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How a Real Estate IRA Can Grow Your Wealth

All Cash vs. Non-Recourse Mortgage How a Real Estate IRA Can Grow Your Wealth Leverage is a very powerful principal in investing. By using credit instruments such as a mortgage, an investor can increase the potential return generated by an investment. Most retirement plans do not allow for the use of leverage. Typical investments in assets like stocks, bonds or bank instruments such as CD's require all cash purchases. With a self-directed IRA or Solo 401k you have the opportunity to put the power of leverage to work in your favor. INCOME PROPERTY SNAPSHOT Mary and Mike are both purchasing investment properties. On the outside, their purchases look much the same Mary Mike Single Family residential properties - 1,100 square feet $$ Property Market Value Purchase Price Rehab Costs Non Lender Closing Costs $500 Expected Appreciation 2% annually $107,000 $2,500 $115,000 FINANCING THE PURCHASE LEVERAGE VS ALL CASH Mary has chosen to utilize the power of leveraging her IRA with the use of a non-recourse mortgage loan to purchase this property. Mike decides to purchase this property in all cash. All Cash Payment $110,000 Cash Down Payment Loan Amount $55,000 $46,000 Interest Rate 5.5% Lender Costs $750 $110k Term 240 months Mary's Monthly Payment $316.43 $55k CALCULATING INVESTMENT PROPERTY INCOME Mary and Mike list their income properties on the rental market and find qualified renters. FOR RENT FOR RENT Metro area currently experiencing a 7.53% vacancy rate Mary & Mike both earn $1200 monthly rent 7.53% Annual vacancy allowance $1,084.32 FOR RENT $14,400 ( Annual rent received $13,315 68 « Total annual income 36.80% Expense ratio $4,900 ( Annual operating expense 5 YEARS LATER – ROI ANALYSIS While Mary and Mike's investments started out looking much the same, Mary's use of a mortgage to purchase her IRA income property produced significantly higher returns. Here's how Mary and Mike's respective investments look after five years. INITIAL CASH $55,750 $110,000 INVESTMENT INITIAL PROPERTY $115,000 $115,000 VALUE $126,96929 PROPERTY VALUE WITH APPRECIATION $126,96929 MORTGAGE $22,700 40 II $0 PAYMENTS CASH FLOW $20,39554 $42,07840 RECEIVED $9,27424 EQUITY INCREASE THROUGH MORTGAGE $0 PAYDOWN $57,644 ТОTAL $59,04769 RETURN RETURN ON 98.12% 53.68% INVESTMENT WITH APPRECIATION Relative Performance of All Cash vs Leveraged Investment over Five Years Mortgage All Cash 100% 100% 96% 90% 80% 70% 61% 60% 51% 54% 50% 38% 40% 30% 34% 20% 15% 10% 0% Cash Invested Equity Increase Cash Flow ROI w/ appreciation LONG-TERM INVESTMENT CONSIDERATIONS: DOUBLE YOUR ROI With a lower initial cash investment, Mary could purchase two income properties through leverage for the same price as Mike's all cash investment in one income property. 2$ $ 24 Income Property 1 Income Property 2 Income Property 1 Initial Investment Initial Investment: Initial Investment $55,750 $55,750 $110,000 5 Year ROI 5 Year ROI 5 Year ROI 98.12% 98.12% 53.68% What does this mean? Mary can essentially purchase two properties through leverage for the price of one, and double her ROI! Before you go out and start buying up properties with your IRA or 401(k) using mortgages and reaping the benefits of leveraged returns, there are a few important things to learn about this more advanced investment strategy. Contact an Advisor at Safeguard Advisors today to learn more about the process of leveraging a Real Estate IRA to purchase an income property. SAFEGUARD Copyright © 2015 Safeguard IRA & 401k Advisors Infographic designed by Mad Fish Digital

How a Real Estate IRA Can Grow Your Wealth

shared by SafeguardIRA on Nov 22
Did you know that self-directed IRAs and Real Estate IRAs allow investors to leverage the purchase of real estate through their retirement plan? Investing in real estate with cash gives investors grea...


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