Chris Hively has grown tired of gambling with his life savings in the stock market.
“We’re kind of playing along in a game that we have no control or understanding of,” says Hively, an Equity Trust client who owns a packaging company near Los Angeles. “There’s so much information out there that if you’re not plugged in to the market day in and day out, you’re rolling the dice.”
After risking his nest egg for years, he had to ask himself a sobering question.
“I said to myself, this is ridiculous,” he recalls. “Why am I putting my money into something I have zero control over? I don’t do that with my business, I wouldn’t do that with my personal stuff; why am I doing this with my IRA? I need to find something that isn’t influenced by emotion and factors that I can’t control.”
Hively was contemplating better ways to grow his retirement savings when one day he heard an ad on a local radio station that caught his attention. A man in the Phoenix market buys foreclosed properties in bulk, rehabs them and sells discounted notes for the properties to investors like Hively while making a $5,000-10,000 premium on them.
Leery at first, Hively did his research on the investor and decided to give it a try. He bought a note with a face value of $98,000 at the discounted price of $66,000 in his newly opened Equity Trust self-directed IRA. The property’s tenant agreed to pay Hively at a 9% interest-only rate over three years, with a balloon payment at the end of the term.
On the note alone, he stands to make a 48% profit over three years (an annualized return-on-investment of nearly 17%). In addition to the value of the note, he receives $735 per month in interest payments.
Combined, the annual rate of return over three years is 30% per year – with few headaches along the way.
“I have none of the hassles of a landlord,” Hively says, “And I still have first lien position on the property to back it up.”
Hively adds that the house also has gained value, so there would be a significant equity gain if the borrower defaults. But if the borrower continues to pay and qualifies for an FHA loan at the end of the three-year term as expected, he’ll pay back the note at full face value.
“The tenant was pre-screened with strict criteria, and was sold on owning their own home for less than the current rent in the same neighborhood,” Hively says. “They want to own eventually, so they make their payments on time and keep the property nice.”
This type of investment feels safe to Hively – more so than following the whims of the stock market.
“With a self-directed IRA, I can take an active controlling interest in all my investments, and if I make a bad decision it’s on me, but at least I can point to what went wrong,” he says. “It’s logical, there’s accountability and it makes sense.”
Hively acknowledges that the discount he scored through his investment might not be available in all markets, especially as the economy recovers, but insists there are still ways to replicate his deal.
“If you’ve got an IRA with a chunk of money in it and you’ve got cash, the banks will listen to you and you can do the same thing I did,” he says.
Even more satisfying than the discount he received on the note is the feeling that he’s helping not one but two families’ financial futures.
“The best thing about this,” Hively adds, “Is that I am helping someone own a home, and profiting at the same time.”
February 11th, 2013 | 2 Comments »