That strategy seems different than what you were initially indicated, in that you don't have non-IRA money invested along with the IRA money. That might be fine. But, you seem to only be focusing on the interest rate aspect of it rather than the other aspects could make something a prohibited transaction.
Yes, i'm modifying the strategy based upon your input to ensure it's safe for the investor.
However, I think you are overstating the "SAFE" aspect of this. There certainly are risks. And if your goals is getting investments from "panicky little old ladies", I doubt you are going to find many that are willing and able to jump through the hoops and keep the records necessary to ensure a self direct IRA investing in real estate doesn't run afoul of any requirements.
Old ladies are one example. Smart business people with money would see the wisdom in this investment as well.
How is it that i'm overstating the "safe" aspect of this? There certainly are risks, yes. However, if we involve a good financial planner on the lending side of things I'm certain we'll be fine. I don't plan on having Grandma do her own paperwork. On the risk of loss side of things, they are also very safe.
Also, I always wonder this (or an appropriate variation thereof) when someone posts a "absolutely safe and incredibly profitable" investment strategy: if the property is worth $100,000, why is the original seller willing to sell it to you for $50,000? And if you can immediately sell it for a profit without any work, what incentive does the original seller have to sell to you rather then the next buyer?
The quick answer is "Motivated Sellers".
The long answer is that we pay cash for the property, we buy it as-is, and this kind of buyer is not easy to find in a hurry. Sometimes we are the ones who find the seller and not the other way around, so there are fewer buyers to compete against. We deal only with properties in foreclosure which means sellers are under a time pressure and if they like our offer, they accept it. If they don't think it's fair, they reject it and try to get a better one. Frequently they'll come back and take our original offer when they find out nobody else will pay as much or move as fast.
Is it hard to believe it's both safe and profitable? It might be. Even so, it happens all the time no matter what you choose to believe.
Who sets the standard on what is a "safe" and "acceptable" return on investment? If the answer is a 401k or IRA at 3-5%, then you are probably asking someone who is investing in an IRA or 401k at 3-5%. Ask the clerk at the store and they'll tell you their bank account at 1-2% interest.
The point is that if you want to be happy with the 3-5%, hang out with people who believe it's safe and the standard, then these figures will always be true.
However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.