I heard you can own real estate in your retirement account! Is that true?

Yep! In fact, here is a personal story about my business partner (Gary) and his wife (Vicki). I rencetly helped him and his wife purchase a rental home in his wife's retirement account, and I think you should consider doing the same!

Like many of you, our retirement accounts were hit hard during the tanking of the stock market, especially the Nasdaq market. Although that market has started to recover in the past year, I thought it was best for them to diversify, and recognizing the recent drops in the real estate market have created an opportunity to ride that market back up again, he decided to purchase a rental home using some of the funds in her retirement account.

To accomplish this, they first transferred her retirement account into a “self-directed” account, which includes real estate as an “allowed” investment. Her account then purchased a single family starter home, 3BR/2BA, a cosmetic fixer upper, in Hayward. She paid $240,000 cash (financing is available, however), and they spent $20,000 fixing it up to make it rentable. After two weeks, they rented it for $1600 per month. Subtracting insurance and property tax expense, they deposit the balance of $1300 per month ( a 6.5% return) straight into her retirement account, UNTAXED, making there return even higher. And, we all expect the home to appreciate over time, adding to the return and (hopefully) covering the buying and selling costs.

I think this is an excellent, safe “long term” investment, a wise use of retirement funds. And it gets even better. They’re now going to take advantage of “leverage” by putting a 50% loan to value against that home and using the funds to buy a second property. The positive cash flow will be reduced to $585 per month due to the payment on the 50% loan, but using the same investment numbers for the second home, they’ll have a positive cash flow on each of TWO properties now, bringing the total back up to $1170 per month into Vicki’s account. AND, now they’ll own TWO properties which we expect to appreciate over time.

A few comments:

* The loan on the home must be a “non-recourse” loan, as the loan is being made to the retirement account, not an individual.

* The purchased property must have a POSITIVE cash flow.

* If you hire a property manager, that cost will of course lower your return. They chose to manage the home themselves.

* Please call call or email me if you’d like to meet and discuss the specifics about how I can help you accomplish a similar purchase in your retirement account!

* Although it can be done by yourselves, they hired an expert on retirement accounts to open and helped them transfer Vicki’s funds into a “self directed” account.

* It does not have to be a single family home that you purchase; multi-unit properties tend to have even better cash flow numbers, but perhaps not the same potential for appreciation that single family homes provide.

By the way, because of the drops in prices for entry level houses (and some multi-unit buildings), this works for buying rentals OUTSIDE of your retirement account as well, but you can’t take advantage of the depositing the positive cash flow “untaxed”.

Would you recommend I buy investment property here in Sunnyvale, elsewhere in Santa Clara County, or out of the area?

We STRONGLY recommend purchasing investment property; we cannot think of a better or safer way to gain wealth, in the long run, than to own more real estate! Where you should buy is the better question.

OK, so where should I buy and how do I go about it?

The first thing to decide is whether you are more interested in positive cash flow or overall appreciation. This will help in determining where you should look to make your purchase.

Buying real estate in the Sunnyvale area, or really anywhere in Santa Clara County, would be a purchase based on overall appreciation. This is because a home's value here in Sunnyvale is very high in relation to it's rental value; but, it can provide excellent appreciation in the long run.

For example, let's say you buy a four-plex in Sunnyvale for a purchase price of $1,000,000. With 25% down ($250,000), your monthly payment for principal, interest, taxes, and insurance will be in the range of $5900 per month. You'd also have to add another $400 per month for expenses like water, garbage, and landscape maintenance, bringing your total cost to $6,300 per month. Since it's local, you could likely manage it yourself, saving the property management fee.

Current rents for the four units would probably total in the range of $5,300 per month, so you'd have a NEGATIVE cash flow of about $1000 per month. To make this purchase profitable in the long run, you'd need the property to appreciate enough to overcome this negative cash flow AND provide a decent return on your investment (the down payment).

For example, if your desired return is the equivalent of 8% on your money, you'd need the property to appreciate an average of $2666 per month; the $1,000 negative cash flow PLUS $1666 per month (the return on $250,000 at 8%).

Now, contrast that with a positive cash flow investment (not really possible in Sunnyvale), for which you'd have to look out of the area.

As an example, in Cincinnati, Ohio, today you can purchase an apartment complex of 34 one-bedroom units for a purchase price of $750,000. With a 25% down payment, the total cost for the loan, utilities, taxes, property management, etc. would be in the range of $11,000 per month.

Current rents for the units would be in the range of $13,000 per month, so you'd have a POSITIVE cash flow of about $2000 per month. While the investment is not likely to increase much in value (appreciation), the return is realized on a monthly basis, through the cash flow. A return of $2000 per month on an investment of $187,500 equals a 12.8% annual return on your down payment, even if the property doesn't appreciate. You'd of course have to factor in a vacancy rate, so the return would likely be a little less.

We welcome you to post your comments and/or questions regarding these or any other real estate investments. If you'd like to discuss them in person, or get more information about anything real estate related, please give us a call at 861-4813! We have specialized in selling residential real estate in Santa Clara County, and specifically in Sunnyvale, since 1984. We've successfully sold over 1200 homes in Santa Clara County; you won't find anyone more knowledgeable about the market here!

*Originally Posted on www.SunnyvaleRealEstate.com/blog