Want to invest and earn income using other people’s money? Sounds like a plan, doesn’t it? And, why not? The concept is hardly unique. In fact, there’s even an acronym for it in the financial world: OPM.
Warren Buffet and many other sophisticated investors invest with other people’s money. Hedge fund and capital raisers carve their niche in the private sector using OPM. However, you’re not a huge corporation and you don’t need a sophisticated, accredited investor’s shrewd prowess. The average person can (and does) use leverage as a tool to invest and doing so has the potential to broaden the scope of gains.
What you may not know is that you can use your IRA funds to lend money to people seeking capital to invest, buy a home, or for any other reason. Or, YOU can borrow money from someone else’s IRA to do the same!
This type of lending is extremely common with people who use self-directed IRAs. Self-directed IRAs allow account owners to invest in a large pool of alternative assets to maximize their earning potential for tax-sheltered retirement income. Those familiar with using OPM to invest enjoy the benefits of earning that income on the terms and interest of loans extended from their IRAs.
A few ways how investing with other people’s money works:
Private money can be raised to invest, but on a smaller scale than you see with sophisticated investors. Startups, business expansions, real estate, and other investments can be funded by pooling other people’s money. You can negotiate repayment in different ways including offering stock and equity in a project, or simply repay the borrowed funds (with interest). Self-directed retirement plans are an excellent source of capital for this purpose.
Partnering funds is common when investors want to acquire larger and more expensive holdings. Partnering reduces exposure in the event of a loss, but when gains are realized within the right circumstances, they can be quite lucrative for all involved. Your self-directed IRA can also partner its funds with another IRA, your personal funds, or another person’s funds to invest.
Hard money loans are quite a bit more expensive in terms of interest but present a viable resource for projects that deliver quick returns. Rehab-and-flip properties are one example as these investments typically turn over in a short period of time. Again, you and/or your IRA can be the lender or you can be the borrower in these transactions
When you use other people’s money to invest, you’re widening the spread for potential gain—but you’re also responsible for bearing a bit more burden of any loss. This strategy is a great tool to help you snap up desirable assets when you have limited funds. But, if the returns net you losses, you’re responsible for covering the portion of the loss incurred by the leveraged portion of the investment.
If you have questions about this article or want more information on how self-directed IRAs work, contact Advanta IRA at 800.425.0653.