Entrust New Direction Blog

Like most Americans, Juan did his best.  He worked 50 hours a week, took his kids fishing in the summer and sledding in the winter, occasionally fit in some golf games with his pals.  Every day, Juan tried to be the best dad, best husband, best friend he could be.  Juan also wanted to provide for himself and his family as well as possible, for now and the future.   So Juan contributed to his 401(k).  He figured as long as they matched 3%, he should figure a way to get that free retirement money, even if it meant a little less income right now.  

Then the stock market sunk and his 401(k) dropped 40%.

Then Juan was laid off.

Talk about a flying drop kick to the stomach. 

While surfing the web, ostensibly looking for a new job, Juan ran across a press release targeting the newly unemployed.   "What? I can invest the retirement money however I want?  No way!  I can't believe it!"  Since Juan was screaming in the empty basement, his wife ran downstairs to make sure the idleness of unemployment wasn't atrophying his brains.

When Juan explained about DIY retirement investing, and the discount, Juan's wife, Jenny immediately thought it was a scam.  "I don't think so.  Why haven't we ever heard about this?  The government is going to let regular people decide what to do with their retirement money?  There must be a catch." 

Still, Jenny had a small hope that this self-directed IRA investing was true, because she knew exactly where to invest some of the money - in her friend's new start-up kitchen gadget company.

Juan continued researching and discovered that there is an entire industry of self-directed IRA custodians and administrators, and one was located right in town!  Juan and Jenny happily transferred the funds from their 401(k) into a new self-directed Roth IRA.  Juan and Jenny took the buy direction letter home, and Jenny called her friend the kitchen gadget start-up company CEO.

Her friend the CEO was so excited, she knew Jenny loved the idea.  But then she  remembered the words of her start-up lawyer, "Accredited investors only." 

"Um, Jenny, are you an accredited investor" the CEO asked, knowing the answer.

Jenny's investment dream was smashed.

Jenny and Juan's IRA was not an accredited investor.

Juan and Jenny were able to find some other investments - they put some money in real estate, some in gold and some in CDs, but Jenny watched her friend's gadget company double, triple and quadruple in size.

Has this happened to you?  Maybe you know of a great investment opportunity but you don't have the requirements of an accredited investor.  Questions?  Watch this blog for more information on accreditation and discussions and what the little person can do.  

Kick photo courtesy of mighty mighty bigmac.

Bottles photo courtesy of shkumbin.

Many Realtors® and Real Estate Investors have been upset and up-in-arms this summer about bill HR1728, which passed in the House and is in process in the Senate.  This bill has admirable, if late, aspects aiming to prevent predatory lending.  That's not what makes many Realtors' stomachs churn.   The bill also takes on seller financing, which is increasingly utilized in a credit-desert environment like ours today.

Seller Financing allows the buyer and seller to work out a deal on payments, frequency of payments and interest rates, independent of banks or professional mortgage companies.  Seller Financing is what allows a self-directed IRA owner to lend money on real estate and create passive income for their IRA.  These deals happen thousands of times each year by real estate investors, IRAed or not.  Many real estate sales could not have happened in this credit-crunch environment without seller financing. Under this bill, an individual is only allowed one seller-financed deal every three years, or else register as a lender.  This is, to say the least, a complicated process.

The National Association of Realtors® initially supported the bill.  From their newsletter May 11, 2009: "NAR is supportive of this bill because it protects both the consumer and housing sector."

However, the NAR swung on this issue.  The latest "news" comes from correspondence from NAR clarifying their position.  The NAR reports that the Senate Banking Chairman, Chris Dodd, indicated that “this issue is not on his ‘mustdo list’".  

I would like you to take the following two messages from this e-mail and NAR. First, the bill looks like it will die due to inactivity in the Senate. Meaning, these requirements, which are not in effect, will not go into effect anytime soon. Second, if the bill begins to move in the Senate, NAR will work diligently to have a full exclusion for seller financing added to the Senate's version of the bill, or increase the limitation so it does limited harm to consumers that have to utilize this type of financing.

This is one case where congress's tortoise pace might be to our benefit as real estate investors and Americans.  

Photo courtesy of MiiiSH.

The EBRI, Employee Benefit Research Institute, makes my job easier and more fun.  They've surveyed thousands of Americans on retirement planning and other benefits over the years, and released many interesting (albeit dry) reports on the findings.  I wish they'd do a report on self-directed IRAs, but considering we SDIRA holders are maybe 4% of the market, we're likely not loud enough to be counted.  Regardless, EBRI's latest indicates that, on average, retirement plan finances aren't as bad as many thought.

For example, while the Dow Jones dropped approximately 35% between Jan 1, 2008 and June 19, 2009 (don't ask me why they chose these dates), the median account balance for retirement plans dropped only 16%.  This number was worse for families who had more than 100k (22% drop) and worse still for those in the top 10% net worth bracket (28%).   Still, that's not so bad. 

As always with the stock market, experts disagree and the regular Joe and Jolene are wondering - why?  Why is the average retirement plan loss (of those surveyed) less than the DJI loss? 

Diversification.

And what is better than smart diversification?  More smart diversification.  Many think their only options are stocks or bonds (with a commission paid to the broker, of course.)  But now is the time to really diversify, especially with more employers no longer matching.  When the stock market drops, you can make money on real estate.  If real estate is rough, you can ride it out with a private placement.  If your mini-microsoft dies, your IRA is making money on the personal loan.

Diversification works for squirrels, who "scatterhoard" their winter storage in many different locations, and it'll work for retirement investment.

Be the squirrel - diversify.

Photo courtesy of Gilles Gonthier