IRAs and Real Estate: What You Need to Know

Many investors are familiar with using Individual Retirement Accounts, or IRAs for short, to grow their wealth in the stock market tax deferred. Did you know that you can take advantage of those same tax benefits when investing in real estate?  It’s true, ever since 1974, IRA and 401(k) account holders have control over how they invest their retirement money.  This means you don't have to invest your IRA or 401(k) into the traditional stocks and bonds. You can invest into tax liens, or even real estate. 

There are many advantages to real estate investing. It can be a great investment for your IRA because real estate can be much safer and more familiar than the stock market.  Real estate is a tangible asset and investment. Real estate investors can see what they are investing in; they can visit their investment; they know if it is being maintained well.  That is why astute investors are starting to turn to real estate investment as a means to support their retirement accounts.  

And still, most investors don’t understand the power and advantage of buying and selling properties through an IRA. Since your IRA is the title holder of the subject property, all earnings from that property are tax free, including earnings from rent, interest, and appreciation of value. Furthermore, your IRA can buy real estate of any property type, such as residential, commercial, agricultural, or unimproved land. 

Investing your IRA into real estate can seem daunting because of the large sum of money that is involved in an initial transaction, but there are alternative methods to raising the capital needed for real estate investment. Non-recourse loans, loans that do not require a personal guarantee, and land contracts can finance the remaining balance not covered by your IRA. Try hedging your risk by bringing in partners! Instead of paying 100% of the purchase cost of a property, consider having a partner or multiple partners invest in the property with your IRA.  Partners can be a person, another IRA, or a company.  

The team at Neighbors Development often brings partners together to invest in various income producing investment properties.  Contact us by email or phone with any questions you might have about investing your retirement accounts in real estate. 

Kevin

Business Development Manager | Neighbors Development

Don't Get Trapped: 3 Lies About Real Estate

When people find out that I sell real estate, they want to talk to me about it. Fortunately, real estate is my favorite topic to discuss. I love real estate.  But, there are so many misconceptions about real estate.  I feel that being able to recognize these lies and avoid getting caught in their trap, is the first key to successful real estate investing. 

1. Your Home is Your Biggest Asset.

"Your home is your biggest asset," is the most believed and dangerous lie regarding real estate. When challenged about this false cliché, many people become offended or go straight to denial. I assure you, your home is actually your biggest liability.  My point is simple. Does your home put money in your pocket or take it out? First, lets count all the ways your home takes money out. 

Expenses:

1. Property Tax.
2. Insurance.
3. Utilities.  
4. Maintenance.
5. Debt Service (Mortgage Payments).
6. Condo or HOA Fees.

Now let's count the ways it puts money into your pocket.

Income:

1. Rent? (Only if you are renting a portion of it out)
2. Sale? (But then you don't own it any more) 
3. My home gained artificial intelligence and got job with a nice salary!

You see? Unless number three happens, your home is a giant liability. The good news is that recognizing your home as a liability allows you to take action. You can turn your home, or a portion of it, into a short term rental (airbnb.com) or long term income property putting money in your pocket. You could go a step further and make your tenants pay some or all of expenses 1-6 listed above, reducing your liability. I suggest before you buy your dream home, buy assets, like income properties, that cancel out your giant liability of a home on the balance sheet.

2.  Debt is Bad.

While getting over leveraged can be dangerous, not all debt is bad debt. Many people want to pay off their loans so they don't have to pay interest. I am always puzzled when someone tells me they don't want to invest their money at a 10% return until they completely pay back the money they are borrowing at 3% interest. At the risk of getting too technical, lets walk through an example. 

Cindy has $10,000 she wants to invest. She can buy stock that is paying out dividends at $1,000/year or 10% annually. Or she can borrow $40,000 from the bank, at 5% interest to be paid back in equal monthly payments over 20 years, to buy a $50,000 income property that profits $5,000/year or 10% annually.

Both investments return 10% of purchase price annually so which is the better investment? The answer lies within the power of good debt. Cindy's Annual Debt Service or annual mortgage payment is a little less than $3,170. This means that Cindy would make $1,830 a year after paying the bank.  An income of $1,830 dollars annually would improve her return from 10% to 18.3% annually on money invested (remember Cindy only invested $10,000 of her own money in the property). 

Now lets say in 20 years neither the stock or the property go up or down in price, when Cindy decides to sell. The stock would sell for $10,000, returning all of the money Cindy invested.  The income property would sell for $50,000 returning an extra $40,000 dollars more than Cindy invested with out going up in price.

This example shows how taking on good debt can allow you to enhance return on investment and build equity in more expensive assets.

3. You Need to be Rich to Invest in Real Estate.

I think a lot of the people who are currently investing in real estate may be the ones propagating this rumor. After all, who wants more competition? The reality is you just need to know where to look to get capital.  If you only have $1,000 and you want to buy real estate then my advice is simple. Find a good deal; then find, partners, grants, or banks to finance the deal. 

The first property I bought was a duplex for less than $15,000. I had partners. We pooled our money, bought the duplex, used grants to fix it up, and then rented it out. We reinvested our profits into more real estate. Just remember you have to start some where.

If you want to learn more about getting started in real estate investment the team at Neighbors Development wants to help. Give us a call or Email us.

Look out for my next article "That Vacant Strip Mall is a Cash Cow!"

Coleman

President & Broker | Neighbors Development