The last time, we talked about 401(k)s and the alternatives you have with your 401(k) when you leave a company. I mentioned rolling your 401(k) over to a Self-Directed IRA was my favorite option. An option that opens you up to a whole new realm of investment possibilities.
Here’s an example. Did you know that you may purchase and hold Real Estate in your IRA? With the proper custodian in place, you can direct that custodian to use money in your account to purchase a Single Family Home in Westland, MI, say. Subsequently, you may direct the custodian to pay, from your IRA, for the fix up costs of the property. Then you may put a renter in there and all the rental income goes back into your IRA.
I know what you’re saying. “But, like stocks, house prices are falling all around us, too!!! That’s going to cause my retirement account to slide further!” And on the surface, that’s a legitimate concern. But let’s look a bit deeper.
When you purchase a stock, there’s a set price you have to pay. That price is what the stock is going for right now on the market. There’s no negotiation, just pull the trigger and hope you get it for less than what you saw it for a few seconds ago. And then hope that is goes up in order to collect a profit.
When you purchase a house, especially in today’s buyer’s market, you have much more flexibility. The fair market value of a house, even in today’s market, might be $100,000, but what if it’s bank-owned? I have picked up houses recently for 25 cents on the dollar from banks. In our example, that means we could pay as little as $25,000 for the house that’s worth $100,000. Even if the value of that house drops another 40%, I still have equity that can be recouped. And that means I have at least some of my profit baked into the purchase right when I buy!
Many of the homes out there at prices like these need little more than carpet and paint. To be conservative, let’s say I spend $10,000 in remodeling, holding, closing and marketing costs, putting my total cost at $35,000.
In addition, rents have stayed relatively stable. I can rent that house out for $850 a month! With only $35,000 into the house, adding up that $850 over a year gives me over a 29% gross cash on cash return EACH YEAR on my retirement funds, regardless of the value of the house! Now to be sure, there will be some other costs to renting the house, some of which may significantly reduce your return (like vacancy!).
Next time, I will address the next question that is going on in your minds right now.
“What? Me a Landlord?”
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