I have a good friend who just moved $100,000 into a self-directed IRA and we recently discussed how he could invest that money in real estate. I thought it was an interesting discussion and assume this is probably a fairly common scenario. Many investors that are tired of insanely low returns from conservative vehicles such as money markets, CD’s, bonds, or even just cash positions are often open to investing in real estate, but don’t know where to begin.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Step One: Self-Direct It
For starters, I would roll my IRA(s) into a self-directed IRA. There are a handful of good, reputable custodians that specialize in this. Yes, the yearly fees may be slightly higher than you are used to, but the ability to invest the money in real estate and other creative outlets far outweighs the minimal costs associated with this type of account.
Keep in mind this is just my opinion, but I like the idea of pursuing a balanced approach to real estate investing. While owning real estate obviously has numerous benefits, there is also much to be said about diversifying into other income producing strategies such as private lending (also referred to as hard money lending)
Buy a Property First
The first thing I would do is identify a market (city ands state), product type (single family vs multi-family) and a price-point that will help you achieve your goals. In referring to goals, it’s important to determine where you fall into the spectrum of cash flow vs. appreciation. Some markets produce excellent cash flow, but aren’t necessarily growth markets. Some markets are poised to appreciate quickly over the next several years, but perhaps don’t produce as much cash flow. Personally, I think it makes sense to invest in a market that has a healthy combination of the two.
Once you have narrowed down your criteria, find a team of professionals in that market that can help you purchase a property, renovate it, and finally get it leased and managed. I think in many markets, it’s reasonable to buy and rehab a good investment property for around $70,000 to $110,000. In purchasing the property, I recommend using leverage if at all possible. There are a handful of lenders around the country that have non-recourse loans that can be obtained for properties purchased through an IRA. Most of these lenders require between 30%-50% down.
Become a Lender
Once I had purchased a property, I would take the balance of the IRA funds (minus $5000 as a slush fund) and find a good team of real estate professionals to do short term hard money loans with. It’s not uncommon to find a team of turn-key operators (with a solid track record) that will pay in the neighborhood of 1 to 2 points and 12% interest for 6 month notes. This is a great way to get safe returns while not locking up money for an extended period of time.
Using this blended strategy, over the course of a few years, I think it would be very reasonable to obtain a yearly ROI of between 15-20% on your money taking a fairly conservative approach. Again, this is just my opinion on how to invest 100K. One of the great things about a platform like BiggerPockets is the wealth of experience and shared knowledge that help all of us as investors develop our own opinions and strategies on investing! I’d love to hear how others would investing 100K in an IRA!