Raising enough funds for investments is a big concern for investors, even for someone with years of experience. The process usually takes time to complete, while some opportunities come and go quickly. What if there is a source of capital that could help you fund your investments without a complicated, lengthy loan application process? This can be a possibility with the concept of a “private bank”, using the Checkbook IRA and Solo 401k investment.
In the US, there is a total of $5 trillion held in IRAs, 401k’s, and other qualified retirement plans. This massive number can be accessible to you through the use of self-directed retirement accounts, such as the Solo 401k and Checkbook IRA.
A private bank is called so because the borrowed funds will come from a person’s Solo 401k or IRA account, instead of a regular commercial bank or other institutional lenders. As an investor, you can reach out to a Solo 401k plan owner, for example, to ask for a loan to fund your investment. Then, you can pay back the borrowed amount plus interest as agreed in the loan terms. For the plan owner, the earnings from this Solo 401k investment will be tax-deferred – or tax-free in case of a Roth account.
Many institutions, such as insurance firms and venture capitalists, have recognized the advantages of raising investment capital from retirement accounts. They have tapped into these valuable resources for years, and you can certainly do so as an individual investor.
What Investors Can Get From the Private Bank Concept?
- Ability to catch time-sensitive deals
- Invest without tying up your personal funds
- Fast and simple process
- Ability to offer cash for purchases and negotiate for a better deal
What Plan Owners Can Get from the Checkbook IRA or Solo 401k Investment?
- Better rate of return than traditional assets such as bonds, mutual funds, or saving accounts
- Lower risk investment: Usually the property acts as collateral
- Passive investment with little to no effort required
- Enjoy tax-free or tax-deferral benefit on all investment earnings
How to Access Your Private Bank as a Real Estate Investor
Find a good deal:
Search for a property with no more than 75% loan-to-value ratio. This will make it a low-risk deal for your lender. Make sure that you have enough time during the contingency period to find an investor that will lend you money. You will also need to generate enough earnings in order to offer an attractive interest rate to your lender. Often, the purpose of working with a private lender is to have an easily available source of funding, even if it means a higher cost of borrowing.
Approaching investors:
Once you have the deal, you can start approaching potential lenders that you know through networking. Make sure to present your case well, offering them an attractive return at low risk. Many choose to offer investors the first lien on the property for security. Don’t forget to remind them of the additional tax benefits from holding the Solo 401k investment within a tax-deferred retirement account.
Set up a Solo 401k and Checkbook IRA account:
Once you find an investor who is interested in becoming your private bank, the process is nearly complete. Your investor will only need to set up a self-directed retirement account, rollover their funds, and then they will be ready to explore the Checkbook IRA or Solo 401k investment options! The only thing left is for you to close the deal and follow through with the investments.