A real estate agent listed an REO fourplex that was in pretty bad condition. The owner prior to the lender getting it back from the foreclosure proceedings drained the property, did no repairs or maintenance, just collected the rents from the tenants as long as he could. Eventually two of the tenants moved out because of the poor conditions and the other two quit paying rent because they learned the owner was going to lose the property to foreclosure. They called the owner’s bluff and quit paying and the owner disappeared from sight. About 12 months after the notice of default was filed the lender now owned the property and listed it with a local real estate agent. The agent upon listing the property gave the two remaining tenants “cash for keys” and both tenants packed up and vacated their units. The property was now 100% vacant.
A Buyer’s agent had the perfect buyer for it. He had been working with John for a couple of years. John was self-employed owner of a computer company. John couldn’t fix anything but his childhood friend was a general contractor and was able to do all the needed work on John’s previously acquired properties. John did have experience owning rental properties, all of which were bought in similar condition to the fourplex. Over the years John had taken advantage of the opportunity to set up an IRA and always contributed the maximum to it. John was not aware that he could use his IRA to invest in real estate, something he understood and loved being involved in. John had been very fortunate with his IRA investments by investing in mutual funds that had performed real well. When his knowledgeable real estate agent shared with him that he could set up a Self Directed IRA and invest in real estate, he knew this was the perfect situation for him. He contacted one of the Custodians from the list I provided and completed the paperwork that enabled the new Custodian to have his existing IRA rolled over into a SDIRA. His timing was perfect, two months later the stock market did its meltdown. John had $177,000.00 now sitting in his SDIRA in which to invest in real estate.
John and his agent were very selective; they didn’t jump at any deal. They waited over a year until the right deal came along. A deal that John could use his skills to maximize his return on investment.
The property was listed for $275,000. John and his agent knew that this fourplex had sold for $200,000 more than the list price three years earlier. John’s agent presented an offer for full price the first day it hit the market. John had already been preapproved for a 55% loan to value non- recourse loan with the bank that he had been doing business with for years. Within a SDIRA the loan has to be non-recourse so don’t expect any loan to be more than 65-70% loan to value. Don’t forget that the law requires the property to be the only collateral. There can be no personal guarantee which allows the lender to come after the SDIRA holder in event of foreclosure.
John had estimated the rehab of the property would be at least $15,000 with a worst case cost of $20,000. In his proposal he used the worst case figure knowing that with a $125,000 down payment and $5,000 closing costs he would still have $27,000 left in his SDIRA. The remaining funds could be used for holding costs as he was rehabbing the property and screening for good tenants. John’s contractor friend estimated that he would have the property in A+ condition within a month.
Within three months John with the help of his real estate agent had four quality tenants each renting a unit at $850/month. John is now receiving in excess of $1,200 per month that is going into his SDIRA.
Monthly Operating Statement:
$3,400.00-Monthly rents of $850.00 X 4 units
-$200.00-6% allowance for vacancy
-$1,000.00-30% operating expenses. John’s agent does management
-$900.00–$150,000 non-recourse loan for 30 years at 6% interest
Bottom-line is $1,200.00+ per month is going into John’s SDIRA. Each month the management company sends the Custodian a check, John never handles any of the funds. John’s SDIRA is only earning 8% per year, but John has already turned down two offers in excess of $370,000 to sell his A+ fourplex which is one of the most desired properties in town.
What excites John the most is that if he decides to sell the property he doesn’t have to do a 1031 Exchange to defer taxes. The sale proceeds will go directly into his SDIRA and will be deferred until he starts withdrawing funds after he turns 59 1/2.
John’s real estate agent has shared John’s success story with a couple of his existing clients as well as three solid referrals who would like to form a business group with John for future projects. Some of the investment funds will be from SDIRAs and some will not be. Properly set up this is allowable. They have a couple exciting possibilities that they are making offers on.
Fund a real estate loan:
This is my favorite area of SDIRAs. I started arranging private investor loans in 1997 and was given the opportunity to see the power of controlling your retirement through SDIRAs. As I started meeting private individual investors and I brought potential loans to them I was amazed that many of them had millions of dollars to fund real estate loans. Often when it came time to vest the loans (the beneficiary name on the loan) it was vested in part or in whole in a SDIRA.
Over the years as I developed my investor relationships I enjoyed the investor’s stories of their financial successes. Many of the investors started having their SDIRA invest in real estate loans back in the 1970’s. When they originally started they were usually buying seller carry back notes at a discount. Eventually that changed to broker arranged real estate loans as the laws changed in the early 1980’s. Broker arranged loans created an opportunity to be in compliance with usury laws. Of course they still bought discounted carry back notes as the opportunities appeared. The broker arranged loans were the type of loans that I was presenting to them. They typically were a loan that for various reasons needed to be funded by a private money source. Loans where.Tembusu Grand