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INVEST IN REAL ESTATE – FINDING MONEY FOR REAL ESTATE
On this page we will discuss MONEY and where to find it for real estate investments. First let's talk about where you have have some money hidden in plain sight but do not know about it. We're talking about what many of you have but possible don't realize it and that is your 401K plans.
INVEST IN REAL ESTATE WITH YOUR 401K FUNDS
Many individuals are unaware that they can use their retirement funds within a 401K to invest in real estate. You can do this even while you are working at your company. Check with your plan administrator where you work as to the particulars with your plan. However, if you are retired or have left that company you have access to these funds utilizing a Self-Directed IRA which we will talk about in more detail below.
For individuals still working at the firm who provides a 401K plan and are interested in how they can get access to those funds to invest in real estate, here are a few benefits to using your 401K funds. First, instead of using traditional bank funds to purchase or finance the purchase of a property or even refinance your current property, you can use your own funds within your 401K to borrow from. Typically borrowing from your own 401K is done at a lower interest rate than from banks. A benefit from borrowing from your own 401K is that your 401K reaps the interest being paid when repaying your 401K back thus the money (interest) accumulates within your own 401K and NOT some bank. Typically funds borrowed from your 401K are required to be paid back within 5 years so your monthly payment could be extremely high which may not be beneficial. But realize this, you are using the money for a down payment most likely and couple this strategy with other money management strategies (using OPM, which stands for Other People's Money) to quickly pay yourself back sooner (this is where education plays a huge part and why we stress education first before jumping in feet first because you will learn about these strategies from it).
And lastly, you are eligible to take a loan amount equal to the lesser of half your account value, or $50,000 but check with your plan administrator for the exact details of your plan.
You should also note that if you default on your loan to your 401K, according to IRS rules, you are required to pay the loan back within 60 days of the default or you will be issued a 1099 for the balance of the loan for tax purposes and also be penalized a 10% early withdrawal penalty (with some hardship exclusions - see IRS rules regarding that).
A far better way to use your 401K funds to invest in real estate is to roll your funds (either some or all) into a self-directed IRA, preferably a Roth IRA where the gains will not be taxed however if you do not want to incur any tax at the time you roll over your funds, then a traditional IRA can work (Uncle Sam is going to get you one way or another so it is our choice to bite the bullet early and use a Roth IRA as the gains will far outweigh the earlier tax consequence IF you continue to reinvest your funds, otherwise use a traditional self-directed IRA).
For individuals still working at the firm who provides a 401K plan and are interested in how they can get access to those funds to invest in real estate, here are a few benefits to using your 401K funds. First, instead of using traditional bank funds to purchase or finance the purchase of a property or even refinance your current property, you can use your own funds within your 401K to borrow from. Typically borrowing from your own 401K is done at a lower interest rate than from banks. A benefit from borrowing from your own 401K is that your 401K reaps the interest being paid when repaying your 401K back thus the money (interest) accumulates within your own 401K and NOT some bank. Typically funds borrowed from your 401K are required to be paid back within 5 years so your monthly payment could be extremely high which may not be beneficial. But realize this, you are using the money for a down payment most likely and couple this strategy with other money management strategies (using OPM, which stands for Other People's Money) to quickly pay yourself back sooner (this is where education plays a huge part and why we stress education first before jumping in feet first because you will learn about these strategies from it).
And lastly, you are eligible to take a loan amount equal to the lesser of half your account value, or $50,000 but check with your plan administrator for the exact details of your plan.
You should also note that if you default on your loan to your 401K, according to IRS rules, you are required to pay the loan back within 60 days of the default or you will be issued a 1099 for the balance of the loan for tax purposes and also be penalized a 10% early withdrawal penalty (with some hardship exclusions - see IRS rules regarding that).
