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5 Rules of Thumb For Retirement Investments

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5 Rules of Thumb For Retirement InvestmentsEvery once in a while, it helps to get back to basics with retirement investments.

After all, Self-Directed IRA investing is like any sport: If you master the fundamentals of the game, you will find yourself much better able to adapt to any situation.

Pay yourself first. This means that at least 10 percent of your income, right off the top, should go to advancing your own long-term financial security. Not to short-term needs, and not to enriching someone else’s. Of course, carelessness with debt, or buying too much house, or any number of other common mistakes can make paying yourself first extremely difficult, as debt service overwhelms your income and gradually restricts your options. Paying yourself first, however, can go a long way to preventing this from happening.

Increase that 10 percent. That 10 percent is a bare minimum. That’s for people at the very beginning of their careers, still eating Top Ramen for dinner. As you get older and more established, your disposable income should go up. So should your minimum acceptable savings rate.

Cash Counts. Yes, cash counts in the bank, but inflation can tear the guts out of bank savings accounts over time. Cash counts in equity investing, too: Recent research by Lowell Miller of Miller/Howard investments, has found that stocks that pay regular dividends consistently outperform stocks that don’t pay dividends – and that the higher the dividend, the greater the risk-adjusted outperformance.

Miller’s analysis was of publicly-traded stocks in the S&P 500 – but the same logic applies to just about any investment – the ability to come up with a cash dividend on a regular basis is a useful acid test for retirement investments. Even if you choose to reinvest those funds, it’s good to have enough internal cash flow within a given investment so that you have a choice.

That’s not to say there aren’t excellent early-stage retirement investments in the venture capital and private equity world and the closely-held business world that don’t pay a regular dividend or even generate a lot of cash internally. Many of these will have a sale or acquisition strategy rather than a strategy of eventually paying dividends to the current owners. That is, they are hoping their technology or service will be purchased outright by a bigger fish. But understand where these companies lie on the risk axis!

Multiply by 25. This rule of thumb refers to the amount of money you should have in a retirement nest egg by the time you hang up your spurs. Estimate your desired retirement income. Then multiply it by 25. This is the approximate level of savings planners recommend their investors have to generate income when they retire.

This is a very broad rule – someone with a lot of in Roth real estate IRAs may be able to get away with quite a bit less, with a healthy portfolio of real estate generating tax-free rental income. You may be able to generate better cash on cash returns by concentrating on non-publicly traded, unconventional assets through the use of self-directed IRAs. Indeed, that’s the point, isn’t it?

Diversify. Now, diversification doesn’t mean you necessarily have to own thousands of different positions – though that’s one way to do it. But the downside to that approach is that the lousy investments dilute the effect of the good ones. Another way to approach diversification is to try to own a few excellent positions in several different asset classes and industries. The idea is that you will still get the strong cash flow properties of the best appropriate investments in each asset class you can find, even though any one of these holdings may be a bumpy ride. Their volatility should largely be mitigated by other bumpy rides in other asset classes, which aren’t closely correlated with one another.

This is the approach favored by Warren Buffett, who, while he usually favors equity holdings, counsels “put your eggs in just a few great baskets – and then watch those baskets!”

 

 

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Commercial Real Estate – In Your IRA?

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Commercial Real Estate – In Your IRA?

As most of you know by now, IRA rules don’t restrict you to stocks, mutual fund shares, bonds, annuities and CDs. Because of the way the tax code is written, you can use your IRA money to take direct ownership of all kinds of different investments, including real estate.

Thanks to the availability of significant leverage, real estate is one of the most potent assets a skilled investor can place in an IRA. The combination of innate inflation hedging, potential for capital growth, and the expectation of a steady, growing and indefinite stream of rental income makes real estate an ideal investment to enhance a retirement income.

Why Commercial Real Estate?

Commercial real estate has many of the same advantages as residential real estate, listed above. But for some of our clients, commercial real estate has a few other advantages as well: It’s easier to “scale up” commercial space for larger accounts without having to buy many smaller properties. Commercial real estate can also generally be repurposed to suit a tenant more easily than a residential property in a market where residential property is underutilized. If you have a good tenant in mind, you can frequently make the deal happen.

Commercial real estate also involves much longer term leases than residential real estate. Residential properties will lease for a year at a time on a good day; but you can demand multiple years and even decade long leases on some commercial spaces – and tenants are delighted to secure them in exchange for security. These longer leases can go a long way to helping you ensure a steady stream of retirement income, without having to go crazy managing many different properties.

Further, you may find a much more inefficient market in smaller commercial properties. Many times, these little warehouses, storefronts and workshops are too big for the residential specialists to handle, but are still below the radar of institutional investors. When you go looking for property, you may find you’re the only one talking to the owner.

Special IRA Rules

Putting commercial real estate in an IRA for tax-deferred growth can be a tremendous way to leverage your real estate holdings while sheltering your rental income from taxes. And if you convert to a Roth IRA at some point, you turn that stream of rental payments into tax-free income for as long as you live.

