Non-Traditional Investments

Life Settlements

A life settlement is simply the sale, or transfer of ownership, of an existing life insurance policy to another party. Typically, the individual selling the policy no longer wants or needs it, and desires to sell it to a third party, often a group of investors. These investors purchase the policy at a discount to its face value, keeping the policy in force until maturity. Upon maturity, the investors receive the full face value of the policy as their return on investment. These funds return to your self-directed IRA and remain tax-deferred or tax-free, depending on the type of IRA.

The typical policy is purchased from someone over 76 years of age with a definable life expectancy. The owner has decided that the policy is either no longer affordable or necessary, and thus chooses to sell the policy rather than let it lapse. These special use policies might be for Estate Planning, Key-Man or Large-Loan policies. Typically, these policies are $1 million - $20 million in face value.


Real Estate

The first thing to remember when your IRA purchases real estate is that the property is for investment purposes only. Your IRA must take title to the property. For example: Custodian Name FBO (for the benefit of) John Smith IRA. Your IRA may purchase property from an unrelated party (anyone who is not disqualified). Any income from the property such as rent goes back into the IRA. Likewise, any expenses, such as property management fees, maintenance etc. are paid from your IRA. It is advisable to use a property management company to avoid any prohibited transactions. When the property is sold funds also go back into the IRA and remain tax-deferred or tax-free if using a Roth IRA.

There are various ways to purchase real estate. You may form an LLC and pool different funds together to purchase. For instance, you may use your IRA funds together with personal funds, a non-recourse loan, or with other investors. These different entities all own a part of the LLC, percentages being based on the amount of money invested.

Below are just some of the types of real estate you can invest in with your IRA:

  • Residential homes, condominiums, duplexes, four-plexes
  • Commercial retail, apartment complexes, office condominiums, homes
  • Industrial manufacturing, warehouses
  • Land

A non-recourse loan may also be secured to purchase investment real estate with your IRA. Typically the down payment for these loans is 30% to 40%. Guidelines for these loans do not normally use credit scores or income for loan qualifications.


Mortgage Notes and First Deeds of Trust

Types of Mortgage Instruments

Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.


The Mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.


The Deed of Trust

The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.


Tax Liens

Payment of a tax lien may occur through various methods:

  • Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage company will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
  • If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
  • Procedures vary from State to State. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).


TICs (Tenants in Common)

TIC ownership is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Through TIC ownership, the average qualified owner of investment real estate is able to enjoy ownership in an institutional-type property with a lower or smaller investment.


Private Placements

A private placement is a direct private offering of securities to a limited number of sophisticated investors. It is the opposite of a public offering. Securities issued as private placements include debt, equity, and hybrid securities.

An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits.

A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.

IRAs can own stock or membership interests in a company. It is important to note in these situations that compliance will scrutinize the investment for any violations of prohibited transactions (i.e. self-dealing, related-party transactions, etc.)

As with any investment, you should consult an attorney, tax professional or your financial adviser to determine if investing in any of these items is right for you.