A far better way to use your 401K funds to invest in real estate is to roll your funds (either some or all) into a self-directed IRA, preferably a Roth IRA where the gains will not be taxed however if you do not want to incur any tax at the time you roll over your funds, then a traditional IRA can work (Uncle Sam is going to get you one way or another so it is our choice to bite the bullet early and use a Roth IRA as the gains will far outweigh the earlier tax consequence IF you continue to reinvest your funds, otherwise use a traditional self-directed IRA).
BENEFITS OF SELF-DIRECTED IRA'S
It's a common misconception among Americans that the only investments allowed in a retirement account are stocks, CDs, and mutual funds because typically large financial institutional custodians are driven in that manner and focus on a narrow universe of investments. While these kinds of accounts may be right for some, they don't offer the kind of financial freedom which a self-directed qualified retirement plan affords the individual investor.The truth is that broader investment options have been available to the general public since 1975,when the IRAs first became available enabling you to contribute funds towards.
Your self-directed IRA can purchase any type of real estate, including single-family homes and multi-unit dwellings, apartment buildings, co-ops, condos, commercial property, and improved or unimproved land. The property can be used to generate income, or for appreciation. There is no time limit as to how long your IRA owns the property either; it can be used as an investment property, a rehab to flip, or to appreciate in value collecting monthly rents.
There are other investment opportunities available within real estate in which you can invest in also. They include: Mortgage Notes, Private Placements as in LLP's or LLC's formed for real estate projects, Tax Liens and Tax Deeds, Trailers/Trailer Parks as well as Commodities such as gold, silver and even livestock, Futures, Stocks, bonds and mutual funds, Hedge funds, Foreign investments, Foreign Currencies, Account Receivables, Equipment Leases, Oil and Gas Rights, Timber and Mineral rights and U.S. Treasury Notes. However we are just concerned with real estate related investments although we want you to know about other financial opportunities that exist.
It is important to understand the difference is that you and your IRA are two separate entities yet, there are very few differences between purchasing the property as an individual versus purchasing property with your self-directed IRA. Even though you will be making all the decisions, you must remember that your IRA account is the actual buyer/owner of the investment and all paperwork must reflect this as such. Your IRA is a legal entity unto itself just as you, yourself is a legal entity. Think of your IRA as a business you own and as the owner you can do what any owner does in operating his/her business (obviously within the confines of the law - as such we strongly urge you to have legal counsel available to you as any responsible business person would.)
So an IRA affords you the benefit of being used as an investment vehicle as well as a way to manage your tax situation better. There are many strategies to use with a self-directed IRA so again, we stress the importance of education first.
Your self-directed IRA can purchase any type of real estate, including single-family homes and multi-unit dwellings, apartment buildings, co-ops, condos, commercial property, and improved or unimproved land. The property can be used to generate income, or for appreciation. There is no time limit as to how long your IRA owns the property either; it can be used as an investment property, a rehab to flip, or to appreciate in value collecting monthly rents.
There are other investment opportunities available within real estate in which you can invest in also. They include: Mortgage Notes, Private Placements as in LLP's or LLC's formed for real estate projects, Tax Liens and Tax Deeds, Trailers/Trailer Parks as well as Commodities such as gold, silver and even livestock, Futures, Stocks, bonds and mutual funds, Hedge funds, Foreign investments, Foreign Currencies, Account Receivables, Equipment Leases, Oil and Gas Rights, Timber and Mineral rights and U.S. Treasury Notes. However we are just concerned with real estate related investments although we want you to know about other financial opportunities that exist.
It is important to understand the difference is that you and your IRA are two separate entities yet, there are very few differences between purchasing the property as an individual versus purchasing property with your self-directed IRA. Even though you will be making all the decisions, you must remember that your IRA account is the actual buyer/owner of the investment and all paperwork must reflect this as such. Your IRA is a legal entity unto itself just as you, yourself is a legal entity. Think of your IRA as a business you own and as the owner you can do what any owner does in operating his/her business (obviously within the confines of the law - as such we strongly urge you to have legal counsel available to you as any responsible business person would.)
