Starting May 28th, through September 3rd, the Next Generation office will close at 3:30pm ET on Fridays.

Investing in Self-Storage Through a Self-Directed IRA

Investing in Self-Storage Through a Self-Directed IRA

Did you know you can include self-storage in your retirement portfolio? Real estate is the most popular asset class in self-directed IRAs—including commercial real estate—and self-storage is a growing segment that offers great potential for self-directed investors. In fact, it is a $39.5 billion industry in the U.S., utilized by approximately 10% of all U.S. households (with tremendous growth potential as Generation Z gets older and Generation X starts to downsize). As of this year, the estimated number of self-storage facilities is over 49,200.

The most common avenues for self-directed investments in this asset class are through promissory notes (lending) or private placements—direct investments in a private entity such as a self-storage REIT (real estate investment trust), C-corporation, LLC or fund. The self-directed IRA invests into those entities, with all income and expenses related to the asset flowing in and out of the retirement plan.

Strong asset class with strong ROI

Investing in self-storage through a self-directed IRA

Before taking the steps to invest in self-storage through a self-directed IRA, there are a few things to note. This must be a passive investment to meet IRS investing guidelines. You, as the self-directed IRA owner, cannot be an active partner, director, or managing member of the investing entity (REIT, fund, LLC)—this makes you a disqualified person and creates a prohibited transaction which can cause your investment to lose its tax-advantaged status. Also, beware of investing in a private fund or company that is owned 50% or more by disqualified individuals, as this would constitute a prohibited transaction. Disqualified persons for this purpose are the account owner, his/her spouse, lineal descendants or ascendants; a beneficiary of the IRA; or plan service providers and fiduciaries.

At Next Generation, we take steps to make investing in all types of alternative assets as easy as possible. Our Starter Kits contain all the paperwork needed to open and fund a new self-directed retirement plan. After you do your research and identify the entity into which you wish to invest through your IRA, we’ll provide you with a list of the documentation required to process and execute the private placement (or promissory note, if lending). You will need to provide our Next Generation team with a buy direction letter, private placement instruction letter and advisory notice, transaction payment method, and outgoing ACH or wire instructions.

We will review the transaction for compliance with IRS investing guidelines and complete the transaction; our custodial firm, Next Generation Trust Company, holds the assets for our clients.

Want to know more including self-storage in your self-directed IRA? Watch this on-demand webinar on the topic, or schedule a complimentary educational session with Next Generation. You can always contact us by phone at 888.857.8058 or by email to with your questions.

Accounts Receivable Financing as Self-directed Investments

Many companies rely on factoring to help them through a cash flow squeeze. A factoring transaction is one in which a business sells its accounts receivable (its open invoices) to a third-party entity—usually a specialty finance company called a “factor.” Factors are not banks and the funding they provide is not a loan.

The factor pays cash up front to the business for a portion of the receivables and then collects the amounts due on the invoices directly from the customers. The factor then pays any open balances to the business, minus its factoring fees. The service fee is how factors make their money.

Through these transactions, companies receive cash quickly on their receivables which can be used for inventory, payroll, equipment leasing and more. They may choose to factor invoices on a seasonal basis or during an emergent cash crunch, when waiting 60 or 90 days for payment from customers is not financially tenable. Organizations may choose a factor over a lending institution due to issues with credit ratings or an aversion to taking on debt associated with a loan.

These cash advances may be non-recourse or allow for recourse (depending on whether collateral is involved).

Accounts receivable financing through a self-directed retirement plan

Specialty finance companies are not the only entities that can buy invoices and earn a fee for collecting the payment. Self-directed retirement plans can also include factoring among the many alternative assets these plans allow. As with any factor, the self-directed retirement plan gains value by collecting fees from the client.

As with all self-directed transactions, it’s up to the account holder to work out the terms of the transaction with the business owner whose company is receiving the funds; to conduct due diligence to verify that the invoice is as expected and the customer can pay; and protect against the possibility of non-payment. All expenses and income must flow through the retirement plan.

Here’s one example of how factoring through a self-directed IRA works:

Let’s say your friend owns a commercial painting company and has a contract with the municipality to paint the schools in the district during the December school break and over the summer. Your friend’s company completes the work during these time periods, bills the town for the contracted amount, and then typically waits at least 30 days for those invoices to be paid. Meanwhile, the painter needs supplies or needs cash to make payroll.

You and your friend discuss the situation and you decide, as someone with a self-directed IRA, to advance the cash needed; the retirement plan becomes the factor of these receivables. You and your friend also agree upon the discount (the factoring fee). As the factor, the self-directed retirement plan will receive full payment of the invoice when the municipality pays its bills, and pay the balance owed to the painting company minus the negotiated factoring fee. The investment return comes back into the IRA tax-deferred or, in the case of a Roth IRA, tax-free.

If you already have experience with these types of transactions outside of an existing retirement plan, you might want to consider further diversifying your retirement portfolio by including factoring in a self-directed plan. Our professionals at Next Generation Trust Company can answer any questions you have about the many options and benefits of self-direction as a retirement wealth-building strategy. You’ll find our Starter Kits and other forms on our website, and a team of knowledgeable professionals available to help at our office. Contact us at or -888-857-8058 if you need help getting started or want to discuss alternative assets allowed through self-direction.