But there are certain things to keep in mind when it comes to real estate assets in your IRA.

Watch your cash flows. You can roll money from other retirement accounts into your IRA to satisfy liquidity needs. But you can’t contribute more than $5,000 of new money (or $6,000 if you are over age 50) to an individual retirement arrangement in any one tax year –and then only if you meet some fairly stringent IRS limitations on your income. This means that if you need to make any major investments, repairs or renovations to the property, you will need to finance it from within the IRA, or have your IRA borrow the money from a non-prohibited source. Otherwise, the property must be self-sustaining.

Likewise, you can’t pull cash out of the IRA, except for certain specified hardship conditions, until you reach the age of 59 ½, lest you be held liable for any income taxes due on traditional IRAs, plus a 10 percent penalty.

Don’t Engage in Self-Dealing

You cannot use your IRA for any personal benefit, other than simply growing your IRA. Your IRA cannot do business with you. You can’t act as the paid property manager of the property, nor can you lend money to or borrow from your IRA. You can’t live on the premises, or even stay there overnight – even if you pay the market rent to the IRA. The same applies to your spouse, descendants or ascendants, their spouses, your financial and legal advisors working with you on your IRA and properties in it, and any entities they control.

Watch the Financing

IRS rules prohibit you from pledging your IRA as collateral for a personal or business loan. But your IRA can borrow money for its own use. All borrowed funds – and the goods and services they purchase – must remain in the IRA. You cannot commingle the proceeds with your personal money or any businesses outside of the IRA.

Furthermore, all loans the IRA takes out must be nonrecourse – the lender must have no legal claim on anything outside the IRA. Otherwise, you could “blow up” the whole account, and be forced to pay income taxes and penalties on the whole thing. If there’s any doubt, be sure to talk to a professional experienced in self-directed IRA investing before making any commitments. Not all advisors are familiar with the rules specific to self-directed IRAs

Commercial real estate can open up whole new worlds for the real estate investor, with access to pools of capital and partnership opportunities. And many properties can be had at very reasonable prices in today’s market. Expect to come up with some more significant down payments than residential property investors may be used to – on the order of 35 percent and up. That’s a blessing in disguise, in some ways, though, because unless the IRA has significant liquid reserves, it can be difficult to keep a property maintained, given the limitations on new money contributions to IRAs, unless the property is cash flow positive early on.

As always, be sure to work with an advisory team that is very familiar with the rules specific to real estate in self-directed IRAs, who know the rules, the court case precedents and the IRS revenue rulings governing the practice. Most conventional advisors are not experts in nontraditional investing in IRAs.

For more information, or to explore your options, call American IRA today at 866-7500-IRA(472). We look forward to working with you.

American IRA, LLC’s CEO, Jim Hitt, Addresses A Question His Self-directed IRA Clients Often Ask About Commercial Real Estate Investing

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American IRA, LLC’s CEO, Jim Hitt, addresses a question his self-directed IRA clients often ask about commercial real estate investing. An in depth look at the ‘due diligence’ needed to safeguard your investment.

Jim Hitt has been a successful investor for over 39 years and has a unique expertise in investing with and without a self-directed IRA.

Jim Hitt shares, “When investing with self-directed IRAs, it is the responsibility of the client to do their ‘due diligence’. Recently we have had a wealth of clients asking for a detailed list of ‘due diligence’ items. Many clients know what ‘due diligence’ means but they don’t know the overview. At American IRA, LLC we provide a wealth of information so they are able to do their ‘due diligence’. Readers should keep in mind that while this list is extensive, it is not the end. A professional team is always required when purchasing any type of business.”

Market Analysis: Demographics:

*The offering will say to the effect “gross potential” a.k.a. “pro forma”

  • REO, foreclosures, and distressed sales will need to be evaluated on a case by case basis. These fundamentals will still apply however;
    • Get the real numbers NOT “pro forma” based on the future plan to operate the property
    • Obtain the properties tax return
  • Existing loans
    • Can loan be assumed?
    • Is there a prepayment?
    • Is an extension available?
    • What is currently owned and what are the terms?
  • Verify income

Leases are the most important of all the documents. When reviewing a lease investors should look to see if there are any special arrangements such as: the tenant agreeing to do something each year (ex. New paint, carpet, etc.) and/or the tenant having the first right of refusal on purchase or additional space. Investors should also compare the rent roll to the income documentation and make sure that both report the same income. It is important to see who owns the lease hold improvements. Of equal importance, the investors should carefully read every lease, line by line and they should make notes of anything that stands out to them.

For anyone not familiar with ‘rent rolls’ they include the list of current tenants as well as their name, amount of rent they pay and their contact information. These rolls are important as a high turnover rate in tenants can indicate that there is a problem.

A careful review of expenses is also very important. Bills that should be reviewed include but are not limited to: utilities, taxes, insurance, lawn maintenance, bookkeeping/accounting, and pest control.

Investors should go over every expense and income and be sure they are accurate. Investors are buying ‘income’ and if it does not match up to the proposed price, the price should come down or the investor should exit the deal.

