Investing in Real Estate With Your IRA

Did you know that it is possible to use your retirement fund to invest in real estate? While not widely publicized, your IRA is one of the best tools available out there to invest in, and profit handsomely from, real estate. The process is farily simple and offers you the chance to grow your retirement fund tax free, a proposition that you’re unlikely to find anywhere else. I’ll detail everything you need to know to get started using your IRA to invest in real estate.

Open a Self Directed IRA
Traditional IRA’s and Roth IRA’s are geared to be used for securities and thus are not eligible to be used for the purposes of real estate transactions. You will need to open what is known as a self-directed IRA account. These accounts are offered by specialty providers and can be found easily with a google search of “self directed IRA”.

A self directed IRA basically means that you have opened up an IRA in which you tell the custodian (the company you opened up the account with) how and where to invest your funds. You maintain full control over the account as well as where the money goes and how it is invested. If you tell the custodian that you wish to invest in real estate they will direct the correct amount of funds to the seller of the property you wish to purchase.

Purchasing Property with your IRA
Many self-directed IRA’s will allow you to buy either developed or undeveloped land, commercial or residential, even foreign land or property. Do not worry if you dont have the total amount needed in your retirement fund to purchase the property, the IRA will allow you to invest whatever amount youd like as an “interest” in the property. You can even combine interests in the property with other investors who are also using their IRA’s for the purchase.

Limitations on Investing
The IRS will not allow you to use the property that you have purchased with your IRA as your primary residence or vacation home. The property has to be used for investment purposes and personal interests can end up costing you dearly in the form of additional taxes or penalties. You are also not allowed to take a property that you already own (or that any direct family members own) and place it in your IRA. The property must be purchased originally by your IRA in order to be eligible.

How to Operate Property held in your IRA
Once the property is being held in your self-directed IRA, you must take great care how you operate it to avoid additional costly fee’s or penalties. All funds used in maintaining or operating the property must be taken from the IRA account used to purchase the property. In addition, all income generated from the property must be deposited in the IRA account, it cannot be used for personal use. If you dot have enough money in your IRA, you must withdraw the property from the IRA account which will cost you a pretty penny in taxes and penalties.

What happens when I retire?
At age 59 1/2 you are legally allowed to withdraw any money or property in your IRA without any IRS penalties. You have two possible decisions to make when this time comes: sell the property or take an in-kind distribution (meaning that you will own the property outside of your IRA and are free to do with it what you wish).

Investing in property with your IRA is one of the smartest strategies you can use as a real estate investor. The tax deferred ability of the IRA allows your property to increase in value rapidly while limiting your tax exposure. Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.

So you’ve decided to become a landlord and purchased your first rental property. You’re excited to have somebody else start paying your mortgage and build equity for you. Congratulations, you’re successfully on your way to becoming independently wealthy through real estate.

The first thing you need to do once you’ve purchased your property is find a tenant to occupy it. While it seems simple on it’s face, this is one of the most crucial decisions you will make as a landlord and it can have a huge impact on the success of your investment property. By following these simple rules for screening tenants you will be off to a great start with trustworthy and respectable tenants occupying your property.

Where to Find Tenants

When you are first beginning your search for the perfect tenants, your goal is to get a large pool of potential applicants so you can narrow them down to just the right people to occupy your property. This involves posting ads for your rental property in commonly read publications either online or in print. Some great places to advertise online include: Craigslist, online versions of local classifieds, roomates.com, etc.

Print advertising can also be a great way to advertise your property. Some forms of print advertising include: classified sections of local newspapers, flyers that can be posted in public areas or neighborhoods, universities or corporate housing offices, or specialized rental property magazines.

Last but not least, make sure you place a rental sign outside the property. Be sure that the sign is placed in an area that is easily seen from the road and includes useful information such as the phone number to call, monthly rental price, and some features of the property such as # of bedrooms, bathrooms, etc. These details on the sign will weed out tenants who wouldn’t be a good match for your property and will save you time in the long run.

The Rental Application

Now that you’ve got your phone to start ringing with potential tenants, you need to be have them fill out a rental application. Generic rental applications can be found all over the internet, and you can pick and choose aspects of each that you like when creating your own. Ask for all the basic contact information as well as important information about past and present employment history, current income level, personal and professional references, and rental history. Consider charging an application fee to cover any costs incurred by background or credit checks. Charging an application fee will also weed out any applicants that are too cheap to pay it - and if they’re too cheap to pay the fee they’re most likely too cheap to pay their rent.

Credit Checks & Background Investigations

The next step is to verify the information that the applicant has given you. Make sure you call the references they have listed as well as their employer. If anything seems strange or out of place about their references or employer, throw the application away. Dont ask questions, dont hesitate…throw it away. You dont have time to waste figuring out whether people are lying or not, its just not worth your time.

