How to Double Your Retirement Overnight

The following is a hypothetical model based off of an investors figures he figured on this actual property.

Back in 2007, the average IRA that was transferred to a self-directed IRA was about $200,000. After the crash in 2007-2008. The average value of IRAs decreases to about half, thus putting the current value at $100,000.

We will be walking through this example of a $200,000 IRA in a real-life scenario to show you how you can double your retirement overnight.

The investor purchased a rental property at the height of the market in the name of his IRA. The investor is utilizing a self-directed IRA where he can purchase alternative assets, NOT taking a distribution from your retirement account.

The property was purchased for $180,000 in a self-directed IRA coupled with a non-recourse loan. The investor was able to leverage the funds in his IRA to purchase an investment property.

What the investor had to put down on this property to qualify for a non-recourse loan was $63,000. The remainder was a loan from the bank in the investor’s IRA. The IRA will have a mortgage and a deed of trust that goes inside of the IRA. The investor does not own the property, the IRA does.

The market value on the day that IRA closed on the property increased the value to $217,000. Let’s break down how this happened; $180,000 on the property and $37,000 cash. The day before the value was $100,000.

If you recall the original value before the crash was $200,000, then the market crashed which brought the value of the IRA to $100,000. The current value was able to double overnight by using other people’s money through a non-recourse loan.

When the investor calculated this investment he chooses to calculate the value of the investment now and projected value in the future to determine when and if he would like to sell the property.

The investor projected about a 3% capital appreciation on this property per year. This percentage is based on the market value of the property at the time of purchase ($180,000). The property should make about $5,400 per year and the investor plans on holding this property for 10 years. After 10 years, the capital gain is estimated to be $54,000.

At this point, we are 10 years after the purchase. The investor’s calculations are almost spot on, the calculations fell a little below 3% but has caught up recently. The original idea was to sell this property after 10 years.

The value of the property and cash in the self-directed IRA is now $271,000. Remember, the investor started with only $100,000 in this IRA. You may be saying, “yes, but there is a loan on the property.” You are correct. However, the investor paid more than the minimum of $700 per month on the loan. This property is currently producing $1,350 per month in income. The net income has been about $900 after setting aside money for property taxes, management fees, and repairs that must be paid by the IRA. After 10 years of paying more than the minimum, the balance is now at $40,000. If the property would have been sold at 10 years for the IRA would receive $231,000 – the investors IRA only put $63,000. That is about 30% per year average annual return on this investment in a tax-sheltered self-directed IRA.

Here is a table to show how the IRA doubled overnight:
2007 IRA account value $200,000

 

After crash IRA account value $100,000

 

Investment Property Purchased:
Funds from IRA $63,000

 

Funds from non-recourse mortgage $117,000

 

New value of IRA + Cash Funds $180,000 + $37,000

 

Long-term Investment Calculation*:
Capital Appreciation at 3% times 10 years $54,000

 

10-year appreciation $271,000

 

Loan Payment at $900 per month (-$40,000)

 

IRA Tax Advantages Appreciation $231,000

 

*Estimated by investor, not advice

If you would like to learn more please visit our webinar, Alternative Asset Allocation Model 

Using a Self-Directed IRA To Purchase Property

When investing in real estate with a self-directed IRA, there are a few rules the account holder needs to be aware of so they don’t get penalized. Here are five rules pertaining to purchasing real estate through an IRA:

  1. Cannot be Owned or Rented by Disqualified Persons

An IRA cannot purchase a property already owned by the account holder. It is also prohibited from purchasing property or selling property to disqualified persons. A Disqualified Persons cannot rent the property from the IRA, this created a prohibited transaction. Visit the Mountain West IRA website to learn more about who is considered a disqualified person.

  1. No Indirect Benefits

The account owner cannot use the property the IRA has purchased for a vacation home or as an office space for themselves. Investments are for benefits at a later date, not right now. If the property in some way benefits the account holder or a disqualified person, that is considered an “indirect benefit.”

  1. Titles

Account holders need to view their IRA as a separate entity. As such, investments are titled in the name of the IRA, not the investor themselves. Properly titled investments make the transaction clear and easy to follow when purchasing real estate in an IRA.

  1. No Out-of-Pocket Expenses

Every expense related to the property in question must be paid for through the IRA. This includes improvements, taxes, home owner’s association fees, maintenance, and more. Paying for such items outside of the IRA could lead to penalties.

  1. Buying Real Estate

With a self-directed IRA, the investor does not have to purchase the property outright for the full amount. Options like partnering with others or using a mortgage are also available.

For more details on the process of investing in real estate with a self-directed IRA, visit the Mountain West IRA website.

