While we certainly believe our partners are great people to work with, we also believe real estate is local and there are opportunities in every market. ?The trick is working with someone you trust to help uncover them. If you already have a trusted advisor, you?d be foolish not to?work with them.
But what if your trusted advisor knows a ton about real estate investing and not much about self-directed IRAs??Don?t be alarmed. While this kind of investing has been around as long as IRAs?have, it?s rare to find a REALTOR who has this kind of experience.
As a REALTOR?who does, here are a few things to be aware of when buying real estate inside your retirement account:
- Not All Self-Directed IRA Custodians are Created Equal: Which custodian you work with is your first decision. You may not even need one. Choosing a self-directed account that will best meet your needs is Step 1.
- Loans are Tricky to Get: IRAs and 401(k)s?CAN get a loan, but it has to be non-recourse. That means that you can not personally guarantee the loan. So the down payments are usually in the 40-50% range ?not 20-25%? with rates in the 7-12% range. ?Click?here?to download our list of Non-Recourse lenders.
- The Silver Linings on IRA Loans: Your credit score probably won?t matter. Neither will the number of loans you already have in place. Since the only protection the lender has is a deed to the house you are buying, they care a lot more about your real estate deal than your financial history.
- Don?t write a check for the good faith deposit: There?s a big?potential issue with this. You and your IRA are prohibited parties and you can?t buy something your IRA owns, or vise-versa. So if you send in a check with a signed offer in your name THEN transfer title to your IRA, you have technically engaged in a prohibited transaction. There are ways around this, but the ideal way is to avoid it all together. Set up the IRA first, then write offers in the name of your retirement account.
- You don?t sign the offer, your custodian does: This is where most of the delays can happen in escrow. You are not purchasing the property, your custodian is ?for benefit of? your IRA. So you need to authorize everything for signature, but you don?t sign any of the contracts. Each custodian has a different procedure for this, so check in advance with your custodian on how to process the purchase contract. If you do it wrong, the delays can take precious days to unravel and?jeopardize?close of escrow.
While this list is a good starting point, there are other nuances with every investment that can trip up a deal. If you or your REALTOR?prefer to work with someone who has experience in this kind of transaction, we can help. We?ve overseen hundreds of real estate transactions via IRAs and 401(k)s and know to get them finalized.
Here?s what value we can bring to this arrangement:
- Account Creation: Which IRA custodian is right for you? Well that depends on you! How much money you have, what kind of investor you are and how many investments you plan on making all matter. We work with each investor to understand their situation and choose a custodian that will provide the appropriate level of service with the least amount of fees
- Self-Directed Advisor: We probably spend the most time answering questions about what is and isn?t a prohibited transaction. We are also constantly advising clients on the process of getting a real estate deal funded with retirement funds. While we don?t know everything, we do have deep experience in a wide range of real estate investments.
- Advice on Loans: Per above, your retirement account can get a loan, but it?s tricky. Very few banks offer them and those that do are subjective with their underwriting criteria. We can help you navigate these waters and make sure getting a loan is feasible before you get too far into escrow.
- Investment Advisor:?Once your REALTOR?finds you a property, how do you know if it?s going to be a profitable investment? We can help you run the numbers through our arsenal of spreadsheets and proformas and let you know whether the projected returns seem reasonable and/or at ?market? levels.
- Portfolio Creation:?Being a successful real estate investor is more than making a solid investment. You have to build a?real estate portfolio. As with any asset class, the key to a stable portfolio is diversification of assets. NOBODY succeeds on every investment. But building a profitable portfolio greatly reduces the financial risk to investing in real estate. Check out this video. It?s all about creating, managing and optimizing a successful portfolio of real estate investments.
So how do we get paid for our time and expertise? The most common way is for us to partner with your REALTOR?as the self-directed expert. They can bring us in on a transactional basis and pay us a referral fee from the commission they receive. That means our time doesn?t cost you anything! This allows them to focus on what they do best,?identifying?local real estate?opportunities. We?ll focus on everything pertaining to you and your retirement account.
A very similar arrangement happens all the time with short sales. A REALTOR?that doesn?t have (or want) the experience of dealing with banks on the short sale negotiations will ?hire? a professional that specializes in it. This costs is paid out of their commission and frees the REALTOR?from getting bogged down in a process they are unfamiliar with?and uninterested in.
Investing in real estate using your?self-directed IRA?has many advantages, especially for those set to retire or recently retired. But make sure someone on your side of the deal has experience with this kind of investment. The land mines are few and far between, but they are well hidden and very destructive to your IRA if you step on one.
Source: http://www.freedomgrowth.com/archives/1422
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