When the Feds raised the contribution rates for non-working spouses from $250 a year to $2,000, they opened the door to a whole new variety of investment vehicles, including real estate investing.
Let’s see how. The first requirement is you have to have an IRA, SEP-IRA or a Qualified Plan, such as a Keogh, or be the decision maker in a multiple employee plan such as a 401(k) that contains at least $20,000. (Anything less than that amount will result in fees that aren’t worth the rate of return.)
Fees for administering your IRA or other plan are usually based on the total asset value in your account, and can range anywhere from $600 a year to more than $100,000.
Next, you need to have an account or plan that allows for complete self direction – meaning you can make the decisions for where that money is invested. The good news with a self-directed plan is that you get to make the decisions and do all the work. The bad news with a self-directed plan is that you get to make all the decisions and do all the work. Oh, that’s the same thing?
What that means is that you really do get to do all the work – you find the properties, or the assets that you want to invest in. The custodian/administrator can provide you with the plan capability and expertise to assist you through the process, and should be able to complete the record-keeping, compliance issues and administration portion of the investment.
Although an additional annual contribution of $2,000 to an IRA doesn’t sound like much, over time it adds up. The average return on investment (ROI) for this type of investment ranges between 8 and 12 percent. For a married couple contributing $40,000 ($2,000 annually for each person) over a 20 year period, at 8 percent the investment would grow to about $100,000. So real estate, as usual, is an excellent investment vehicle.
Real estate investing can improve investment yields dramatically. Some investors have used their IRA’s and Qualified plans to yield a return of more than 30 percent!
Obviously, to generate that kind of ROI the investor has to really work at it. One of the most common methods has been buying rehab property – using the fund money for the down payment, financing the rest on a short term note outside of the plan, and then flipping the property when the rehab work has been completed. The most difficult part of this scenario is finding a lender who understands the intricacies of this type of transaction.
Twenty years ago (back in the dim past of the 1980’s) there were a lot of lenders and mortgage brokers that understood these were equity-only loans, and the lenders almost always had the plan owner personally guarantee the loans. (Not the trustee of the IRA – that’s illegal.) In today’s markets, you’ll see many private lenders taking advantage of this type of investment.
Part of the reason real estate investments continues to be such an attractive investment vehicle is the volatility of the stock markets. Back in the boom days of the markets, and before the “dot.com” bust, investors looking for a quick buck and a rapid rise would follow the crowd to Wall Street. But with the economy facing uncertain times, those investors are coming back to the tried and true venture that will give them a solid investment foundation – real estate.
And here’s a final benefit to using your IRA or other retirement account to invest in real estate: the return on your assets is tax deferred, which translates to tax-free until your start withdrawing them without penalty, usually after age 59. How could the government have let this happen?
Allowing investors to reap huge rewards using their retirements in a manner that’s completely legal! How shocking (and rewarding!)
