Getting Creative in the Hunt for Investment Financing

Posted by Monte Davis on Thursday, September 16th, 2010 at 8:48am

In looking for sources of investment funding, you need to get one thing straight . . . cash is just cash.

Even if you don't qualify for institutional funding, which is possible, due to your credit score or your debt-to-income ratio, you most likely have a source of cash that can be used in innovative ways -- you just don't know it.

Most people are not aware that a Roth IRA can be transferred into a self-directed IRA and used for investment purposes.

That's right. You will be in control of where the money is invested and all proceeds of the investment will go back into your IRA.

When used to invest in real estate, the IRA owns the investment property. You can actually partner with your IRA.

(For that matter, your IRA can partner with anyone, but banks usually won't get on board with that since they don't do non-recourse loans as a rule. Simply put, they can't take recourse -- foreclose -- on an IRA.)

Think about the numbers for a second, even in the broadest strokes, and you'll see how using your IRA in this fashion opens up a lot of potential. If you have $50k in cash and another $50k in your IRA, you can buy a $100k property in a 50/50 partnership.

Do it that way, and 50% of the proceeds are paid directly to you. Of course, you also own 50% of the appreciation, debt, and maintenance -- and you will be taxed on your part of the proceeds -- but you grow your investment and you get an immediate return (assuming you're in a cash flow situation with the property.)

Always, always, always check with you financial advisor before even considering a self-directed IRA. Unless you are a highly seasoned veteran you will need the help. There's a long approval process for the transition and you must be aware of all the potential ramifications before acting.

You are running the same risks with your money using it as the basis for real state investment as you would face in the stock market. Typically people don't go out and buy stocks or bonds without professional advice. The same caution should apply in using a self-directed IRA for real estate investing.

However, making use of your IRA money in this fashion may introduce just the level of flexibility you need to make good real estate investments. Plus:

- You're not tied to buying a single property.
- You're only limited by the amount of money you have.

If cash is an issue, a self-directed IRA may just be the creative solution for which you've been searching.

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