Does that title grab your attention? It sure does for me.
As many of my friends, family and clients know, I have been fairly active and pretty successful in the real estate investment market in both California and Colorado over the past twenty-five years. While most folks tend to assume that the average person needs to save cash for years upon years in order to afford a down payment on an investment property (think, single family home rental properties in Denver suburbs at around $150,000), there are perfectly legitimate, legal ways to use funds you may already have in your possession. I am talking about using a funded 401K IRA account.
Simply put, pursuing this course to finance an investment property, is a matter of comfort level and willingness to be self-disciplined. Most folks prefer to keep their cash for retirement in the stock market and ride out the market corrections for decades. But if you are not like most people, you may want to consider using your current IRA account as a Self Directed IRA in order to enter the investment property business. After you research the subject, and talk those who have done it, you may determine that you can earn a better return on your nest egg by using those funds to purchase investment properties instead of keeping those funds in the stock market. Oh, and as a side note, your money manager will never encourage you to do this, since it would mean moving your funds out of his or her firm's guardianship.
So what about this potential for doubling the return on my investment, I put in the title? Well, here is an example of how you could see such a return on your investment. This example is based on a balance of $200,000 in a traditional 401K IRA retirement account:
Scenario 1: Purchase one (1) rental property at $150,000 with your Self Directed IRA and take in $12,000 per year in rental income for a 8% ROI.
Scenario 2: Purchase two (2) rental properties at $150,000 each with your Self Directed IRA, BUT in this scenario take out a mortgage on each property in the amount of $75,000 each (50% down) and take in $24,000 per year in combined rental income for a 16% ROI.
While in the second scenario, your Self Directed IRA holds two mortgages (at $75,000 each) on your rental properties, you would have 50% equity in each of the two homes, less than $400 in monthly mortgage payments for each home, as well as twice as much rental income per year as compared to the first scenario. You may be asking why didn't I use the entire $200,000 balance from my Self Directed IRA to buy a better or larger income properties? Your lender will require you to leave a percentage or your IRA in liquid cash as collateral.
As you explore the idea of using your 401K IRA holdings to purchase investment real estate, you will discover there are IRS rules and procedures that normally don't come into play if you purchase a property with a traditional, consumer mortgage. For example, neither you, nor any of your immediate family may reside on the property purchased with a Self Directed IRA. Additionally, you will need to use a custodian or third party agency to hold the assets on your behalf, such as New Direction IRA. The custodial requirement is in place to keep the investment property's income and expenses from being co-mingled with any of your other personal assets. Since your investment property will be held by an Self-Directed IRA account, there is a fair amount of compliance to manage, which your custodian can help you understand.
If you want to read our Frequently Asked Questions on the Self-Directed IRA, click here or download our guide here. Or feel free to email me at firstname.lastname@example.org. I would love to help you understand if this might be the right strategy for you.
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