The Basics of Mortgage Notes

To diversify their portfolio, investors sometimes need to think outside the box. This means considering alternative investments such as mortgage notes. Investing in mortgage notes allows investors to get involved in the real estate investing world without flipping houses or vetting tenants for rentals.

When an investor uses their self-directed IRA to invest in a mortgage-backed note, the IRA acts like a bank by loaning money to the borrower. The IRA then receives a note and deed of trust. According to the terms of the mortgage, the borrower pays back the principal and/or interest to the IRA each month until the loan is satisfied. Once payments have been completed, the borrower owns the property outright.

The deed of trust provides protection for the investor in the event of default, putting a lien against the property so the mortgage holder can foreclose and take control of the property if necessary. If this happens, the IRA will own the property instead of the mortgage. The investor is then free to do with the property as they see fit.

To invest in a mortgage note, the investor needs to work with a title company or real estate broker. They will help to gather all of the necessary forms for the investor to sign and send to Mountain West IRA. As the custodian, Mountain West IRA will then review the paperwork before approving the investment to make sure everything is in order.

Mortgage notes do not require as much personal involvement as directly owning a piece of real estate, making them a favorable investment to many investors. For those interested in investing in mortgage notes with their self-directed IRA, visit the Mountain West IRA website to learn more.

Benefits of Rental Properties

Real estate is a tangible investment, which is one of the main reasons it has become a popular choice for IRA accounts. Unlike stocks and bonds, investors can actually visit their properties. Rental properties are a great way to diversify a portfolio and provide the ability to earn measurable income for the investor.

Here are some benefits to investing in a rental property with a self-directed IRA:

  • Income from Renters

The main benefit of rental properties is the direct income from renters. However, this is only true if the property is occupied. With a house, this can be more difficult, because there is only one renter and the property may remain vacant during transitions between renters. Apartment complexes, duplexes and other multifamily properties have more than one renter and therefore generally provide a more balanced income stream.

  • Income from Property Value Growth

Over time, property value traditionally increases, even with no changes made to the property itself. This depends heavily on the location of the rental property as some areas increase or decrease in value more quickly than others.

  • Sweat Equity

When a property is well maintained and upgraded when necessary, it will add additional value. This allows the owner to charge more for rent and sell if for a larger profit later, if they choose. Home improvement projects such as landscaping, repainting, and upgraded appliances can significantly increase the property value and attract potential renters.

  • Property Management

For investors who do not want to personally manage the property, a property manager can be hired to take care of finding and evaluating renters and ongoing maintenance. Many investors find having a property manager relieves the stress and day-to-day activities from the owner.

For investors interested in investing in rental properties with an IRA, contact Mountain West IRA for more information. Real estate is just one of the many investment opportunities available to Mountain West IRA account holders.

Investing in Raw Land

When investors with self-directed IRAs consider investing in real estate, they usually think of rental properties or homes they can flip instead of raw land. For many people it can be difficult to imagine the potential of vacant land and the healthy returns which may be available from this type of investment.

While raw land can require a longer investment timeframe than some other real estate investments, it offers great opportunities for those who understand and are willing to take on the commitment. There are a variety of prospective uses for raw land, including:

  • Residential and Commercial Development Property

If growth is expected in the area of the raw land, it could be parceled off and sold or leased to building contractors and investors. Or, investors could choose to develop the land themselves.

  • Oil and Mineral Producing Land

Investors may choose to lease mineral rights to mining companies or other investors.

  • Timberland

Soft and hard woods can be planted, harvested, and sold for profit. Tracts of the land could also be leased to others such as timber companies.

Some other uses for raw land include:

  • Raising crops
  • Raising cattle or other animals
  • Orchards
  • Vineyards

When considering investing in raw land, investors should understand not only the process, but the rules set forth by the IRS regarding this type of investment.

  1. All income and expenses relevant to the investment must flow directly into and out of IRA funds
  2. Avoid prohibited transactions and dealings with disqualified persons.
  3. Land purchased with the intent of running a business within an IRA is subject to Unrelated Business Income Tax.
  4. If the IRA took out a loan to purchase the asset, Unrelated Debt Financed Income Tax may apply.

For those interested in diversifying their portfolio by investing a self-directed IRA in raw land, contact Mountain West IRA. They can answers question investors might have before starting the process.

What Type of Investor Are You?

Each generation faces differing events and challenges that impact their investment strategies. Which type of investor are you?

The Traditionalist Generation (1925-1945):

Defining events: The Great Depression, lunar landing, WW I & II, Korean War, Peace Corp, McCarthyism, JFK assassination, Martin Luther King Jr. assassination

Traditionalists are generally a financially conservative generation. In fact, 49% of Traditionalists have more conservative risk tolerances, while only 10% are more aggressive investors. Traditionalists experienced employment stability, pension plans, and assured social security, leading to over half of Traditionalists with assets in annuities, and 87% with savings, investments or insurance to provide additional retirement income.

