Authored By: Greg Emmer
The benefit of having a self-directed IRA is the autonomy that the account holder has in the scope of investments he/she can take part in. With the housing market hitting new highs every day, an increasingly popular strategy for an IRA is to invest in real estate. That is, buying properties, renovating them, and subsequently selling the home for a nice profit. When implementing the right acquisition strategy, an investor is certain to find several suitable purchase opportunities in today’s marketplace.
An investor may have the IRA funds to purchase a property outright, that is, they do not need any outside financing to close their transaction. However, when properly utilizing a non-recourse loan to fund the purchase, an investor can increase his/her RoR (Rate of Return) considerably. As a comparison:
Purchasing a Property Using Entirely IRA Funds
Purchase Price: $100,000
Repairs & Closing Costs: $20,000
After-Repair/Sold Value: $150,000
Cash Used: $120,000 ($100,000 + $20,000)
Profit: $30,000 ($150,000 – $120,000)
Rate of Return: 25% ($30,000 / $120,000)
Purchasing a Property Using a Non-Recourse Loan
Purchase Price: $100,000
Loan Amount: $80,000
Down Payment, Repairs, Loan & Closing Costs: $25,000
After-Repair/Sold Value: $150,000
Cash Used: $45,000 ($20,000 + 25,000)
Profit after Loan Payoff: $25,000 ($150,000 – $125,000)
Rate of Return: 56% ($25,000 / $45,000)
As indicated by the illustration above, if leveraged properly, an investor will stand to double his/her rate of return by taking out a loan on a single purchase. While the investor realized $5,000 less in profit, he/she saved $75,000 in IRA funds by wisely financing the transaction. With this windfall of available IRA funds, the investor can easily utilize the remaining $75,000, in total or in part, to purchase more properties. Assuming an investor made two similar investments utilizing non-recourse leverage, he/she could stand to make a total of $75,000 ($25,000 x 3 properties) in profit. This would represent an increase of nearly over 130% over the original profit of $30,000, had an investor only participated in one real estate transaction.
If interested in leveraging your Self-Directed IRA to invest in real estate, contact NuView Trust for a list of recommended non-recourse lenders that can work with you!