So an IRA affords you the benefit of being used as an investment vehicle as well as a way to manage your tax situation better. There are many strategies to use with a self-directed IRA so again, we stress the importance of education first.
SO HOW DOES IT WORK? UTILIZE THE HELP OF A REPUTABLE FINANCIAL THIRD PARTY COMPANY
Today many investors are dissatisfied with the low rate of return they are getting from traditional stock market investments and desire to take matters into their own hands. As such you need to work with a good neutral third party company to help you do so.
First you need to have this independent financial third party help you to set up your self-directed IRA. They are experts in keeping you and your self-directed IRA functioning safely within IRS rules however they are prohibited in providing any specific investment advice. So when looking for a good firm, make sure you ask them if they bring in speakers whom you can meet to discuss investment opportunities which you can use in your self-directed IRA portfolio. Also note the fees they charge as they do charge a fee to help establish your self-directed IRA and any maintenance thereof which these fees differ firm to firm yet are not extraordinary.
So the general process for establishing your self-directed IRA once you decide on a firm to work with is as follow:
• First decide on the type of plan you want to open with the help of a trusted financial
advisor (remember the firm can not provide input) examples include: Inherited IRA,
Traditional IRA, Roth IRA, SEP, SIMPLE, Individual(K), HSA or ESA
• Fund your IRA (Transfer/Rollover funds from an existing IRA or 401(k), or make a
contribution)
• Select an Investment Option (Choose an investment opportunity for your IRA to
purchase/invest in)
• Get with your Firm's Representative to prepare things ( Having negotiated the terms
of your investment & performed the necessary due diligence, let your firm's advisor
help you with the proper documents to consummate the transaction legally)
• Give the "Proceed" Directive (Submit the required Asset Purchase paperwork
based on the investment you've selected)
• Complete the purchase/transaction (Per your instructions to purchase the asset the
firm provides the funds from your account and the asset is recorded in your IRA)
• Deposit any profits back into your IRA account as you receive them which will
remain FDIC insured.
Remember, your IRA can do anything you can do with the asset; hold it for appreciation, collect rents if applicable, improve the asset, be part of another property investment such as an LLP or LLC, and/or even sell it down the road. The important thing is that ALL proceeds from the asset be deposited into the IRA account.
First you need to have this independent financial third party help you to set up your self-directed IRA. They are experts in keeping you and your self-directed IRA functioning safely within IRS rules however they are prohibited in providing any specific investment advice. So when looking for a good firm, make sure you ask them if they bring in speakers whom you can meet to discuss investment opportunities which you can use in your self-directed IRA portfolio. Also note the fees they charge as they do charge a fee to help establish your self-directed IRA and any maintenance thereof which these fees differ firm to firm yet are not extraordinary.
So the general process for establishing your self-directed IRA once you decide on a firm to work with is as follow:
• First decide on the type of plan you want to open with the help of a trusted financial
advisor (remember the firm can not provide input) examples include: Inherited IRA,
Traditional IRA, Roth IRA, SEP, SIMPLE, Individual(K), HSA or ESA
• Fund your IRA (Transfer/Rollover funds from an existing IRA or 401(k), or make a
contribution)
• Select an Investment Option (Choose an investment opportunity for your IRA to
purchase/invest in)
• Get with your Firm's Representative to prepare things ( Having negotiated the terms
of your investment & performed the necessary due diligence, let your firm's advisor
help you with the proper documents to consummate the transaction legally)
• Give the "Proceed" Directive (Submit the required Asset Purchase paperwork
based on the investment you've selected)
• Complete the purchase/transaction (Per your instructions to purchase the asset the
firm provides the funds from your account and the asset is recorded in your IRA)
• Deposit any profits back into your IRA account as you receive them which will
remain FDIC insured.