The Baby Boomer Generation (1946-1964):

Defining events: Watergate, Vietnam, women’s liberation and feminism, Roe v Wade, Civil Rights Movement, selective service

Boomers balance the liberalism of their youth with conservatism from age and years of family demands. 41% of Boomers have more conservative risk tolerances while 16% are more aggressive. While Boomers hope to receive retirement assets from employer-sponsored plans these plans are disappearing, leaving many late to realize the necessity of investing. They are currently facing the unique position of allocating unexpected income (parents’ trusts, real estate and other assets) while aiding the financial needs of their children. This has lead them to look toward longer-term income-producing investments with low volatility.

Generation X (1965-1980):

Defining events: Challenger explosion, “Black Monday,” Cold War, fall of the Berlin Wall, end of apartheid in South Africa, sale of the first Macintosh computers, rise of the AIDs epidemic, the Internet

Generation X witnessed the rise of technology, making them more entrepreneurial, independent, and goal-oriented. 23% of Generation X exhibit more conservative risk tolerance, while 31% are more aggressive. They started careers as cutbacks began on pensions and healthcare benefits. Additionally, nearly 30% of people in their 30s and 40s (includes early Millennials), still possess outstanding school debts. After paying debts, Generation X places priority on saving for housing and children rather than retirement. They view themselves as permanently on the cusp of financial disaster, minimizing their investments.

Millennials (1981-2000):

Defining events: Desert Storm, Iraq War, 9/11, Oklahoma City Bombings, Global Financial Crisis and Great Recession, social media, schoolyard violence, environmental impact awareness, Googling, multiculturalism.

Millennials witnessed an economic collapse, often referred to as “the Second Great Depression.” This impacts their investment decisions. In fact, 59% of Millennial investors say avoiding risk is their top priority. Investors, however, are few. With 37% of 18 to 29 year olds unemployed, 44% of recent college graduates underemployed (part time or in jobs that require no degree), and the highest student loan debt in history, Millennials are slow to invest.  Those who are investing, however, ensure that their investments are aligned with their philanthropic interests. In fact, Millennials ranked “social responsibility” in their investments higher than any other generation.

Which of these categories describes your investment style? The beauty of a self-directed IRA is the flexibility to manage your own investments. This allows you to match your investment risk comfort with your investments based on your own knowledge of investment. Contact Mountain West IRA to learn more about self-directed IRAs.

5 Must-Have Characteristics for Successful Real Estate Investing

real-estate-investmentOver time, real estate investments have afforded many people the powerful combination of appreciation and income.  The purchase of real estate through a self-directed IRA is a popular choice for this and other reasons. While there is no definitive list of characteristics that make someone successful at real estate investing, most successful real estate investors share a certain set of characteristics.

  1. Competence – it is crucial to understand the ins and outs of investing in real estate. Joining local associations, such as a real estate investment association, can be a great way to develop an understanding about real estate investing. Mountain West IRA provides our clients with continuing education and seminars to put their self-directed IRA to work for them by investing in real estate. Learning as much as you can about real estate will help you become a more competent investor.
  2. Make decisions grounded in logic – with every investment decision you make, your strategy must be based on facts and logic. You cannot let emotions sway your financial decisions. Work on developing solid financial goals based on your knowledge and understanding of the market and avoid being influenced by emotion in your real estate transactions.
  3. Understand the real estate market – while it is necessary to understand the principles and strategies of real estate investing, you must also understand your particular market. Certain concepts you’ve learned about may not apply to the real estate market you’re investing in, so completing your own research becomes essential.  Asking questions of successful real estate investors or joining a real estate investors association can provide valuable information. If you are using money from a self-directed IRA for your real estate investments, it is absolutely crucial to understand the applicable rules and regulations. Contact Mountain West IRA for help in setting up your self-directed IRA and to understand the prohibited transactions.
  4. Be consistent – when you first begin investing in real estate, you must develop an investment strategy. Begin developing good habits early. There will be regular steps to take on a daily, weekly or monthly basis – do them consistently. Consistency is one of the biggest hurdles to overcome, but if you do establish consistency, success will likely follow.
  5. Establish good character – Stick to your principles and treat business deals the way you would a relationship – treat the other person like you want to be treated. Shortcuts and hasty deals can backfire and a damaged character is more difficult to repair than the “fixer upper” investment property. In the world of real estate investing, opportunities abound.

With patience, logically grounded decisions, and professionals like Mountain West IRA to help you establish and manage your self-directed IRA, you will have a much more enjoyable real estate investment experience.