6 Ways Your Self-Directed IRA Can Invest with Limited Funds

This article covers six ways your self-directed IRA can invest with limited funds. Because, even the most seasoned investors had to start somewhere. And, if you’re new to the freedom of self-direction, you may decide to start small until you get the hang of it. Thankfully, there are many different ways to invest with limited funds in your self-directed IRA or solo 401(k).

In each investment strategy below, your retirement plan is considered the investor. The asset is titled in the plan’s name. Income is deposited directly into your self-directed IRA or solo 401(k) on a tax-sheltered basis.

Assets You Can Invest in with Limited Funds

1. Mobile homes

Affordable housing is crucial for many people in lower-income brackets and for retirees on fixed incomes. Mobile homes cost these individuals and families less to own and maintain than a house that comes with property. Even retirees who Female investor sitting at desk on her laptop learning how to invest with limited funds.enjoy much higher income brackets prefer the ease of mobile home life to owning a single-family home or apartment living.

Mobile homes also cost less to invest in and maintain than single or multifamily dwellings. This is why many individuals use them to build retirement income. Less expensive assets like these make it a bit easier to invest with limited funds.

There are a few ways your IRA can invest in mobile homes. You can buy a mobile home that is located in a mobile home park. You can invest in single mobile homes that come with the land they are parked on (much like investing in a single-family home, but less expensive). Either way, your IRA earns tax-sheltered income on renting it or selling it. You can also purchase an entire mobile home park to earn a bit more lucrative, long-term rental income.

2. Tax liens and deeds

Tax lien and deed investments are inexpensive and can produce quick returns. When property taxes are in arrears, municipalities often hold public auctions to sell liens and deeds to investors in order to maintain adequate operating capital. Investors who win the lien and/or deed bids pay the taxes, fees, and penalties owed to the municipality.

With tax liens, the investor receives income through a set interest rate and fees. The majority of liens are paid in full to the investor within one to three years. Depending on the situation—your IRA has the potential to earn consistent income on the repayment of these notes. In cases of default, you can take possession of the property and earn additional income when you rent it, flip it, or sell it. In tax deed transactions, the investor takes immediate possession of the property and can renovate it to rent it out or sell it.

Your IRA is the investor in either transaction. Therefore, all income from liens and/or deeds is deposited into your IRA on a tax-sheltered basis.


3. Private mortgages and loans

Your self-directed IRA can lend money through online platforms and to individuals that you know or become connected to on a personal level. This is a favored strategy for those who have limited funds to invest.

Peer-to-peer lending platforms are popular because they require less capital to invest. The premise is to make several small loans to a few different people and reap potential returns that can further grow your investing capital. The income your IRA gains through these transactions is earned on the interest of the loans. The income from these transactions is earned on the interest of the loans.

In private lending investments, your IRA is basically the bank and extends loans to individuals who need cash. For example, let’s say you have a friend who needs $5k to pay off a debt. Your IRA can loan that cash to your friend. Your friend signs a promissory note to repay the loan in a certain amount of time at an interest rate you set. Because there is no collateral attached to this loan, you can charge little higher interest rate—let’s say 12.5 percent instead of 6.25 percent. Depending on the length of the loan, your retirement plan has the potential to score a good return on that investment.

4. Private equity and stock

Private equity and stock options do not always involve sophisticated investors with the required net worth of the Warren Buffets or Mitt Romneys of the world. There are many options available to non-accredited investors. For instance, you can buy one or more shares of stock in a private company whose goal is to go public within a year or so. The U.S. Securities and Exchange Commission (SEC) regulations also allow businesses to set up crowdfunding deals for their private stock for non-accredited investors. And, your self-directed IRA can do the same. Depending on how well the company performs when it does go public, that stock can sell for a much greater price than it cost.

Funding Strategies You Can Use to Invest with Limited Funds

5. Partnering funds

These transactions help reduce investment buy-in costs as well as offset risk potential. Pooling funds is common in both lucrative and less expensive investing opportunities. Your IRA can partner with your personal funds, with another IRA, person, or entity to invest. The returns are based on the percentage of your IRA’s buy-in. So, if your IRA purchased 40 percent of an asset, it receives 40 percent of any gains. It’s also responsible for 40 percent of expenses related to the investment.

6. Non-recourse loan

Your IRA can take out what is called a non-recourse loan to help purchase an investment. This is a common way your IRA can invest with limited funds in the real estate realm. Let’s say your IRA doesn’t have the funds to buy a home you want to use as a rental asset in your plan. Your IRA can take out a non-recourse loan to finance a portion of the purchase. The property is used as collateral to back the loan. The loan is titled in the name of your IRA. If the loan goes into default, the only asset the loan company can access to recoup unpaid funds is the collateral property. Your personal funds, IRA funds, and assets don’t come into play.

It’s important you understand your IRA will earn unrelated debt-financed income (UDFI). This is the amount of income attributed to the percentage of the asset financed by the loan. This means your account is subject to unrelated business income tax (UBIT). However, the tax only applies to the percentage of earnings of the financed portion. Discuss this with your tax professional to determine.

Closing Thoughts

All income in a self-directed plan is tax-deferred or tax-free depending on the type of plan you have. The gains your account earns creates capital for future investments. If you make the right choices and your assets perform well, you have the potential to grow funds in your account at a faster pace than returns on bonds, mutual funds, or CDs.

To learn more about how to invest with limited funds in a self-directed IRA or solo 401(k), contact Advanta today.

Additional reading on this topic:

2 Ways Your Retirement Plan May Owe UBIT and 3 Ways to Avoid It

Podcast: The Secret to Flipping Mobile Homes

How a Private Mortgage Works in a Self-Directed IRA or Solo 401(k)

5 Steps of Tax Lien Investments in a Self-Directed IRA

What Are Alternative Investments? Here’s a List of 120+ for You & Your SDIRA

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About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.