Have you always wanted to take the reins of your retirement account and be in charge of what you buy with your money? I think most of us just hope whatever we are investing in makes us enough money to live comfortably on into our golden years. But the stock market can be a real roller coaster, and a drop in the value of your retirement account not only upsets your stomach, but it can have major consequences on you and your family. I remember feeling sick as I watched the stock market take a dizzying drop in October of 2008. What had recently been a record high Dow Jones of 14,000 would end up around 6,500. It made all hard-working Americans question the safety of their retirement nest egg.
I would like to introduce you to another way to grow your retirement account. This idea is not new. It has been available since the 1970′s, but is gaining popularity in these uncertain times. I’m talking about self directing your retirement account and buying real estate with your money instead of stocks. Amongst panicky investors, your stocks can plummet to little or nothing in the blink of an eye. Real estate may fluctuate in value, but unlike stock, it is a tangible asset that you can insure against total loss.
The investment possibilities with your IRA are endless. You can buy rental property or flip houses in Clarksville TN, Destin Florida, Gatlinburg TN, or anywhere you choose. You can partner with another investor, or several investors to purchase a large apartment building or commercial property. Just like stocks and bonds, the money that comes in off your investment goes right back into your IRA.
The Rental Home Example – The easiest example I can illustrate is an individual purchasing a single rental home with their IRA. Let’s say you have $100,000 in an IRA. You would love to get a 10% gain in value on that money every year, but we just haven’t seen those gains in the stock market in recent memory. Most of us are just trying to get back to even. Now you decide that you have had enough with rolling the dice on your retirement and you do something about it. You transfer your IRA to a self directed IRA so you can invest in whatever you decide to. You contact a Realtor and describe what you are looking for. Maybe something in great shape for $90,000 in an area that rents fast and has good schools. May a fixer-upper for $65,000 that you can put a little money into and have some instant equity. Let’s say you go for the $90,000 home. You take $90,000 from your IRA and purchase the home. The home rents for $900/month, or $10,800/year. After expenses you make $9,720 which goes back into your IRA. You keep this home for 5 years and decide to sell it because the renter wants to buy it, and it has appreciated nicely given the school district you are in. Your $90,000 has appreciated at an average rate of 4% over 5 years bringing the value to $109,500. After paying closing costs for the transaction you are left with $106,200. Now add that to the money you have made in rent for the last 5 years, ($9,720 x 5 = $48,600) and your $100,000 IRA is now worth $154,800 after only 5 years. Maybe now you decide to do it again, but this time you have enough money to buy two homes…you do the math this time.
The Flip Example – Maybe you’ve always wanted to flip a home. Now you can do it with your own money. No lenders and no closing costs can often get you better deals when you buy a flip. You are a cash buyer and can expect big discounts. You contact a Realtor and let them know what you are looking for. Soon your phone is ringing and your Realtor has a great deal for you. It’s a $75,000 home that needs mostly cosmetic work on the inside and will sell for $115,000 when it is fixed up. You make an offer to close quickly for $60,000 with no contingencies. After negotiating you get an accepted contract for $67,500. After 30 days and $7,500 in repairs you are ready to sell. The home is in great shape and outshines 90% of the existing homes out there and you get a contract for $113,000 in 60 days. After real estate fees and closing costs you net $103,000. After subtracting the repair money you are left with $28,000. Oh yeah, and you didn’t have to pay interest to a bank each month because there was no loan. I can’t put a price on the amount of stress this saves you, but the dollar amount would be about another $1,500 (4 months of interest).
On a normal flip you would be paying taxes on your profit, but with your IRA your taxes are deferred. If you have a Roth this investment income is tax exempt! You have just grown your retirement account from $100,000 to $128,000 in about 4 months. Now it’s time to find another flip…or maybe you’ll do a flip and a rental this time???
Other Options- If you don’t have enough money in your IRA to purchase a home yet, there are other options for you. You can partner with your own IRA and bring your own cash for the difference. You can partner with another investor or family member with their IRA or cash and gain profit off your percentage of the investment. If it’s a 50/50 split you would get 50% of the money returned to your IRA and your partner would get the other 50%. Finally, if you don’t have quite enough to purchase the home you want, you can get a loan for the difference to make the deal work. This is a specialized product and only a few lenders will handle this for you.
There are important rules involved with this process that you will have to take into consideration. You will have to have a qualified trustee or custodian maintain your assets and keep records of your transactions. I have all the contacts, knowledge and expertise to help with self directing your IRA. I am also a loacl expert in finding suitable investment properties for your needs. If you are interested in using local Clarksville TN real estate to grow your retirement account, instead of some brokerage in New York, just give me a call. I would love to sit down with you and discuss your options!