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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
