It is a dilemma all too familiar for many aspiring investors. Not having enough money to get started.
Too often investors pass on an investment opportunity because they do not have enough money in their IRA to complete the investment. In fact, Equity Trust client, Emerich from Ohio, found himself in this same quandary a few years ago.
Emerich is a member of his local Real Estate Investment Association (REIA) and had attended an Equity University event in the past so he was familiar with the concept of self-directed IRAs. As a real estate investor for the last 20 years, he was well-versed on investing. He wanted to open a self-directed IRA so he could use his real estate investing knowledge to build for his retirement, but how could he get started when his IRA was underfunded and did not have enough to make an investment?
Little-Known Loan Option Paves the Way to First Investment
Emerich didn’t think there was any way for him to get the funding he needed in his IRA.
Then, at one of his local real estate club meetings he learned that an IRA could utilize a non-recourse loan to purchase real property. “This was the green light I had been waiting for,” he recalls. “As soon as I learned I could invest with debt financing when my IRA couldn’t purchase outright, I was ready to go.”
For more information on non-recourse loans read this
Putting the pieces in place for his first investment
Emerich opened a Roth IRA, which was funded with $10,000 from an existing retirement plan. Knowing there were few real estate opportunities available for $10,000, he enlisted the help of his neighbor as the non-recourse lender.
Emerich purchased his first property in his Roth IRA for $15,000: $10,000 from his Roth IRA and $5,000 from his neighbor as a non-recourse loan. He was able to purchase a four-unit property at a discount because he found a motivated seller in his network who was getting older and could no longer keep up with the property.
Three of the four units were already occupied with long-term tenants, which provided cash flow from day one. Additionally, Emerich had a buyer lined up who he worked with in the past and was purchasing an assortment of properties in the area.
Three months after the purchase Emerich was able to sell the property for $55,000. After repaying the $5,000 for the non-recouse loan and all expenses and fees associated with the maintenance or sale of the property (including Unrelated Business Income Tax
), Emerich netted approximately $40,000 to his Roth IRA, tax-free.
As Emerich states, “I was able to quadruple my account within about three months with my first real estate investment in my IRA. I think that is awesome!”
“You don’t need as much money as you think”
Emerich wants his experience to be a lesson to other investors. “You don’t need as much money in your account as you think,” he says. “Go out and talk to people and find people who are willing to lend money. Just go for it, make the offers. You can’t find the investments unless you make the offers. You’ll come up with the money if the opportunity is right.”
Now that Emerich has grown his retirement savings, he’s spreading what he learned about non-recourse loans to other investors in his network and is continuing to invest for his retirement. He has provided a hard money loan from his Roth IRA to another investor and purchased another property with a non-recourse loan from the same neighbor who originally kick-started his first Roth IRA investment.
Emerich has gone from the investor whose Roth IRA needed a non-recourse loan to make his first investment to the investor who is providing loans from his Roth IRA so others can complete their own investments.