Today’s REI Classroom Lesson

Clay Malcolm shares a real life example about how a real estate flipper utilized another person’s IRA money to fund the flip.

REI Classroom Summary

Learn more about how it works, advantages for both parties, and how it can be a win-win for everyone involved.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Man: All right. Today we’re going to take a real life example of the way that one fix and flip person is using other people’s money, and in this particular case, an IRA’s money, and this particular case, it’s actually my IRA money.
Mike: This show was sponsored by
Man: So this is a real life example that I’m participating in and I thought that the way that this person is running her business is really interesting in terms of the way that she’s deploying her cash and then backfilling that with other people’s money.
So this is a person who has an active fix and flip business, also does fix and holds on a number of other real estate investments. But in this one particular sequence, she’s been acquiring a house, and in a lot of cases, she’s actually partnering with the existing owner. Now, the existing owner, in a lot of cases, is already an investor but in some cases, not.
And then, she brings in another lender, in this case, my IRA, to essentially buy out the money that she’s put into the deal. So I get the advantage of a piece of the profit once the repairs are done and the property is sold. She gets to take that money that she has put into that particular project and get that money out so that she can start the next one.
So one of the things that I think is really effective about this particular strategy is that she’s able to keep her money moving toward the next project, and the next project by backfilling the loans. So this is not the exact amount of numbers, but I’ll give it to you in a very easy math using math numbers.
So let’s say she gets a property for $60,000 or that’s the participation of the owner. Let’s say the repairs are 20, and she puts that $20,000 in at the beginning and starts the rehab work. And once she feels like that she’s able to get that work going, then she starts looking for investors to come in and loan her $20,000. So she actually replaces her money in the deal with somebody else’s and then she’s able to, again, go out and start the next property.
Now, the cool thing is the way that she has it set up is that all three of those participants get to split the profits as she sells the property. So the percentages will shift according to the dollar amount, and the work, and a number of different things. So she’s obviously the quarterback in terms of what those terms are and how that works.
But from my perspective, as the IRA investor, all I’m really doing is making a loan which is an easy thing for a self-directed IRA to do. And typically speaking, in her scenario as well as others that I’ve seen, there is a rate, an amortized rate that probably would carry through if the sale didn’t occur right away are on the schedule of the way that the loan is structured. But the prepayment part is what everybody expects. So as soon as the repairs are done, that sale will actually occur and everybody will split up the proceeds, and a way we go on and start again.
So it’s one of the really interesting things about . . . I’ve been in the self-directed IRA business for a while but I’ve also been a self-directed IRA investor myself. And so one of the things that’s really interesting is when I hear about an investment seeing about how the business person, in this case, a fix and flip business is deploying or engaging other people’s money. Because it’s one of the ways that she keeps in business and keeps her revenues up. It’s also great for me as an IRA investor. So it’s one of the nice matches about the way that IRA real estate investing works.
Thanks for joining us on the REI Classroom. We’ll see you next time.
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