealth and equity, but not every investor wants to go through the hassle of buying and managing investment properties. For those who are interested in real estate investing but don’t want to follow traditional real estate purchasing routes, investing in trust deeds with a self-directed IRA can make a great deal of sense.

Self-Directed IRA for Trust Deed Investment

What are trust deeds, and why is it a good idea to invest in them using your self-directed IRA?

As their name suggests, trust deeds are granted to investors who purchase all or some portion of an individual’s debt to a private lender in exchange for a promise to repay the loan plus interest. Trust deeds are offered for a variety of reasons, but in many cases borrowers find themselves unable to make mortgage payments and choose to work with private real estate investors instead of going through foreclosure.

The value of the loan is backed by the property, so if the borrower fails to pay back the investor, some or all of the real estate investment may be recouped by selling the property. Because the loan is secured by the sale value of the property, it’s essential to remember that property value is critical when it comes to trust deed investing. While you don’t need to invest in a property you would want to live in, you do need to invest in a desirable investment property that can be sold at a profit should the borrower default.

As long as you keep the important of property value in mind, trust deeds are an excellent option. Trust deed investment is a well-known and widely used form of real estate investment because trust deeds can offer some measure of security against losses.


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Self-directed IRA accounts are great way to invest in trust deeds, due to the ability to defer taxes and create a reliable stream of passive income.

Investors who are new to the real estate game or who want to invest only a limited amount of money are well served by considering trust deed investing. When you use trust deed investing income to build your IRA, you create a stream of tax-free, passive income designed to secure your future. Though the process might seem confusing at first, trust deed investing via your self-directed IRA is relatively simple:

  • A borrower or group of borrowers executes a note payable to a private real estate investor, which is backed by a deed of trust on a recorded, clear property.
  • The borrower promises to pay back the total amount of the loan plus interest in monthly payments over a set amount of time.
  • Monthly payments are directed to your IRA, which may result in a higher-yielding return for your IRA.

To defer taxes on trust deed investments, investors need to hold the investment in a self-directed IRA account. Compared to traditional IRAs, self-directed IRAs offer access to a much broader set of investment opportunities. This is because most traditional IRA custodians are banks or brokerage firms which limit holdings in IRA accounts to stocks, bonds, mutual funds and CDs approved by the firm. Self-directed IRAs allow investors to hold alternative assets such as real estate, hedge funds, promissory notes, tax lien certificates, private placements and precious metals in a tax-deferred account, in addition to conventional stocks and bonds. At present, real estate and private placements are the most popular alternative asset choices for self-directed IRAs.

What are the advantages and disadvantages of investing using a self-directed IRA? What companies manage these accounts?

While self-directed IRAs offer the advantages of tapping into a much broader swathe of investment choices, there are also unique risks associated with these accounts. For example, some alternative assets are less liquid than stocks and bonds. In addition, self-directed IRAs typically require more research, paperwork and IRS reporting than traditional IRAs, which is one reason that only a handful firms offer these accounts. The principal firms offering custodial services for self-directed IRAs are Pensco, Polycomp, IRA Services, Entrust, and Equity Trust Company.

Pensco, which has offices in San Francisco and Denver, is one of the largest self-directed IRA companies in the country. For those looking to keep their costs to a minimum, one of the advantages of its size is that it can offer lower fees for its services.

Polycomp, which is based out of Roseville, has many investors in the Sacramento area. For Central California investors willing to pay higher fees in exchange for access to face-to-face service, Polycomp is a suitable choice.

IRA Services Trust Company is based out of South Dakota, but has an office in Southern California, and offers their clients a vast array of options for investing in alternative assets.

The Entrust Group, which has been serving clients for more than 35 years, has more offices than most other self-directed IRA administrator. Clients can visit their offices in Santa Monica, Mission Viejo, Oakland, and Morristown (New Jersey).

Equity Trust Company, based out of Ohio, is the largest self-directed IRA custodians in the country, with more than 130,000 clients throughout the country and $12 billion under management.

Take the time to explore your options, and find the IRA administrator with the services and qualities that best suits your needs.

In most cases, setting up a self-directed IRA account with these custodians is as easy as downloading an application from their website, choosing a fee option based on either the number or value of assets, funding the account with a rollover, transfer or deposit and submitting the application along with a copy of ID that verifies your signature.

Because of the extra work involved, investors should expect to pay a slightly higher annual maintenance fee for a self-directed IRA, with fees generally ranging from $100 at the low end to as much as $2,000, depending on your choice of investments. Investors should also not expect investment advice from their account custodian. For those services, investors should rely on their financial advisor, accountant, or attorney.

There are limits, however. Investors must follow certain rules to obtain tax benefits from their self-directed IRA.

Buying or selling investments from a person considered “disqualified,” such as a parent or spouse is prohibited. These accounts cannot be used to buy a rental property for the personal use of the account holder. In addition, the investment must generate passive income for taxes to be deferred. Earnings received from a business in a form other than dividends are considered active income and taxed accordingly. If debt is used to purchase real estate for a self-directed IRA account, some of the income from that investment may be taxable.

The alternative assets held in the self-directed IRA account should be valued at least annually for tax purposes. This is especially important in the case of older investors, who must begin taking annual distributions from their account six months after their 70th birthday. Valuing the real estate in the account may require paying an appraiser. If assets are undervalued, this could result in tax penalties for the investor down the road due to the fact that the annual distributions taken were not large enough.

How do you determine the right strategy for investing in trust deeds?

For many real estate investors, trust deed investing through a single borrower in one trust deed may seem too risky. While you might be able to recoup some or all of your investment if the borrower defaults, it’s important that you take time to thoroughly evaluate the security of your investment when investing in trust deeds using a self-directed IRA. Choosing an investment fund, which works much like a mutual fund, can help to lessen real estate investment risks and increase potential returns.

Investment funds are group-driven funds that invest in a large group of trust deeds, which is another great option for investing in trust deeds with self-directed IRAs. In this system, the default of one borrower has a small overall effect on the investments of all fund participants. Consolidating the investment process into a fund can also make a great deal of sense for busy investors who want to use their self-directed IRAs to make the most of their trust deeds investments. After all, when a borrower defaults, you won’t be individually responsible for taking over and selling the property.


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