5 Benefits of Investing in Equipment Leasing with Your Self-Directed IRA
The beauty of a self-directed IRA is that your investment options are almost limitless. You have the power to diversify investments across alternative asset classes such as real estate, cryptocurrency, precious metals, peer-to-peer lending, self-storage units, and so many more.
While perhaps not the most glamorous investment option, one alternative asset that has huge potential is equipment leasing.
You can invest your self-directed IRA savings into equipment leasing funds, or you can become an equipment leasing broker in which you own the physical equipment and lease it to businesses directly.
What Does it Mean to Invest in Equipment Leasing?
Investing in equipment leasing is different from equipment financing. Equipment financing is similar to debt financing, while equipment leasing programs typically use operating lease structures to define agreements between the lessor and lessee. Equipment leasing operating agreements often provide the lessor with a bit more protection than debt financing agreements.
As stated above, investors interested in equipment leasing have two overarching options: investing in physical assets or investing in equipment leasing funds. Those wishing to invest in physical assets will be responsible for operating their equipment leasing business, as well as ensuring proper underwriting processes to properly vet potential lessees.
Recently, the most prominent players in the equipment leasing game (i.e., local banks that wanted to accommodate their manufacturing clients or large national companies such as GE Capital) have exited the field. Therefore, equipment leasing has become a more promising asset class to private equity investors and other accredited investors.
Types of Equipment You Can Invest In
The types of equipment you can invest in and lease to businesses are many. Perhaps the most common type of equipment leasing that comes to mind is construction equipment. And with 2021’s housing supply and demand driving the existing white-hot real estate market, some investors are banking on projections for increased construction activity in the coming years.
But construction equipment is far from your only option. Other opportunities for equipment leasing include:
Landscaping equipment
Computers and office equipment
Computer software
Construction and renovation tools
Vehicles
Farming equipment
Medical equipment
Diagnostic testing equipment
Merchant services and credit card processing equipment
The wide array of options available for equipment leasing allow investors a unique opportunity to invest in industries and businesses they expect to grow over the next few decades. Of course, there are always risks associated with any type of investment, which is important to keep in mind as you consider your options.
5 Benefits of Investing in Equipment Leasing
Below are five benefits – or opportunities – associated with investing in equipment leasing. Depending on economic and industry conditions, one or more of these benefits may not apply at a given time.
1. Consistent income stream
Perhaps one of the greatest advantages to investing in equipment leasing is the cash flow opportunity. Similar to rental income from real estate investments, fixed lease payments provide investors with consistent, reliable cash flow throughout the operating period of the lease.
And unlike residential real estate investments, equipment leased to businesses doesn’t require as much overhead maintenance and upkeep. Of course, as industrial equipment is used, it does require some maintenance, which is an important consideration to keep in mind.
However, once a typical 4-5 year lease operating agreement expires, the equipment is usually paid off. Subsequent lease placements or extensions are all profit for investors.
2. Diversification opportunities
Equipment leasing is typically thought to have stability of principal, which means that it has historically demonstrated its ability to withstand market volatility associated with stocks and bonds. This characteristic makes equipment leasing an attractive diversification option for investors looking to safeguard their retirement nest egg without sacrificing the opportunity to earn high returns.
Additionally, because equipment leasing investments do not have close ties to general market performance and other similar economic indicators, equipment leasing may be an opportunity to hedge against inflation (which is a concern many investors are grappling with at the time of writing).
3. Strong collateral
Equipment leasing (and other types of leasing) often provide lessors with a unique collateral benefit: a purchase money security interest (PMSI). A PMSI protects the lessor in case the lessee stops making lease payments and gives them first rights over other creditors. A PMSI typically provides the lessor with even more protection than a lien.
4. Tax advantages
Equipment leasing also provides the investor with more tax advantages than equipment financing. Because leased equipment is expected to depreciate (often dramatically), lessors may be able to take advantage of significant tax benefits through depreciation tax credits.
5. Potential for high returns
Because of the vast opportunities for different types of equipment leasing and financing, it’s not possible to provide hard data on the historical returns investors have enjoyed from equipment leasing. With that being said, historical returns as quoted from the industry may fall between 8%-24%.
It’s also worth noting that institutional investors have recently been targeting commercial and industrial equipment leasing as an ascending asset class. While that in itself is not a sole reason to invest in equipment leasing, investors who have other experience in rising industries such as construction, technology, medical innovations, and others may find that investing in equipment leasing is a good way to profit from the growth of companies in these sectors.
Risks Associated with Equipment Leasing
Whether you invest in equipment leasing funds or become or purchase equipment to be leased, there are of course risks associated with this type of investment. Like many other alternative options, equipment leasing is a relatively illiquid investment.
In fact, some equipment leasing funds may not allow you to sell your shares, requiring you to hold your shares for the life of the fund. Equipment leasing fund lifetimes may be as long as eight years or more, but this varies by fund
As with any type of investment, returns on capital are not guaranteed, nor are returns of capital. Just like any other asset class, equipment leasing investments are subject to general and industry-specific economic conditions that may have adverse effects on your investment.
Start Investing in Equipment Leasing with Chicago Trust Administration Services
At Chicago Trust Administration Services, we help investors invest in what they know to increase their likelihood of achieving a secure retirement using a self-directed IRA.
Whether you want to invest your tax-advantaged retirement savings in equipment leasing, real estate, precious metals, or something else entirely, we are the custodian you need to help you avoid prohibited transactions and adhere to IRS regulations while enjoying more freedom with your investment opportunities.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.