I have long advocated investing in under market value properties in cash, rather than investing in the stock market. I once had nearly $100,000 invested in the stock market, and lost almost half of it during the crash after 9/11.
As soon as that happened, I pulled my money out of the stock market, moved to Texas, and began to invest in San Antonio investment properties.
My under market value strategy is as follows:
- Buy a house in cash for $25,000.
- Perform $25,000 or so in rehab.
- Resell with owner financing at 10% interest, at a price of $79,000 or so.
- Typical rate of return is 14-16% per year, with no maintenance costs.
What do you think, investors? Does making 14% per year steadily sound like a good proposition? Can you do that in the stock market every year for 10 years or more? And can you enjoy regular cash flow from your stock market portfolio? Many investors only realize their gains if they cash out – if the market does not tank and they lose half of their portfolio as I did!
My distressed properties may look like a risky investment, but looks can be deceiving! When you invest all cash in a piece of real estate property, you do not have a mortgage. And, when you owner finance the property, you get steady real estate cash flow each month, and you do not need to do landlording repairs either.
Here in San Antonio, my below market value properties always make a steady rate of return no matter what the larger economy is doing.
How to Invest in Real Estate with a Self-Directed IRA
I always buy my houses in cash, but many investors have cash in their IRA and they want to learn how to invest in real estate with IRA. This can be a great strategy, if you buy the right kind of real estate. More investors than ever are deciding to invest in real estate with self directed IRA – Kiplinger’s says that there has been an 82% increase in the purchase of real estate investments from inside an IRA.
But, funny, many people with IRAs still do not realize that they can invest in real estate. The ERISA statute only states that IRAs cannot be invested in collectibles, some precious metals and life insurance. But other than that, you can invest in almost anything you want.
Investing in real estate with a self directed IRA is still a rather ‘niche’ business. As of 2012, there was about $95 billion in self directed IRAs. But many investors in the middle class are now getting in on the act.
There are some things to keep in mind if you want to invest in real estate with an IRA:
- No self dealing: This is where the IRA owner cannot invest in something that benefits themselves certain members of their family. If you make this mistake, the entire IRA could be taxed!
- You cannot mingle non retirement funds and your IRA funds. So, if you buy one of my houses for $25,000 cash, you cannot write a check from your personal bank account that your IRA is going to purchase. The money must be in your self directed IRA.
- Note that you cannot deduct expenses of owning real estate from inside your IRA. However, your real estate cash flow will collect over time tax deferred. Personally, all I care about is cash flow, not deductions, but your preferences may differ.
- If you rent out the property, all expenses must be paid from your IRA, but with owner financed properties, which is what I do, this is not an issue.
Note that the custodian for your self-directed IRA cannot give you any advice about the investment in real estate. They just take directions from you, the real estate investor.
Also note that the title to all assets in your IRA are vested in the name of your custodian, for the benefit of your IRA. All proceeds from asset sales or any real estate cash flow must go back into your IRA. You can set up an LLC if you like, but some experts say it is not necessary.
An IRA is actually a trust and it has its own set of rules and protection of assets.
In the end, investing in real estate with an IRA can be a great choice for retirement….if you invest in the right sort of under market value properties.
Many of my cash buyers who used to invest in California investment property, San Francisco investment property, San Diego investment property and Los Angeles investment property now invest in San Antonio investment properties using their IRAs. Imagine – earn 14-15% ROI every single year with your self-directed IRA, and never have to repair a house! That’s what my investing system in San Antonio investment properties offers.