Remember, your IRA can do anything you can do with the asset; hold it for appreciation, collect rents if applicable, improve the asset, be part of another property investment such as an LLP or LLC, and/or even sell it down the road. The important thing is that ALL proceeds from the asset be deposited into the IRA account.
INVEST IN REAL ESTATE – FINDING OTHER MONEY FOR REAL ESTATE
OPM - OTHER PEOPLE'S MONEY
Other People's Money comes in several different forms. For example, there are conventional bank loans (yes, that's right.. the banks do not lend you their money, they lend you their depositor's money and pays them a meager interest rate for their deposits while charging a higher rate to you on a loan.) Then there is Hard Money and also Private Money, both of which are typically brokered, meaning you work with an independent "money" broker to obtain a loan.
SO WHAT'S THE DIFFERENCE?
We won't go into details about a traditional loan you get from a bank because you probably have experience with that type of loan already. BUT, here's the major difference between the conventional bank loan and the other two types of loans (Hard & Private Money loans). Banks look at your credit scores, your assets (other money you have and assets like stocks, bonds, etc.), your income, employment history and other information before determining if you will qualify for a loan.
Both Hard Money & Private Money lenders make their determination on the property you are buying and if the loan makes sense to them. Basically their determining factor is LTV (loan To Value) of the property and typically their loans are interest only loans payments where banks offer fully amortized loans so you pay more in interest.
Another feature or benefit of a Hard Money or Private Money loan is they typically offer 100% financing of rehab work needed on a property (typically for fix and flip investments but also on fix and hold investments, again if it makes sense and within LTV guidelines.)
Both Hard Money & Private Money lenders make their determination on the property you are buying and if the loan makes sense to them. Basically their determining factor is LTV (loan To Value) of the property and typically their loans are interest only loans payments where banks offer fully amortized loans so you pay more in interest.
Another feature or benefit of a Hard Money or Private Money loan is they typically offer 100% financing of rehab work needed on a property (typically for fix and flip investments but also on fix and hold investments, again if it makes sense and within LTV guidelines.)
THE DIFFERENCE BETWEEN HARD MONEY & PRIVATE MONEY
So just what is the difference between Hard Money and Private Money? The answer is quite simple - Points & Interest Rates for the most part. Private money tends to cost less and sometimes not at all depending on how the deal is structured and your Private money source becomes a partner in the deal.
Finding Private money is more difficult plus you have to be concerned with the legal aspects as well with respect to accredited investors vs non-accredited investors and the number of each involved in a project. You also must be aware of SEC (Securities & Exchange Commission, both Federal & State) regulations too plus much more money management requirements in many cases.
Whereas Hard money lenders are already in compliance with SEC regulations with the money they have raised to lend out. The choice is yours however starting out, using Hard money sources are better for you because, after all, these are short term loans to accomplish what you need to accomplish. Don't focus on the interest rate and points but rather the ROI (return On Investment) of the overall deal when using Hard money. For example, if you are making $35,000 more or less net on a deal, does it really matter that you paid 6 points up front and 13% interest for 3 - 4 months. No! - I'll do those deals every day of the week. Too many people get hung up on this or feel cheated because they could have made an additional $500 - $1,500 or whatever on the deal without Hard money - don't look at it that way!
Finding Private money is more difficult plus you have to be concerned with the legal aspects as well with respect to accredited investors vs non-accredited investors and the number of each involved in a project. You also must be aware of SEC (Securities & Exchange Commission, both Federal & State) regulations too plus much more money management requirements in many cases.
Whereas Hard money lenders are already in compliance with SEC regulations with the money they have raised to lend out. The choice is yours however starting out, using Hard money sources are better for you because, after all, these are short term loans to accomplish what you need to accomplish. Don't focus on the interest rate and points but rather the ROI (return On Investment) of the overall deal when using Hard money. For example, if you are making $35,000 more or less net on a deal, does it really matter that you paid 6 points up front and 13% interest for 3 - 4 months. No! - I'll do those deals every day of the week. Too many people get hung up on this or feel cheated because they could have made an additional $500 - $1,500 or whatever on the deal without Hard money - don't look at it that way!
