A common challenge to investing in real estate is not having enough cash to act quickly to take advantage of the deals you find. I would like to introduce you to a funding source from which you could easily and quickly draw upon funds to finance your investments. The Private Bank Concept is simple yet overlooked by many. For many investors, they simply have asked friends and family to invest in their deals. The professional method of raising money from other "cash rich" investors can be uncomfortable. However, most of these investors need and want safe, healthy returns on their money. YOU can be the opportunity they have been waiting for.
Recent estimates place over $4 trillion within IRAs, 401(k)s and other qualified programs across the country. These funds can become available to you through the utilization of self-directed IRAs and the proper application of these funds to profitable real estate deals. In fact, when you pass through all the hoops, IRA funds can be used for many different investments. The only challenge is an investment must pass the "tests" set forth by the government and not violate a few rules such as:
1. No management of the fund can be performed by the owner of that fund or his/her immediate family.
2. No personal guarantee can be placed on any IRA fund. Most loans are not qualified for IRA investing.
3. Profits from the IRA must stay in the IRA. To avoid penalties, distributions need to abide by IRA guidelines.
The "private bank" concept is borrowing money from an individual's IRA (not a financial institution) for investments. For example, an investor can borrow money from someone else's IRA to complete an investment and pay the IRA back an amount of interest that is agreed upon in advance. Since IRAs are an exempt entity, interest earned on the money loaned is tax-free or tax-deferred depending on your type of IRA.
Lending institutions, insurance companies and venture capitalists have been using similar concepts to raise money for years. By utilizing self-directed IRAs, you can apply this concept to your investments, allowing you to become more profitable and stay ahead of the competition.
Create Your Own "Private Bank" in 3 Easy Steps
The following is a real estate Private Bank example, but this concept can be utilized with other investments such as notes, tax liens, and private placements.
1. Find an investment property and negotiate a 75% or less loan-to-value ratio to give your investors safety for their investment. Build in enough gross profit to pay your investors an attractive rate of return. Remember, it's not the cost of money, but the availability of it, that is important. Finally, leave yourself enough time, through a contingency clause, to find your investors.
2.Present the deal to potential investors, including friends, family, business acquaintances and local professionals (e.g., doctors, lawyers, and business owners). It is important that you offer an attractive rate of return and explain the security they have in the transaction by offering them the first lien on the property. Remind your potential investors that, in addition, their returns will be able to grow in a tax-deferred or tax-free environment, depending on which type of IRA they have. Be sure to under promise and over deliver on everything you say. Utilizing their funds once is good. Having availability to their funds over and over again is brilliant!
3. Now that you have the investment and investors in mind, the final step is to open an Equity self-directed IRA for each investor.
Once your investors have established their accounts, and the particulars of the investment have been agreed upon, you are ready to utilize these funds for your investing strategy.
"Private Bank" Advantages
· Allows you to participate in more deals
· More deals = More profits
· You are able to offer cash for investments to receive deep discounts
· Beat out your competition
• Free up personal money for personal needs
What You Avoid by Creating Your Own "Private Bank"
· Lengthy committee approvals
· Bureaucratic red tape
· Potential credit risks
• Tying up your personal funds
For more details on earning double digit returns on your money (IRA or otherwise) contact Doug Crowe at dcrowe@themayanislands.com.
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