Using Self Directed IRAs Creatively

Lending to Fund Non-Profit Organizations

Or How to use your IRA Creatively and Mindfully

Private schools, churches and other non-profit entities, regardless of focus or denomination, frequently have difficulty borrowing funds for building projects.  The addition of classrooms, labs, a new steeple, additional capacity added to an existing facility, or even remodeling of an existing space all take money.  The use of building fund drives has long been the method of fundraising, requiring significant long term planning and the uncertainty of consistent results.  New Direction IRA has seen alternatives to this fundraising approach among its clients.

There is another way.

Ask the members to lend funds from their IRA and other tax-advantaged plans!  Self-directed plans may lend funds and can benefit both the organization and the IRA holder.  IRA lending using a self-directed IRA administrator allows the individual to choose their own investments, one of which can be a loan to the organization.  These loans, for example, could be:

• In the form of a Note
• Can be secured by the organization’s property
• Would represent an investment for the IRA and would have to reflect a reasonable rate of return.
• Would pass the benefit of interest on principal and fees to the IRA account as opposed to an outside lender.

Consider these examples:

The Youth Center

An inner city church has decided to add a teen social center in an existing space currently used for storage.  The 1000 square foot area needs new flooring, painting, drywall partitions and restrooms.  In addition, the furniture and equipment for Friday night movies and a pool table will be purchased.  The cost of this project is estimated to be approximately $50,000.   The youth group will charge for movies and food purchased at the location. 

Funds are raised by creating a $50,000 note which will pay 5.5% interest annually.  The note will be amortized on a 5 year schedule and the investors will be church members’ IRAs.  Let us assume that 5 individuals come forth, each lending $10,000 from their IRA accounts using a self-directed administrator who is responsible for maintaining the tax-deferred status of the IRA accounts.  Principal and interest flow back to the IRA account.  The IRA holder has made a retirement investment that is secure and feels good too. 

The Theatre

A small private school would like to have a venue for school assemblies and theatrical productions.  It is anticipated that this new facility will boost enrollment as the Board has decided to focus on the arts in their curriculum.  They have the room to expand on their current property and approach a local bank to fund the $500,000 price of this addition.  The bank is interested in the project based on the reputation of the school and the predictability of the annual tuition paid by the students but is not willing to provide 100% funding. 

With a $250,000 loan from the bank, the school trustees decide to issue “bonds” for the construction to interested parents and, possibly to alumni.  They structure the issue in $50,000 increments that will be offered in step with the construction.  The interest rate offered will be based on some margin over the T-Bill rate at the time the bonds are issued.  This allows them to only borrow the money when it is needed, thus controlling costs but to offer current competitive rates to their investors.

Wildlife Conservation

Your favorite charity, a bird rehabilitation facility would like to create an educational facility to educate the public on the importance of preserving the habitats of native birds.  The organization already has the land available to place a facility on its property but does not have the current cash flow necessary to secure a bank loan. You have an IRA which can lend 25% of the funds for the purchase of a prefabricated building in order to house the education center.  The remaining funds will come from cash donations and pledges from local businesses.  Ultimately the education center will charge an admission fee to the facility and provide special presentations for schools and other interested groups.  Payments from the organization will be made directly to the IRA and the loan can be structured in a way to both provide collateral for the loan and allow construction draws as the facility is being built.

Many individuals these days want their investments to in some way reflect their personal values.  The stock market does not necessarily speak to some individuals' viewpoints.  What better way to invest, not only in “what you know” but in what you believe as well.

Broker Builds Business Using Self-Directed IRA Accounts

“There are twice as many buyers out there!” exclaimed Realtor® Paul K in Denver Colorado. Paul, after hearing about how he could invest his own IRA in real estate, got to work putting together deals for his and his wife’s IRA.  “If I am to help my clients I will need to do this myself first” is Paul's belief.  After sponsoring a class by New Direction IRA for his investors in January, he feels that the idea is gaining momentum all over the Front Range where there is currently a housing shortage due to displaced former homeowners and low rental housing inventories.  He has a lot of clients who are interested in the “real estate IRA” concept and, because of his knowledge and experience in the process, have come to him when it’s time to make that IRA real estate investment.

It is a smart real estate broker who realizes, like Paul, that for every client that buys or lists a house there is likely a rollover 401k that can be self-directed into real estate and other non-traditional retirement investments.  Opportunities also exist in real estate offices for bridge loans and second deeds of trust for both the brokers and their clients to expedite real estate deals.

Many individuals are tired of their money taking a ride on the stock market roller-coaster and most of them would be interested in self-direction and the world of investment choices available through brokers like Paul and other knowledgeable professionals.  Traditionally most financial advisers have been rooted in securities either through restrictions with the companies they work for or through lack of knowledge about non-security investments.

The IRS states on the FAQ section of their website that “investment in real estate is not prohibited”.  There are rules, of course, such as the real estate must be for investment purposes only and that there be no personal use of the property.  For experienced real estate investors, this and other rules should not present a problem.  The key to investing an IRA in real estate or other non-traditional investments is working with a knowledgeable IRA administrator who provides assistance and education for that first self-directed investment.

We think Paul is on to something.  Dissatisfaction with stock market and the desire to own a tangible asset like real estate will create more clients for a real estate broker like Paul as well as satisfied IRA investors, whether it be on Front Range or anywhere in the country.