I was waiting in line today at the store and the gentleman ahead of me purchased 2 packs of cigarettes which cost him $10.40. As I was standing in line behind him waiting to purchase my diet soda which costs me $1.50 each, I remembered that I had forgotten to pack my lunch today.
American IRA thanks Alan Cowgill for excellent ‘How To Get All The Money You Need To Buy Property’ seminar and thanks host Robert Woodruff, Charleston REIA President. Jim Hitt, CEO of American IRA, a National Self-directed IRA Provider, expresses appreciation, “Alan Cowgill lived up to his promise and delivered in this event giving great insights into how people can get money for their investments. The word must be out about his experience because this event had a great turnout! Thank you Mr. Cowgill for such an excellent presentation.”
The Associated Press reports that U.S. home prices drop for 6 straight months. Jim Hitt, CEO of American IRA speaks about what this means to real estate investors while he offers a reminder that self-directed IRAs are an excellent tool when investing in real estate.
The Associated Press article goes on to report that the steady price declines have brought the nationwide index to its late 2002 level. Home prices have fallen 35 percent since the housing bust. The average price in Atlanta fell 17.3 percent in February compared with a year earlier. That’s the biggest annual drop in the history of any city.
Still, the article states that some areas are seeing gains in housing prices such as Phoenix and most cities are reporting smaller declines than in previous months.
This all leaves investors with many decisions to make. Some investors feel that they should only invest when they can buy at ‘rock bottom’ prices and sell ‘high’. Other investors look carefully at the overall trend of real estate in each area and determine what the realistic short-term and long-term gains are. While still other investors wait for a more stable market that provides them with less profit but more certainty in relation to potential profits. These investors are all looking to buy and flip the property or buy-hold-then sell the property.
There is yet another class of investors that like to ‘buy and hold’ real estate for current income…generally rental properties. When these investors like to purchase real estate varies; though all of these investors look carefully at these properties using calculations to forecast the monthly income, expenses, and ultimately profits. The caution here is to know the rental income averages for the area and to purchase the property correctly so that profits can be maximized.
Jim Hitt, CEO of American IRA, says, “Self-directed IRAs are a tool that savvy investors utilize. Purchasing real estate inside a self-directed IRA allows their profits to be tax deferred and in some cases tax free. There are many investors who ask my opinion as to whether now is a good time to purchase real estate or whether it is better to wait for the market to bottom out. After 40 years of watching the real estate cycle go up and down, my observation is that it is not the ‘bottom’ that is important. The important things is getting in at a good time. In this market, my opinion is that now is the time to invest in real estate. The key to every successful venture is to due your ‘due diligence’ before purchasing any real estate and to always use professionals, such as CPAs and Attorneys, to ensure that your interest is protected.”
American IRA, LLC, a national self-directed IRA provider-announces Sean McKay has been promoted from Vice President of Business Development to Senior Vice President!
Sean McKay has been instrumental in the development of the American IRA, LLC business both before and after its transition from Entrust Carolinas, LLC to American IRA, LLC.
Sean began working for Entrust Carolinas, LLC prior to their move from the Entrust Group at which time American IRA, LLC was born. One of the great things about this transition is that it allowed American IRA, LLC to become completely independent. Their CEO and Founder, Jim Hitt, made the decision to go independent for a number of reasons, one of the most important reasons was that Jim wanted the ability to be more responsive to clients’ needs. Jim knew that the key to seeing this transition move through smoothly was relying on the experience and expertise of the current staff. Jim Hitt interjects, “Sean was part of the original team and keeping him through the transition was one of the better decisions that I have made! He has great insight into customer needs and is able to move through the most complex customer questions.”
Sean’s background fit the needs of American IRA exactly. Joining the team with a Bachelors Degree in Economics ensured that Sean has a great understanding of financial matters. Sean is now a well-known speaker in the IRA field and a successful investor; Investing in everything from private notes to real estate.
Jim Hitt concludes, “Sean came to us with the perfect skill set and educational background to help move the business forward. He has grown his skills tremendously each year and it is clear that he is definitely the right person to carry the American IRA team forward leading the way as their Senior Vice President.”
According to USA Today, many will have to work until they are 70. Jim Hitt, CEO of American IRA, says this is exactly why self-directed IRAs are so important!
The USA Today article ‘Retirement bottom line: Many will have to work until 70’ addresses the serious issue of retirement funds. The article begins by explaining that Baby Boomers, with their inheritances, homes, and pensions, may be on track for a good retirement. They then caveat that by saying that the generation born from 1946 through 1964 isn’t necessarily so rosy.
This article is right on point when it states that many are ill-prepared for retirement. Jim Hitt, CEO of American IRA, says “In addition to the American IRA business I have some real estate investments…mobile home parks and single family rental homes…too often I have someone rent a mobile home that should be enjoying their retirement but, instead, are struggling just to keep a roof over their head because they don’t have any retirement funds. This is a sad and very avoidable situation.”
The overall gist of the USA Today article, as they stated by Munnell “is that retirement ages are increasing as people live longer and health care costs rise, and at the same time the retirement system is retracting.”
