USE A SELF-DIRECTED RETIREMENT ACCOUNT FOR INVESTING

Would you agree that the average person does not understand the stock market and even if they do, that world events and public sentiment towards the economy make it very volatile? Yet most people have their retirement funds in an IRA or 401(K) that invests in stocks, bonds or mutual funds.

There is a product available called a Self-Directed Retirement Account.  Mitt Romney has millions in his account.  You get to choose what you want to invest in.  Life Insurance and collectibles (like Art and antiques) are pretty much the only things off limits.  Like normal retirement accounts, the maximum you can contribute to an IRA or 401(K) is $17,000 per year and the assets inside the account grow tax deferred.

Invest in what you know or with someone you trust.  I invest my retirement money in distressed residential real estate in South Florida.  The first property that I purchased was a mildly distressed home.  I paid contractors to fix up the property then hired a property management company to manage the property as a rental.  The property was purchased and renovated for about $55,000 and I rent out the 3 bedroom, 2 bathroom home for $850 per month ($10,200/year).  Let’s say property taxes, insurance, property management fees and repairs account for $4,000 annually.  I’m putting $6,200 into my account each year.  Not great but hey, it was my first IRA investment.  The big payoff will come when the market comes back (probably 10 years from the initial investment in 2010).  What I haven’t told you yet is that the property was a builder foreclosure.  It was brand new and never lived in.  To buy the land and build that home even in today’s market in South Florida would cost over $150,000.  So, when I sell the home, all of the proceeds go back into the retirement account tax deferred.  A Self-Directed Account is better used for investments that will have explosive growth.

If you have the expertise, you can buy one to two distressed properties each year, fix them and resell to a retail buyer in the same year.  If you don’t have the “know how” or desire to do that much work, you can lend your retirement funds to someone that is a real estate investor.  This is called Private Money Lending.  If you don’t know any real estate investors, you can lend indirectly through what is called a Hard Money Lender.  The Hard Money Lender connects you with the real estate investor and takes a commission in points.  Points are a percentage of the loan amount.  The investor then pays the interest on the loan directly to your Retirement Account.  The rates for these types of investments are 10 to 15% in general and the investment is secured by a lien in first position and a note.  In essence, your Retirement Account is the bank (lender).  It is my opinion that this is a safe investment.  You are lending on undervalued real estate that increases in value as soon as the renovations are made.

There are several companies out there that administer these Self-Directed Retirement Accounts.  I started out with Equity Trust.  There is also a product called a Checkbook IRA.  The checkbook feature is great if you are going to do many transactions.  Any of the Self-Directed accounts cost more to manage than a traditional IRA or 401(K) because they require more work and maintenance.

There is an organization that promotes Self-Directed investing.  Check it out along with the TODAY SHOW video.  Retirement Investing Trust Association

To be totally transparent, Finance and Real Estate is my area of expertise.  I studied this field at the University of Arizona and have experienced all facets of real estate in my personal life as a corporate relocation 7 times.  I have had my FL Realtor license since 2006 with a designation as a Certified Distressed Property Expert.  In addition, I have studied and coached with many experts in the field.  You must complete some type of due diligence when investing in real estate whether consulting with a Realtor who specializes in investment property or someone that you trust that has done this type of investing themselves.  You make money in real estate when you buy and recognize the profit when you sell.  Long term “Buy and Hold” investment properties should ALWAYS provide a positive cash flow and should not be based on speculation.

Because of time constraints with my family, I have been investing in Real Estate as a lender for three years.  In 2013, A-List Homes LLC will be purchasing and renovating properties in South Florida.  Please contact me if you are interested in South Florida real estate.

 

 

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