Once you have narrowed down the list to a small group of qualified applicants, its time to do the real digging. Request a credit check from the major credit bureaus (Experian, Equifax, Transunion) and see what their credit history looks like. Look for unpaid utilities, judgements in small claims court against them for not paying bills, previous eviction notices, etc. This will give you a good idea of their financial standing and whether they would be able to pay your rent or not. In addition to the credit report, it often pays to have a background check performed as well. Background checks can speak to the character of the applicant and you can make a personal decision whether or not that’s the type of person you’d like to be renting to.

Interview the Applicant

If everything check’s out on paper, its time to meet the person face to face. Schedule a time for the applicant to meet with you at your office or the rental property itself. This is your time to get a feel for the type of person you will be dealing with should you decide to rent to them. A lot can come out in person that could be overlooked through contact over the phone or by email. If you get a good vibe from the person and it seems like they may be someone you’d like to rent to, think it over for a night and then ask them to come in to sign a lease.

Congratulations, you have gone through a thorough screening process and found a great tenant to live in your rental property. With the initial risk minimized, the only thing to do is keep them satisfied and continue to collect your rent on a monthly basis. The process only gets easier and more streamlined in the future as you continue to rent out property.

PRICE REDUCTION

$20,000

$17,500

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What is a “Subject To” real estate deal?
A “subject to” real estate deal involves a seller deeding the property to a buyer while keeping the existing mortgage in place. The buyer does not formally assume the loan, they just start making the payments while the loan is still in the seller’s name. There are many variations on “subject to” deals and as many ways to close a deal as there are investors doing it. We will cover all the steps needed right here.

Obtaining a property “Subject To” the existing loan isn’t really as hard as it may seem so long as you know what you’re doing. If you know the principles behind the deal and can clearly explain it and its benefits to the seller, you can buy more properties at a faster rate than a traditional investor would be able to by getting new loans on each purchase.

Here’s How to a “Subject To” deal works:
When a property is financed, the note says “I owe $$$ amount of money” and the Deed/Trust/Mortgage says something to the effect of “here is what the lender considers collateral to sell if the note is not paid back as agreed upon.” In most cases, the individual borrowing the money is the one that is personally liable on the loan. If the collateral that’s backing the note is sold and the amount received from the proceeds cannot cover the debt owed, the borrower must make up the difference out of their own pocket.

Traditionally, if you didn’t obtain a new loan when you purchased a property, you would take over ownership and “assume and agree to pay the orignal loan as agreed upon”. Recently lenders have started inserting a “due on sale” clause in collateral agreements; meaning that when the original homeowner sells or transfers interest in the property to another individual, the lien holder may require full payment of the loan immediately rather than continue to accept payments.

In the early years of the “due on sale” clause, the current interest rates were much higher than the rates on old loans, so lenders had a good reason to call the loans due where the “due on sale” had been violated. Now that interest rates have reached historic lows and interest rates are still low, lenders in general have not been filing “due on sale” cases at all. And, as a rule, unless something out of the ordinary happens, the lender never notices that a transfer has occurred. If you don’t make the payments, they will notice. If you cause them a lot of paper work, they will notice.

Buying a property “subject to” the in-place mortgage means that you will receive the deed, however you do not assume the full responsibility of the loan. The loan will stay in the name of the original homeowners, but you now own the property and continue to make the monthly mortgage payments. If you stop making the payments, it is possible that you could lose the property and the equity that you have in it. However, if the payments aren’t made and you end up losing the property, the personal liability for the mortgage will fall on the original homeowner.

Who is the ideal candidate for a “Subject To” deal?
Homeowners that are typically behind on payments, individuals that are going through foreclosure or may have little to no equity in the home are among the most frequent motivated sellers which you will be interacting with and perfect for buying “subject to”. Although it is common for highly motivated sellers to agree to practically anything, it’s still a good idea to take the time to explain what you’re doing, how the process of the deal works, and how it ultimately benefits them as well as you. They will ultimately benefit because you will be paying the mortgage in a timely manner which will help keep their credit intact and they could potentially stay in the house as you are making the payments. If the seler is concerned about the process and what you’re doing, it helps to explain to them that the potential risk of losing all of the equity in the house is enough of a motive to keep you from missing any mortgage payments.  You can also include a clause in the contract stating that you agree to pay off the sellers loans within a predetermined amount of time.

If the seller is still unsure, a good way to build their confidence is to have an independant third party collect and disburse the mortgage payments. The third party could be a company that deals with loan servicing or trusts that would be able to do this for you. Another method that works well is to have the seller open a seperate savings account at the bank that holds their original loan and add you on the account. You can then continue to make payments into their account and set up an automatic payment method to pay down the mortgage debt.  This allow them to actually see the money going into their account and then out to pay the mortgage.

What are some issues that may arise during or after the deal?
One of the largest problems that may arise deals with insurance. You must carry the proper insurance during the deal since the homeowner’s insurance policy is usually only valid for 30 days after the “subject to” transfer is complete. The first thing to do is to call the insurance company that is holding the existing homeowner’s policy and get them to add you onto the policy. Once this is done follow up with the mortgage company in a couple of weeks to modify the policy to a “renters” policy or you could get an entirely new homeowners policy which includes you and the seller.

