Whether you're looking to expand your business or just looking for some extra cashflow, the financial advantages of having ready — and waiting — interest-baring investments are second-to-none. There are a variety of untapped, low-risk, investment opportunities available, but it is a matter of having hinges that are oiled, and a door that will open, when that investment opportunity knocks.

Remember the time when your stockbroker gave you the tip on the stock that tripled in value over the next two weeks, and you didn't act on it in time? Or worse yet, the time that your wife (this happened to me) said, buy that Nordstrom stock while it's still in the 20's and you didn't respond until it was too late?

Well, the good news is that down the road there were many other opportunities. When one door closes another opens. The fellow who said, "Opportunity knocks but once" wasn't really paying attention.

Opportunities with real estate are no different than other more traditional IRA investment opportunities, other than they tend to be more profitable. When one investment goes away, another appears.

To be in a position to take advantage of the best investments, however, you do need to be prepared to act, which is different from being rushed. Approaching IRA investing systematically will prepare you for the next good opportunity and will allow you to capitalize on it. As I mentioned, opportunity keeps knocking, but the door on each opportunity is quick to close. Position you IRA assets so that you can move quickly on the right investment.

Prepare for opportunity

Start by positioning your IRA with an administrator who will allow investment in the products in which you want to invest. If you want to invest your IRA in real estate, limited partnerships and trust deeds, you will want to open an account with an administrator of self-directed accounts that allows this. That will not be your bank or stock broker.

You may have as many IRA accounts as you wish. Identify the independent administrator who best fits your needs, open an account with them and transfer funds from you bank IRA to that independent account. Those transferred funds should then be directed into a money market account or other holding account that is earning and easily accessible.

When you have accomplished the transfer you will be in the position to answer the next knock. What kind of opportunity should you be looking for and how will you find it? It all depends. It depends on your age (how close you are to retirement) and how much more you will need (how much you have already accumulated for retirement).

Rule number one in retirement investing should always be: Never risk the principal. You can, however, make large gains by risking the profit. No investment should be attempted without first performing the necessary research. If you are one of the many who will not have enough at retirement age unless you take at least some risk, be sure to do it cautiously and with confidence. You can obtain that confidence through self-study, past experience, or the use of a professional.

A little more risk, a little more return

An opportunity for larger gains that has been successful in the past is joint venturing in real estate development. This can be accomplished by making the IRA a limited partner and using he IRA to fund some or all of the partnership. If you know of a real estate development that is pending and looks like it is going to be profitable you can approach the developer and offer the services of your IRA. There are few developers that will turn down the opportunity to have funding partners.

By participating as a limited partner your IRA will be limited in its liability and the partnership can be constructed so that the principal of the IRA investment is safe, and the profit, while at some risk, is rewarding. Structure the partnership so that the principal contributed by the IRA is paid back to the IRA prior to all other profits being distributed. This ensures that the IRA will receive its principal first which will reduce the risk to that principal.

The profit (interest, return, yield) should be structured differently. The profit to the IRA can be structured as a stated percentage return, i.e., 15 percent annually, or it can agree to a percentage of the overall profits of the development. If the IRA agrees to a percentage of the overall profits it is usually entitled to a bigger slice of the pie.

Few development investments return the exact profit predicted in the beginning. That, of course, could mean that the profit may be more or less than expected. Many times in the past we have been able to obtain an overall return to the IRA of 30 or 40 percent by participating in a percentage of the profits rather than taking a predetermined annual return.

Steady as she goes

Those of you who are starting at an age which will allow you plenty of time to accumulate your retirement funds should be using a different strategy. The compounding effect of continually reinvesting your retirement funds over time allows the long term investor to seek a lesser yield (less risk) and still reach your goals.

An excellent opportunity is the investment of IRAs in trust deeds. Trust deeds are readily available, can be structured to meet individual needs, are significantly lower in risk than many investments, and still return handsomely over time. Typical annual yields seen in the marketplace today are from 11 percent to 16 percent.

Where do you find them? Just ask around. Everyone knows someone who has sold a piece of property or a home and carried back paper on the sale. Many of those sellers would rather have cash than the income stream provided by the note. To get the cash, many sellers will take a small discount from the face value of the trust deed. It doesn't take much of a discount to sufficiently raise the yield and provide a nice return on your investment.

For instance: Three years ago your neighbor Bill sold a rental house for $100,000 and the purchase paid $25,000 down when they bought it. Bill carried back a $75,000 loan at 9 percent interest that amortized over 25 years. The yield to Bill would be 9 percent if the note paid as scheduled. Bill, however, has two children entering college and can use that money more effectively on their tuition.

Because of the amortization, the amount still owed on the property has now been reduced to $72,247. How much would you have to pay for the note to effect an 11 percent yield to you? About $10,000 less than the face value. Bill will obtain $62,000 cash when he needs it and you will obtain an 11 percent yield. In fact, because rental houses tend to sell long before the 25-year term of the note you will probably get a nice boost to that yield when the note pays off early.

The investment made in the trust dead is secure because of the equity above the $62,000 paid for the note. If the house had not risen in value at all from the time it was sold until three years later when you bought the note you would still only have a loan equaling 62 percent of the value of the house. A continuation of this pattern of investing over several years will produce a very nice yield indeed.

Whether it is trust deeds, real estate, or limited partnerships in real estate, don't rush into an investment opportunity because you're told, "You should hurry, this one won't last long." There will be another opportunity. But you do want to be prepared.

Get your IRA situated so that when you hear that knock, knock, knocking at the door of opportunity you won't miss an excellent chance to increase your retirement funds just because you weren't prepared. It's one thing to pass on an opportunity because you didn't have time to accomplish your due diligence, it's altogether another thing to have passed by a chance at increasing your retirement funds because you just weren't prepared.

A word of caution: there are rules that govern the investment of IRAs of which you need to be mindful. Use the CPA, attorney, and investment advisor of your choice, but do use them.

Copyright © 1996 by Patrick W. Rice