“You don’t need to chase risk to earn 12% returns, just lend to the right borrowers, on the right properties, with the right team behind you.”

Retoro Capital Investments

How to Earn Reliable Cash Flow at Higher Returns and Less Risk Through Real Estate Lending

As we at Retoro Capital lean into our renewed mission to focus on our top 3 investor top priorities, this results in more clarity and alignment for certain investors who use our fund as a financial tool.

We are exploring these investor profiles so you can more easily see if you are a good fit for our investing philosophy.

1. Higher Returns

We seek to exceed average public market returns and pay 10 or 12% APR to our investors who lend to our network of real estate borrowers. Compounded over 5 years, reinvesting those gains can yield over 15% IRR, rivaling more risky equity investments.

2. Less Risk

As lenders, we get paid first before any partners share profits (or losses) on the success or failure of the project. We receive a stated rate of return at 12% from our borrowers that we pass along to our investors with asset-backed collateral. Meaning, if the borrower doesn't perform, we take over the property and finish the project.

This reduces downside risk because we are not profit sharing, we have 1st lien on a valuable property, and we focus on areas where we are experts in Utah, Texas, and Idaho.

3. Giving Back

More money doesn't always mean more time, so we focus on reliable passive investments that give our investors the time they need to spend more time with loved ones, serve their communities, start impact businesses or non-profits, and live purpose-filled lives.

We value helping others solve the income side of the equation so we can participate alongside you as you build good in the world.

Chris and Harmonie Borden, Retoro Co-Founders, have dedicated themselves to empowering others through founding several non-profit organizations, reflecting our investors' values.

Early Retirement Profile

While most of our investors share all 3 of these priorities with us, let's break it down to a few patterns we see among our repeat lenders.

The most common is the "early retirement" profile where investors want to be able to step away from 9-5 work on their own timetable for personal pursuits, career pursuits, serving, or to be prepared in case they or their loved ones need care for aging, accidents, or illness.

As you approach retirement, the shift from growth-focused investments to stable, income-generating assets becomes critical. For accredited investors, particularly ages 50-55 looking to retire early with a secure financial future, investing with us in private real estate loans through a combination of cash accounts and a self-directed IRA can be an excellent strategy. Here's how you can leverage this opportunity to ensure reliable returns and a stable income stream for your own early retirement.

All three of our missions are key for those seeking to become financially free for job optionality. One factor unifies this "early retirement" group of investors: consistent cash flow is a necessity for all of them.

The Appeal of Hard Money Loans

A "hard money loan" is a loan that is underwritten based on a hard asset, like a property, and not on the income or tax returns of the borrower. In case of default, the property will cover any deficit. These loans are for non-owner-occupied properties, basically "flips" run by real estate entrepreneurs. Typically they fund quickly, within 1-2 weeks of application, and have a short duration of 6-12 months. The goal of the entrepreneur is to renovate a property and either refinance to a long-term rental property loan or sell the property.

There are several benefits to investing as a lender in these types of loans.

1. Consistent Cash Flow: Hard money loans typically offer high interest rates, providing consistent cash flow through regular interest payments that outperform public market indices. This predictable income stream can be a cornerstone of your retirement strategy, ensuring you have the funds needed to cover your living expenses without dipping into your principal investments.

2. Shorter Investment Horizon: Hard money loans often have shorter terms, typically 6-24 months. This shorter horizon means you can quickly reinvest your principal, compounding your returns and maintaining liquidity. This is particularly beneficial if you need to access your funds sooner rather than later, or to have a shorter liquidity option than equity investments just in case.

3. Lower Risk Compared to Equities: While hard money loans are not without risk, they are secured by a "hard" asset, in our case real estate, offering a tangible asset as collateral. This reduces the risk compared to equity investments, which can be more volatile and unpredictable. With hard money loans, even if the borrower defaults, the property can be recovered and sold to recoup the investment.

Leveraging Your Self-Directed IRA

Using a retirement or tax-advantaged account can help shield interest income from being taxed as ordinary income. For those aiming to retire early about age 55, they can fund most of their retirement from an IRA after age 59½, leaving only a few years to bridge their target retirement age and penalty-free IRA withdrawals.

