Self-Directed IRA Real Estate Investing – Deal or No Deal?

Self-Directed IRAThe Self-Directed IRA industry is on fire with new clients. The word is out and investors are moving their retirement accounts away from the traditional stocks and bonds and into non-traditional assets such as real estate, private loans, precious metals, and so much more. That’s no surprise to the American IRA team. What is surprising the American IRA team is the incredible amount of creative techniques investors are using.

So, How Creative is Too Creative?

Creativity is a wonderful and powerful thing in the investment world. It allows investors to participate in deals that may not otherwise be possible. So long as the deals are in compliance with the law and the IRS regulations and structured in such a way that the investors and their professional teams understand them, no amount of creativity is too much.

Deal or No Deal?

A landlord has a mobile home located on a prime city lot that he has been renting out for ten years. He originally purchased it because it was on the property directly next to his home and he wanted the ability to control who rented it. The landlord is preparing to retire and no longer wants the responsibility of the rental home. The challenge is that this mobile home is over 30 years old and there is no bank that will loan money on such an old mobile home despite the fact that he has carefully remodeled it over the years. Given the prime location, he listed the mobile home for $35,000 with a realtor. It became clear very quickly that there was a great deal of interest yet it wouldn’t sell because no one has $35,000 cash they want to invest in it. Under normal circumstances, this would mean no deal.

Creative Solutions

As a highly intelligent individual, the landlord decided that he was going to have to be creative to sell this mobile home. The realtor had approached him stating that he had a very interested Self-Directed IRA investor requesting to meet with the landlord. The interested investor had submitted his credit report to the realtor (a 780 credit score) along with proof of funds to be shared with the landlord. The realtor shared this information with the landlord and returned to the investor with an offer:

The landlord would owner finance the mobile home purchase with the following terms:

  • $30,000 purchase price
  • $4,000 down payment
  • 3% interest rate
  • 10 year loan term

Running the Numbers

The Self-Directed IRA investor ran the numbers on the deal writing down each number:

  • Current market value of the lot the home sits on: $10,000
  • Current value of the mobile home: $3,000
  • Rent being paid by the current tenant: $585.00
  • Monthly payment on $26,000 at 3% interest: $251.06
  • Average monthly insurance cost: $35.00
  • Allowance for 10% vacancy: $58.50 per month
  • 10% allowance for maintenance: $58.50 per month
  • Property tax amount: $100.00 per month

This particular investor employs a buy and hold strategy, so the first thing he looks at is how much monthly income this mobile home will generate. He determines that it will generate a monthly income of $81.94 ($585 minus ($251.06+$35+$58.5+$58.5+$100)). Conversely if this investor was interested in a Fix and Flip strategy, this deal would result in a minimum net loss of $17,000. In this case…the answer is definitely “No Deal!”

Creative Doesn’t Always Equal a Great Deal

On the surface, this seemed like an excellent creative situation for the investor. The landlord was asking for very minimal cash down, an amazingly low interest rate for a private loan, the ease of forgoing the hoops that banks put in front of investors, and a long-term tenant that was already in place. The Self-Directed IRA investor knew that he had to look past the excitement of the offer and dig into the real numbers of the deal.

Best of all, the investor knows that there are many more deals out there…his search continues.


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