Plan by Investing in Mortgages: Part II
This is the second in a six part series of articles on using your IRA to invest in non-traditional investments such as mortgages.
“Macroeconomics is what happens to everyone else’s IRA, Microeconomics is what is happening to mine.”
Not a classic academic definition on the order of John Locke, Adam Smith, and John Keynes, yet one that resonates in today’s uncertain economic times.
While most of us do not have a first hand perspective on the great depression, many of us recall the impact of gas shortages in the ‘70’s, 18 percent mortgages in the early ‘80s, the first gulf-war in the ‘90s and the economic and emotional damages that remain from the 2001 terrorist attacks. The current cauldron of tightened credit, newly restrictive bankruptcy laws, energy price hikes, and slipping European economies have undoubtedly exacerbated the economy.
By looking at our stock accounts, we are asking, “are we at the bottom yet?” When should I make a move? When will the real estate market rebound? Emotionally, it is a bit draining, especially when played out against the backdrop of all these economic bailouts. Yet, time does not stand still – and we must earn a living or our investments must earn a positive return, despite our current environment. Have you heard of self directed IRAs?
Credit is drying up for the investor, with banks unwilling to offer even well qualified borrowers access to capital for real estate investments. It is the perfect time to be a lender through your IRA. Banks are paying depositors less than 3 percent on their deposits. The opportunity clearly lies in the spread – or the margin the bank makes between what it pays depositors and what it earns from borrowers. There has never been a better time to take advantage of this spread and become a nontraditional lender.
Right now, a large majority of IRA funds are parked in money market funds, given the significant volatility of the stock market. According to BankRate.Com, the average CD yield is currently at 2.65 percent, while the average two year fixed equity based private mortgage is at 12 percent. Clearly, this is a huge opportunity to grow your money fast. Through a self-directed IRA, you can provide loans to for a commercial or residential property which is secured with a first mortgage.
Based on your comfort with the investment and the rate of return offered, you may choose the higher returns of being a lender, rather than simply a depositor. The rate for the loan is negotiated between the borrower and the IRA account holder. Once the funds are issued to the borrower, all payments are made directly to the IRA administrator. The benefits are clear the lender earns a higher rate of return, secured by real-estate, all in a tax deferred fund.
Through a self-directed IRA or an individual 401(k) plan, the power of choice can be a compelling prospect for both the IRA holder and the user of those funds. Private placements, tax lien certificates, and direct ownership of investment real estate may also be accessed through a self-directed IRA or 401(k). So now may be the best time to ask yourself about your IRA and put it to work, potentially increase your return.
As always, surround yourself with good advisors and don’t be discouraged – the best opportunities are often found when no one else is shopping.
Mr. Navarro is the President and founder of Benworth Capital Partners in Coral Gables, Florida. Benworth Capital Partners is a privately funded hard equity mortgage lender. Mr. Navarro has quickly made Benworth Capital Partners the preeminent hard equity company focusing on South Florida. This has quickly earned them the right to be named the “Hard Equity Experts.” Mr. Navarro can be reached at 305-445-5223 x202, or email: [email protected].
