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May 22, 2012
As a season ticketholder of the Orlando Magic, this season has been a difficult one to watch. No matter how well the team performs, there is an overarching feeling of dread, as we may be losing our all-star center, Dwight Howard to free agency or a trade. Although the NBA has become a superstar focused league, what is often lost is that it is the rest of the team, and the coaching that creates long-term and long lasting success.
I have found that in watching our clients self-direct their IRA funds into real estate, the consistent performers are those that have surrounded themselves with teammates and coaches that share a common vision and passion for success. However, many still choose either to “go-it-alone”, or more often “follow-the-crowd”. Often partnering in your investments can be a phenomenal weapon in your arsenal to build wealth when investing outside the stock market.
Sharing in the Due Diligence: Our clients at Entrust invest in a wide variety of investments in their self-directed IRAs that require a different type of analysis than stock market choices. For example, when purchasing real estate through their IRA, they may need to assess market value, project rental income, determine cost of repairs, and review property liens. While this may be onerous for an individual, through splitting up these duties – and reviewing each others analysis, it can permit the team to look at many more deals and guide them to a much better decision.
Sharing in the Costs and Expenses: Partners may decide to form an LLC to make investments together, rather than individually go on title. They may also anticipate the benefits of structuring deals in a joint venture or even a taxable corporation. Getting solid legal and tax advice before making the investment is advisable, but can be a bit expensive for the individual investor. Through sharing the costs, partners are less likely to cut corners on legal, investment and other advice that could be critical to long-term success.
Sharing in the Ongoing Work: Partnerships are best formed through the open and honest discussion of what capital and efforts each party is bringing to the investment. In the case of real estate, one investor may be talented in the discovery of underpriced rental properties, while another may be well versed in mortgage sources or able to rehab distressed properties. Many real estate investors do so on a part time basis, and it is only through sharing responsibilities that they are able to balance their full-time work with their investment duties.
Learning from Others: NuView IRA in Orlando is a member of six investment clubs throughout Florida, and as such have seen many mentorship programs offered to first-time real-estate investors. These nascent investors will partner with seasoned, knowledgeable real-estate veterans trading ownership and equity for valuable know-how. By having a partner that directly benefits from the success of a joint venture, not only will the new investor gain critical knowledge, but they also participate in the financial rewards of the results.
Spreading the Risk: When I was much younger, my investments in the stock market were far more risk tolerant. I would move from one hot stock to another – and during the internet boom, many of my picks were right. Now I’m a bit older, and have seen some of those choices go to zero value – I desire the safer refuge of diversification. Partnership provides the ability to diversify – by spreading investment resources over a greater number of choices. Through a self-directed IRA, those choices can include almost any type of investment in real estate, as well as mortgages or other collateral backed lending.
Doing More Deals: As a bookend to diversification, partnering can also result in the ability to get involved in more transactions. If you are not certain whether lending money, backed by a mortgage, is better than investing in raw land, through partnering, you may be able to do both. By being actively involved in multiple deals, the opportunity for enhanced returns can be increased.
Building Strategic Relationships: As I mentioned, IRA investors are often part time – and may have other business interests. Through partnering, their primary businesses can be enhanced through the extension of their partner’s relationships. We have had CPAs who self-direct their IRA into loans that are marketed to local realtors. These realtors have become an unanticipated referral network to the CPA’s tax practice as a result of his lending relationships.
Broadening Contacts: Partnering can be such a good source of marketing to some clients that they factor in the value of their partner’s rolodex. We have several real estate rehabbers who lend their IRA to local hard money lenders – for them to re-loan their funds to individuals that want to buy distressed property. These purchasers of property often are referred to the rehabbers by the hard-money lenders in turn to repair the property. (note: due to IRS rules (section 4975), the rehabber cannot work on the same property that his IRA has lent money to acquire).
Increasing Liquidity Options: When property is purchased within any partnership, other partner(s) are a logical potential buyer. If they choose not to exercise an option to buy, due to their intimate involvement with the asset the remaining partner(s) are likely to be actively incented to find a new buyer to replace the departing partner.
Specialize in What You Know: A key characteristic shared by investors drawn to self-directed IRAs is their desire to put their skills to work in areas that they are learning or have mastered. This is only enhanced through partnering. My talents may lie in doing on-line research – and my partner’s in assessing property values through visual inspection. Together we make a powerful team as we buy tax lien certificates at our local courthouse. Of course, if I have the desire to learn how to assess property, I can extend my knowledge through observation of my partner.
Partnering is not the panacea for the weak hearted, the slothful, or the uninvolved investor. On the contrary, it is for the engaged, motivated, knowledgeable person who desires to multiply his/her strengths through the power of association of like-minded individuals. Harness the power of partnership in your investments, and you may unleash the full potential of your retirement future.
Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando. He can be contacted at 407-367-3472 or email@example.com