Economist John Turner, director of the Pension Policy Center in Washington, D.C., thinks retirees above the poverty level should do OK with at least 60% of pre-retirement income. Jim Hitt strongly disagrees stating “Now listen, I have a great deal of respect for John Turner and his expertise still I have to take issue with the fact that 60% of pre-retirement income is enough. Think about how much you are making now and decide whether you can get by on 60% of that. For some of you the answer is, yes. Now think about whether you ‘want’ to have to get by on 60% of your income throughout all of your retirement years…I’ll be the answer is, no. With the costs of everything on the rise, it is critical that planning for your retirement is a major priority for everyone.”
Self-directed IRAs are an excellent tool to help build those retirement accounts. These accounts allow people to invest with their IRA funds in things that they know and understand and that leads to greater growth within their accounts. Jim Hitt concludes “Should you save money? Yes…absolutely you should! I’m not suggesting that saving money is not the answer. What I am saying is that saving your money and putting it in an account that you can not control is not the answer. Would you bury your money in a box in the local public park? Of course not! So why then would you place it in a retirement account that you have little control over? If you self-direct your IRA, 401(k) or other retirement account, you have complete control over what you invest in. We have clients that have seen increases in their accounts of over $200,000 in 5 years…some of those clients started out with as little as $6,800. With a self-directed IRA you can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!”
New Suits Over Do-It-Yourself IRAs, as reported by the Wall Street Journal, prompts American IRA, LLC to remind self-directed IRA holders about the importance of ‘Due Diligence’. Regardless of what you invest in…it is critical that investors perform ‘due diligence’ and that they hire professionals to perform ‘due diligence’ for them when they are working in an area that they are not an expert in.
The Wall Street Journal reports that a wave of blowups in self-directed IRAs has prompted some investors to go after firms that handle the paperwork. The article goes on to report that self-directed IRAs have been around for years and have increased in popularity as investors sought after investments that brought higher returns than the stock market.
This recent lawsuit has brought suit in the U.S. District Court in Los Angeles by investors who allege that the companies administering their accounts knew the investors money had been stolen by scam artists yet sent them reports showing the value of their account remained the same. Jim Hitt, CEO of American IRA explains, “There is a common misunderstanding of how the retirement accounts are valued. When an investor takes money out of their retirement account and purchases an asset, the value of that asset is included in the value of the retirement account. The difference is between “cash value” which is the actual “cash” in the account and “asset value” which is the combined value of all the assets in the account. The value of the asset is established at the time of purchase and is then required to be re-evaluated by a professional each year. The professional deems the value of the asset and then that asset’s value is updated accordingly on an annual basis. In the event that an asset loses value prior to the annual evaluation, the account holder must get a professional to evaluate the value and only then can the asset’s value be updated in their account. It is very likely in this case, that the asset values were never formerly re-evaluated which left the value of the account the same even though the investment had gone flat.”
American IRA always emphasis’ the importance of ‘due diligence’ and the importance of working with an administrator who is willing to explain the self-directed IRA process.
The Wall Street Journal article goes on to explain that the outcome of this lawsuit is unclear since administrators do not choose the investments or take fees based on investment success. Jim Hitt, offers a reminder “Administrators do not assign the value to assets.”
The benefits of IRAs are well-understood. Tax deferral itself provides a kind of leverage – allowing investors to put a greater amount of money to work than they would be able to in a taxable account.
However, with the traditional kind of investments most consumers make in their IRAs – stocks, bonds, mutual funds, CDs and annuities – the potential for leverage is limited.
There is nothing in the law, however, that restricts you to the ordinary. The tax code actually provides very few restrictions on what investors can invest in within their IRAs, and how they can go about it. Specifically, the tax code prohibits IRA owners from using their accounts to buy collectibles, alcoholic beverages, jewelry, life insurance, and certain formats of precious metals. The law also prohibits using the IRA to benefit yourself or certain family members or advisors personally while the assets are still in the IRA. Everything that is not specifically forbidden in the tax code is permitted. Among the most popular investments for self-directed retirement accounts is real estate, – which is traditionally leveraged. Your IRA can also engage in private lending or own a closely-held small business, which may have to borrow to meet cash flow needs. Your IRA can borrow money to leverage any of these activities – potentially boosting returns.
Benefits of Leverage
Leverage – the investing of borrowed money – allows you to purchase a relatively large asset and benefit from its growth and income, all with a comparatively small out-of-pocket outlay.
Leverage can also help you diversify your portfolio. For example, if you have a $300,000 balance in your IRA, you can use it to invest in one $300,000 property – or use leverage to enable you to put $100,000 down on three properties. You then reap the benefit of capital growth and income generation of a $900,000 portfolio, minus interest and expenses.
If you do elect to purchase real estate in your IRA, using a special kind of account called a self-directed IRA, any loans your IRA takes out must be non-recourse. That is, the lender may have no lien or claim on any asset outside the IRA itself. The loan can be unsecured, or secured by property or assets which the IRA itself owns. You cannot make a personal guarantee to the lender on behalf of the IRA.
You must also comply with restrictions on counterparties:
- You cannot borrow from or lend to your IRA directly, nor can your spouse or any entity either of you control.