Jim Hitt says, “There is so much more to consider, too much to include in this press release. Some of the additional items of consideration are: surveys, easements, encroachments, and title issues. There are also third party reports that should be ordered: appraisals, environmental, zoning compliance, building, engineering, and ADA compliant. Finally, there are documents that you need to prepare to protect your interest: Tenant and Mortgage Estoppel letters and signed list of personal property included. Investing done correctly can be a winning situation!”

About:

American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self-directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

As a self-directed IRA administrator they are a neutral third party. They do not make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms ). They are not responsible for and are not bound by any statements, representations, warranties or agreements made by any such person or entity and do not provide any recommendation on the quality profitability or reputability of any investment, individual or company. The term “they” refers to American IRA, located in Asheville, NC.

American IRA, LLC Thanks Holly Calabro from the TREIA Publicity Committee for Writing That Great Article about Our Recent Self-directed IRA Real Estate Seminar

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American IRA, LLC thanks Holly Calabro from the TREIA Publicity Committee for writing that great article about our recent self-directed IRA real estate seminar. Holly’s enthusiasm is contagious as she talks about the wealth of investment possibilities available when people self-direct their IRAs allowing them to invest in trust deeds and mortgage notes, rental property, condos, raw land, lease options, gold and silver, joint ventures, promissory notes, LLC shares, and tax liens.

Jim Hitt, American IRA CEO, exclaims “I was elated to read Holly’s article and to see her enthusiasm coming through the page! Our goal is to educate people so that they can maximize their investment profits through self-directed IRA investing, and we know we have done our job when we see someone come out of our seminar as excited about the process as Holly is! Thank you, Holly! You wrote a great article and we are glad that you are excited about self-directed IRA real estate investing!”

Holly explains the process brilliantly in her article and she is generating interest as we are seeing blog posts with questions and comments on her article. One question she received is “In the above Holly states, ‘you and your IRA are separate entities. The assets owned by the IRA must be handled as passively as possible. For example, if your IRA owns property, you cannot provide any labor for that residence, act as a realtor, or be a property manager.’

“However, later on we see in David’s example, ‘No earned income to qualify for an IRA? Make yourself the property manager for your own properties, collect a small income, and qualify.’

“Is this permitted or not?

“Also, where can I find more info on tax liens in NC? As I understand it, purchasing a tax lien does not transfer ownership in any way?”

This is an excellent question that often comes up. The distinction here is a property that is owned by an IRA and a property that is owned directly by an individual. It is true that a property owned inside an IRA belongs to the IRA and the IRA account holder cannot provide any labor for that residence, act as a realtor, or be a property manager.

When she goes on to say “No earned income to qualify for an IRA? Make yourself the property manager for your own properties, collect a small income, and qualify.”, she is calling out a distinction here. In this case, she is saying that the individual purchases a property on their own with non-IRA funds because they do not have an IRA established. She is then suggesting that that individual take the money they earn and contribute it to an IRA so that they can use that IRA to purchase future properties.

For those that missed this seminar…the entire event was professionally video taped and will be available by year end through the American IRA website at a great price. Of course, American IRA clients always receive educational materials at discounted rates, so if anyone is thinking about opening an account, this is a great time to get started.

Home Values Are On The Rise With More People Looking At Real Estate As An Investment Again. Jim Hitt Speaks About Self-Directed Real Estate IRA Investing And The Upturn.

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Home values are on the rise with more people looking at real estate as an investment again. Jim Hitt speaks about self-directed real estate IRA investing and the upturn. There has been a significant increase in the number of real estate transactions in the American IRA office.

USA Today reports that “Home values have turned the corner.” American IRA, LLC has noticed a definite increase in the amount of real estate it’s clients are purchasing…a sure sign that the housing market truly has turned the corner.

Second-quarter data showed annual increases in home values in nearly one-third of the metropolitan areas that it tracks, or 53 of 167, as reported in the USA Today article, “Home values have turned the corner, Zillow says” “The window of opportunity is still open but closed slightly. Investing in real estate is still a tremendous value and if you haven’t considered it, it may be time to look at it now.”, says Jim Hitt .

Jim Hitt continues, “Our self-directed IRA client’s who are avid real estate investors, tend to value the real estate based on the Return on Investment (ROI) which means those who purchase the properties in order to rent them out are willing to pay slightly higher amounts than our investors who purchase the properties to re-sell them. With rental demand increasing, rental fees are on a steady incline which means a segment of real estate investors are willing to purchase the homes at higher prices.”

Regardless as to why the upturn in the housing market has occurred it is a much needed long overdue positive sign for the economy.

About:

American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self-directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

As a self-directed IRA administrator they are a neutral third party. They do not make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms ). They are not responsible for and are not bound by any statements, representations, warranties or agreements made by any such person or entity and do not provide any recommendation on the quality profitability or reputability of any investment, individual or company. The term “they” refers to American IRA, located in Asheville, NC.

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.

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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.”

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