An additional approach commonly used when dealing with insurance involves using a land trust. A land trust essentially holds the title to any real property and thus is often used by investors for estate planning or tax purposes. The beneficiary would be the homeowner and you would be listed as the trustee who’s responsibilities are to carry out orders and control the property. You would then speak with the lender and explain the change and ensure that all correspondences should be directed to the trustee (you) who can then make changes to the policy. To help protect your financial interest in the property, a beneficial interest would also need to be assigned over to your name.

It is a possibility that if interest rates start climbing in the near future that the lenders would be more interested in who’s actually making the payments. The best way to not catch their attention or raise any red flags is to miss payments. It is crucial that during a “subject to” deal you make sure that everything is done by the book so that both parties end up satisfied.

We’ve really got a good one for you this time.  2br/1.5ba townhouse with 1 car garage for sale for $75,000.  This property only needs flooring installed.  The wood flooring is currently in boxes in the basement just waiting to be installed.  We’re talking $3,000 MAX needed in this property to get it into rentable shape.  Check out the video and you’ll see the potential we’re talking about.

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This property is a steal.  $8000 asking price, currently has both sides rented out at $500/month.  The property pays for itself within a year on rental income alone! Small amount of work needed on the inside if you were going to rehab it.  Attic space is currently undeveloped and could be turned into a seperate unit or add an extra bedroom to both sides.  This property will not last long at this price!

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Whats All The Fuss About?

The government is handing out free money!!! Thats what all the fuss is about!  The American Recovery and Reinvestment Act of 2009 allows first time homebuyer’s to take a tax credit of up to $8,000 if they purchase a home before December 1, 2009!

Frequently Asked Questions

Am I eligible to claim the $8,000 tax credit?
If you qualify as a first time homebuyer and you buy a home before December 1, 2009, you qualify for the tax credit.  The date of purchase is recorded as the date at which closing taes place and the title of the property is transferred to your name.

Can you define what a first-time home buyer is?
The term “first time homebuyer” refers to an individual that hasn’t purchased a home during in the previous three years.  If you are married, the law accouts for your spouses home purchase history as well as your own

What homes are eligible to qualify for the $8,000 tax credit?
The home must be used as a “principal residence” in order to be eligible for the tax credit.  This means it must be your primary residence and could come in the form of a townhouse, condo, single family home, houseboat, or manufactured (mobile) home.

Does my level of income effect the amount of the tax credit?
The most that an individual filing as “single” can make is $75,000.  Married persons that choose to file a joint return can earn up to $150,000.  There is a phaseout range of $20,000 for the tax credit which means that the amount of the tax credit will be $0 if your modified adjusted gross income exceeds $95,000 as a single filer or $170,000 as a married couple filing jointly.

How do they determine how much the tax credit is for?
The IRS calculates the credit as 10% of the price of the home with a cap of $8,000.  This means of the purchase price of your home is $80,000 or more, you will qualify for the full $8,000 tax credit.

Whats the difference between a tax credit and a tax deduction?
A tax credit is considered a reduction in what the taxpayer owes. This means that an individual that owes $10,000 in taxes and receives an $8,000 credit would owe $2,000 at tax time. Tax deductions are “deducted” from the amount of income that is taxed. If you made $10,000 this year and received a $8,000 deduction, you would only be taxed on $2,000 of your income for that year.

What do I do to claim the tax credit? Do i have to fill out an application or any forms?
You do have to fill out forms, the good news is you’d allready be filling them out come tax time anyway!  The amount of your credit can be figured out by filling out IRS Form 5405.  Once you figure out how much of the tax credit you’re eligible for, you claim the credit on line 69 of IRS Form 1040 (this is the form you normally fill out for taxes each year).

Do I have to get pre-approved in order to qualify for the tax credit?
Nope! As long as you qualify under the previously mentioned income limits then you can claim the tax credit on your taxes.

What if I’m not a US citzen?  Can I still claim the tax credit?
If your status is defined as a “nonresident alien”, and you meet both the previously mentioned “first time homebuyer” and “income limit” qualifications, you too are eligible to claim the tax credit.

What if I bought a house in 2008? Can I still claim the tax credit?
Unfortunately in this case you would not be eligible for the first time homebuyer tax credit. However, if you purchased your first home between April 9, 2008 and January 1, 2009, it is possible that you may qualify for a different tax credit.  Consult your tax professional if this case applies to you and they can better guide you in the process.

If my home purchase is financed uner a Mortgage Revenue Bond (MRB) program, do I still qualify for the tax credit?
Yes!  The credit is allowed to be combined with the MRB home purchase program.  However, if you purchased your home through the MRB program in 2008 you do not qualify for the credit.

This property has amazing potential.  $16,000 asking price with a ARV of easily $70,000+.  About $10,000-$12,000 worth of work needed.  New roof and windows have already been put into this property. Check out the video below to see a walkthrough of the property and an overview of the work that needs to be done.  At this price, this property won’t last long.

If you would like detailed information on the property

CLICK HERE