1. Tax Advantages: By using a self-directed IRA to invest in hard money loans, you can take advantage of tax-deferred or tax-free growth. Interest income and capital gains generated within the IRA are not taxed until you take distributions (traditional IRA) or could be tax-free if held in a Roth IRA, meaning interest income from the loans is not taxed as ordinary income.

2. Avoiding UBIT and Depreciation: A little-known disadvantage of some IRAs is paying Unrelated Business Income Tax (UBIT) on leveraged real estate investments like equity properties. Using a Solo 401(k) when qualified can remove paying UBIT inside an IRA, and depreciation on a property can offset that UBIT tax because it's paid inside the IRA. However, depreciation cannot otherwise be used by an investor through an IRA.

On the other hand, lenders earn interest income and do not share in depreciation as owners do because lenders are not owners, merely lienholders. Since depreciation is not as valuable inside an IRA, many of our investors choose to use an IRA for lending to shield interest income from taxes, and then a taxable cash account for equity profit sharing and to capture depreciation.

Understanding tax implications helps you make better decisions on what accounts to invest with.

Starting Early Withdrawals in a Taxable Account

For an investor seeking to achieve enough passive income to be job optional by age 55, it's important to plan for that several-year gap before they reach an age to freely access retirement accounts.

1. Structured Withdrawals: Once you reach the age of 59½, you can begin taking penalty-free withdrawals from your IRA. For those looking to retire before 65, structured withdrawal strategies like Substantially Equal Periodic Payments (SEPP) can provide income while avoiding early withdrawal penalties.

2. Non-Retirement Accounts: Investing part of your portfolio in taxable accounts can provide additional flexibility. Although interest income from these accounts is taxable, you can access these funds at any time, offering a bridge until you reach the age where retirement account withdrawals are penalty-free.

Planning for a Secure Retirement

Lending often provides a more stable, reliable form of income with structure payments. It's not an every two weeks thing like we are used to with a salaried position, but the increased predictability to cover most of our expenses is a comfort and smooths the transition to irregular income experienced from other types of retirement investments.

1. Diversification: Even within the realm of hard money loans, diversification is key. Spread your investments across different properties and borrowers to mitigate risk. This approach helps protect your portfolio from the impact of any single investment underperforming.

2. Professional Management: Working with experienced fund managers like us at Retoro Capital Investments can provide additional security. Professional managers conduct thorough due diligence, ensuring that your investments are well-vetted and managed effectively.

3. Reinvesting Returns: Reinvesting the returns from your hard money loans compound to help grow your retirement portfolio. The power of compounding interest should not be underestimated, especially when it comes to building a robust nest egg for your early retirement.

We pay 10% APR for investments under $200k, and 12% for investments over $200k. Reinvesting those gains vver 4-5 years, a 12% APR can compound to 15%+ IRR with much less risk than equity investments predicting similar IRR.

Understanding the Tax Implications

1. Interest Income: Interest earned from hard money loans is considered ordinary income and is subject to federal and state income taxes. However, investing through a self-directed IRA or Solo 401(k) can defer these taxes until you take distributions, or potentially avoid them entirely with a Roth account.

2. Capital Gains: If your investment in hard money loans involves the sale of properties, any gain realized may be subject to capital gains tax. Long-term capital gains, from assets held for more than a year, are taxed at lower rates than short-term gains, offering another layer of tax efficiency.

3. Depreciation Recapture: For properties that have been depreciated, the IRS requires recapturing depreciation upon sale, which is taxed at ordinary income rates. This can impact your net returns, but proper tax planning can mitigate this effect.

4. State-Specific Tax Considerations: Different states have varying tax regulations, which can impact your net returns from hard money loans. Understanding state-specific taxes, such as franchise taxes or additional income taxes, is crucial for optimizing your investment strategy.

CONCLUSION

As an accredited investor nearing retirement, shifting your focus to secure, income-generating investments is essential. Hard money loans offer a compelling option as part of a diversified portfolio, providing consistent returns, lower risk compared to equities, and significant tax advantages when invested thoughtfully through a self-directed IRA. By leveraging these benefits and planning strategically, you can plan for a stable and comfortable early retirement.

For more information on how Retoro Capital Investments can help you achieve your retirement goals with hard money loans for passive income, schedule a call with our team at retorocapitalinvestments.com.