Investing in Equipment Leasing Through a Self-Directed IRA

Published on August 12, 2024

Lease options are among the many alternative assets allowed in self-directed IRAs. Real estate lease-to-buy arrangements are popular; but did you know you can include equipment leasing in your retirement plan?

Historically, local banks and large national financial institutions had a prominent stake in the equipment leasing realm to service manufacturing, trucking and logistics, construction, and other types of clients. However, some have left the sector, creating an attractive asset class for private equity and other investors—including those with self-directed IRAs.

You can use funds in your self-directed IRA to make this investment in two ways: invest in equipment leasing funds or purchase the physical equipment and lease it directly to businesses (in effect, the plan becomes the equipment broker).

How does equipment leasing work?

Unlike equipment financing, which is a form of debt financing (a loan payable at X percentage for Y months or years), equipment leasing programs use operating lease structures that define the arrangement between parties. The operating agreement is essentially a contract that permits the lessee to use the asset without conveying ownership rights.

• If the self-directed IRA has invested in the physical asset, the plan owns it and therefore, the account owner is responsible for vetting potential lessees and creating the lease terms, similar to how one would operate any business.

• With equipment leasing funds, the IRA invests in shares of a fund, taking an equity position in the entity. The fund purchases specific equipment and then leases it to a business that needs it. The business pays a monthly lease payment on the equipment just as it would to a direct investor (the self-directed IRA).

Equipment types for self-directed investment

All types of businesses use equipment of some kind—large or small, heavy or light. There are plenty of investment opportunities if you want to include equipment leasing in a self-directed IRA. Here are some examples across various industries:

• Construction equipment (from power tools to backhoes)
• Farming equipment (tractors, combines, post diggers, balers, and more)
• Landscaping equipment (mowers, fertilizer spreaders, arborist tools)
• Logistics (shipping, trucking, warehouse needs)
• Manufacturing
• Medical and diagnostic equipment
• Computers, software, and office equipment
• Office furniture
• Vehicles (cars, trucks, vans, mobile homes)
• Merchant services/credit card processing equipment

Benefits of investing in equipment leasing

As with many alternative assets, equipment leasing provides consistent passive income through fixed lease payments. The self-directed IRA gets reliable, tax-advantaged cash flow throughout the operating period of the lease. Keep in mind that if the leased equipment requires maintenance or repair, those expenses flow through the IRA.

If the equipment is in good working order at the end of the lease period and the agreement has a clause that allows the lessee to purchase the asset at that time, the retirement plan will receive additional funds (at a profit for the investor). Or the account owner may choose to lease the equipment to another party, ensuring further positive cash flow on the investment.

Leased assets offer portfolio diversification and a hedge against stock market volatility (and inflation), as the lease is not correlated with market performance. There is also potential for high returns, depending on the equipment and current market and sector conditions.

Considerations in equipment leasing arrangements

Bear in mind that the equipment’s value may depreciate over time—which may affect one’s tax situation for good or bad—or that the lessee may stop making payments.

If you are investing in an equipment leasing fund, be sure you understand the ground rules. Some funds require investors to hold shares for the life of the fund (which could be longer than a typical direct leasing arrangement), prohibiting them from selling those shares.

Therefore, it is important to understand this asset class, conduct your full due diligence regarding the investment, and as we often recommend, consult with a trusted advisor before diving in.

Need more information? Next Generation is here to help.

Equipment leasing is growing in popularity as an alternative asset in general and can be a great way to diversify a self-directed retirement portfolio. As a firm committed to investor education, we offer a complimentary educational session to help owners of self-directed IRAs get answers to their questions about this retirement wealth-building strategy—and the many investment options these plans allow. You can also contact our helpful team at NewAccounts@NextGenerationTrust.com or 888.857.8058 during regular business hours.