There ARE always trade-offs. Making more money per deal means using more of your own cash. Everything has risk associated too. Would you like risking more of your own money in a down-turn or risking someone else's money? Also a benefit to using OPM is you can do more deals at the same time.
Another trade-off is time, time in which you find a deal and time it takes to do the deal. Do you want to call a Hard money broker on the phone and get funded within a few days to a couple of weeks or take the TIME to find Private money in which case that deal is already gone.
Don't get me wrong, having Private money sources is great but, don't cut yourself short until you have that in place (note the "keyword" in this sentence is "having" because at that point it is already available to you as opposed to you having to do all that is necessary to get to that point).
Another trade-off is time, time in which you find a deal and time it takes to do the deal. Do you want to call a Hard money broker on the phone and get funded within a few days to a couple of weeks or take the TIME to find Private money in which case that deal is already gone.
Don't get me wrong, having Private money sources is great but, don't cut yourself short until you have that in place (note the "keyword" in this sentence is "having" because at that point it is already available to you as opposed to you having to do all that is necessary to get to that point).
TRADE-OFFS
FINAL NOTE
Once again we must stress the importance of education. Finding money and knowing what to do with it once you found it, no matter the source, is an educational process as well - so become educated!
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Nothing on this website constitutes, or is meant to constitute, investment advice of any kind. If you require investment advice with relation to real estate, legal or financial matters, we strongly advise you to consult an appropriate professional. The information on this website is for educational purposes. If you become a member of our real estate community, then any investment decisions you make are your own decisions. We are not responsible for how well you have prepared, have understood or how you act upon a particular transaction as we have no way of knowing your particular situation. In other words your success is entirely and completely dependent on your own efforts.
Any contact information you supply to us on this website is never shared with anyone. Please visit our Privacy Policy Page for our policies governing your privacy. The owner of this website is solely responsible for the content of this website. We wish you great success with your real estate investing career.
We thank you for visiting invest-in-real-estate.com. We foster REAL working real estate investor relationships within our community of members and professionals. Within our community there are many individuals who make a good living from investing in real estate, although there are no guaranteed profits. The system/program we teach you is not a get rich quick scheme and like anything worth its pound of salt, it takes effort/work on your part as well as being committed, consistent in your efforts and creative in your real estate endeavors. We do not condone nor will we advise you to do anything unethical or illegal, and if you do, you will be removed from our community and our association severed. Please realize and be informed that results vary with each individual depending on the particular project at hand,from project to project and the effort each individual puts forth in their endeavor(s).
Nothing on this website constitutes, or is meant to constitute, investment advice of any kind. If you require investment advice with relation to real estate, legal or financial matters, we strongly advise you to consult an appropriate professional. The information on this website is for educational purposes. If you become a member of our real estate community, then any investment decisions you make are your own decisions. We are not responsible for how well you have prepared, have understood or how you act upon a particular transaction as we have no way of knowing your particular situation. In other words your success is entirely and completely dependent on your own efforts.
Any contact information you supply to us on this website is never shared with anyone. Please visit our Privacy Policy Page for our policies governing your privacy. The owner of this website is solely responsible for the content of this website. We wish you great success with your real estate investing career.
We thank you for visiting invest-in-real-estate.com. We foster REAL working real estate investor relationships within our community of members and professionals. Within our community there are many individuals who make a good living from investing in real estate, although there are no guaranteed profits. The system/program we teach you is not a get rich quick scheme and like anything worth its pound of salt, it takes effort/work on your part as well as being committed, consistent in your efforts and creative in your real estate endeavors. We do not condone nor will we advise you to do anything unethical or illegal, and if you do, you will be removed from our community and our association severed. Please realize and be informed that results vary with each individual depending on the particular project at hand,from project to project and the effort each individual puts forth in their endeavor(s).
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