- Your ascendants and descendants also cannot lend to or borrow from your IRA, nor may their spouses or any entities they control.
- Professionals who advise you concerning your IRA cannot lend money to nor borrow from your IRA, nor may any entities they control.
- You cannot stay in any property owned by your IRA, even overnight, and even to make repairs, even if you pay your IRA a market rate to rent the property.
Leveraging Within your IRA
Typically, when you utilize a non-recourse lender to finance a real estate transaction within your IRA, you should be prepared to put up about 35 percent of the property’s purchase price . Reserves are required , as well as the usual closing costs, insurance premiums and property taxes due at signing. There is little opportunity for “creative financing” in this kind of IRAs. The more money you put down, though, the lower your overall risk.
You may find that mortgage rates on your IRA are somewhat higher than the norm in owner-occupied residences. However, these loans are not exotic instruments at all, and can be had for rates very similar to those on other investment properties.
Other Uses of Borrowing
IRA borrowing isn’t just limited to making asset purchases. There are also unlimited opportunities for owner financing that may qualify for non-recourse loans. Certain lease options may also qualify for non-recourse loans, as may contracts for deeds and many other types of arrangements. Remember that IRS rules limit you from contributing more than $5,000 per year in new money to any combination of IRA accounts. For those over age 50, the limit is $6,000. For cash needs over and above your allowable contributions, it is perfectly acceptable to borrow money to finance operations, repairs, improvements and other investments and expenditures within your IRA. However, regardless of the purpose of the loan, the same rules and restrictions on loans within an IRA apply.
While assets in IRAs generally defer income and capital gains tax until the assets are distributed, IRAs may still be subject to a special tax on unrelated business income. The unrelated debt income tax (UDIT) may apply on any profits within the IRA that are attributed to leverage, in proportion to the leverage amount. This could also be true of any assets your IRA owns as part of a partnership. The reason? The IRS did not want to grant a substantial business advantage for non-taxable entities, including non-profits but also IRAs – engaged in business activities. For more information on the unrelated business income tax, see IRS Publication 598.
As always, you should be aware that while leverage can boost potential returns, it can also boost risks, as well. While you cannot lose more than you have in your IRA – thanks to the IRS prohibition on any borrowing in an IRA other than non-recourse debt.
Cash Flow Factors
Because of the restriction on investing new money in your IRA property, it is doubly important to maintain cash or other liquid reserves within the IRA itself. It is also important that the investment, whether it is real estate or something else – be cash flow positive: If your asset is bleeding red ink because of a vacancy, you have a very narrow window available for cash infusion from outside the account. Fortunately, with down payments in the 35 percent range and up, this is a relatively uncommon occurrence for real estate investments. If you want a larger window, you may consider a self-directed SEP IRA or Solo 401(k), both of which feature much larger contribution limits – as much as $49,000 per year, depending on your circumstances . As a point of interest, Solo 401(k)s are not subject to UDIT, in some circumstances.
Leverage should be employed judiciously, with a healthy respect for potential downside risks. For more information or a no-obligation consultation, please don’t hesitate to call American IRA, LLC at 1-866-7500-IRA(472).
Retirement at 23?!? According to a Wall Street Journal article, Bain Capital offered their employees a chance to co-invest in take over deals averaging 50% to 80% returns in their self-directed retirement accounts. American IRA, LLC CEO, Jim Hitt, says “This is one outstanding example of how tax-deferred and tax-free accounts can be used to build wealth.”
Call to action: protect the value of inherited IRAs. American IRA, a National Provider of Self-Directed IRAs, announces recent proposed provision removal. According to the Washington Bureau “Retirement industry officials are gearing up to remove a provision in Senate legislation that would reduce the value of inherited IRAs.”
The Washington Bureau recently reported that there is a provision included in S. 1813, the Highway Investment, Job Creation, and Economic Growth Act that would reduce the value of inherited IRAs also known as ‘Stretch IRAs’. The report goes on to explain “these ‘stretch IRAs’ are sometimes used to reduce taxes by people who designated a young person as a beneficiary, thereby giving them a long opportunity to increase the value of the IRA through inside buildup.”
American IRA, a National Provider of Self-Directed IRAs, announces its sponsorship of the Pitbull’s 26th National Hard Money Conference on March 21st in Fort Lauderdale, Florida. Learn how to create a pool of funds and avoid those lender induced headaches!
Jim Hitt shares, “As an entrepreneur, I have owned everything from single family homes to multi-million dollar commercial properties. Being self-employed has tremendous benefits…yet when it comes to lenders…being self-employed can be an obstacle. It seems the more creative the deal, the more resistant traditional lenders can be. Hard money lenders are more inclined to loan money in those situations because they know that creative deals can lead to excellent returns.”
- Take Full Advantage of a Self-Directed Roth IRA
- Legacy Planning for Self-Directed IRA Owners and Their Beneficiaries
- How to Roll Over 401(k) Funds into a Self-Directed IRA Correctly
- Keep an Eye out for These Possible Changes to Self-Directed IRAs
- Self-Directed Solo 401(k)s, Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs – Which is Right for You?
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