Clay Malcolm talks about ways expand your investment strategies but using debt leverage within your IRA.
When investing in real estate inside your IRA, there are ways to invest in properties without having the full amount needed, as Clay teaches us.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing in industry teach you quick lessons to take your business to the next level. And now, let’s meet the day’s expert host.
Clay: Hi, everyone. My name and Clay Malcolm from New Direction IRA and welcome to the REI Classroom. Today, we’re going to be talking about how your IRA can invest in real estate using debt leverage and increase your buying power.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.
Clay: One of the things that are really unusual about real estate as an asset for IRAs is the fact that you can use debt leverage. And the reason that’s a little bit revolutionary or unusual as because it allows you, the IRA account holder, to make money on money that you didn’t actually have to contribute to the IRA. In other words, this money is coming from a lender. You didn’t have to make contributions and follow the annual contribution limits to get the buying power of that money.
And a lot of people don’t know that their IRA can use debt leverage. They feel like IRA has the full purchase price of a single-family rental or a duplex or condo or whatever it is that the piece of real estate that they think is best for their account. But you can use debt leverage. And the thing that is amazing about that from a buying power perspective is that it allows you to expand your strategy.
One of the things that we see very often is that somebody will have a cash balance from another asset and it’s sitting in their account and they’re looking for a way to make it work. But it’s not enough to buy a property all by itself and so it will go ahead and get a non-recourse loan, which is a requirement for this type of strategy, and it will use that debt leverage to buy a property they wouldn’t be able to get ahold of otherwise.
And keep in mind that the financial flow is very similar to the way it would be outside your IRA. In other words, the IRA is the buyer of the property, it is the borrower of the money. So the rent comes into the IRA and then the IRA paid the debt service just like you would outside in IRA. And of course, once the debt service is paid off, the IRA is receiving all the proceeds from the property without having to pay any more to the lender.
So it really can be a very powerful strategy. And a couple ways that we see people use it most often is getting a hold of a property that they wouldn’t be able to. So that could either be getting into a starter property with a small amount of money, $20,000, $30,000 or something like that, or it could be getting into a property that’s much more expensive than they thought they could afford because the returns will be much more. And of course, all that money comes back to your IRA, even though you use the loan to get it. sSo if you had a $200,000 IRA, you might go and buy a $500,000 property and go ahead and go ahead and start that leverage cycle because it’s a good strategy for you.
The other thing that we see sometimes is somebody will take that $200,000 and they’ll split up into three or four pieces. So let’s say somebody wanted to get ahold of and have possession of or control of four properties. They could take four $50,000 chunks, get debt leverage on each of those and in that way, they would have a little bit of diversification in terms of the assets that they have not from an asset class perspective but from a numbers perspective. And a lot of people feel more comfortable with that strategy.
But the nice thing is that you can incorporate this knowledge into whatever strategy that you have that you’re most comfortable with. But remember, this is really only asset, at this time, that the IRS will let you use to make money on money that you didn’t have to contribute to your account. We’ll see you next nominee REI Classroom. I’m Clay Malcolm.
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