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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 7:24 am 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
DoingHomework wrote:
I have started wondering why the focus on IRA money.

As I understand your business, borrowing cash from investors to buy houses, fixing them up, then selling them and paying high interest to the investors, could be entirely legal. Just keep away from the IRA money and make sure you jump through the right hoops with your state.

Why are you so hung up on the IRA part?


Doinghomework, I'm stuck on the IRA because people with an IRA are more likely going to want to build wealth. Plus there are amazing tax-free increase benefits of a ROTH IRA.

How much do people with an IRA earn on their investment? 2-5%? That's NOT what they COULD be making if they 1) Knew about the RIGHT real estate investment 2) Had it PROPERLY structured by someone like bpgui so that they were in the guidelines set by the IRS.

I understand this forum is for making money slowly, but there truly are safe investments out there, such as investing in what I do, that generate 10%+ return on investment with VERY LITTLE (if any) risk. The risk they would be taking would be only there if the structure was not set up properly for the IRA, which is why I'm trying to get the kinks out of that now. Aside from that, you won't find a safer investment and rarely will you find one with this good of a return even if you compared it to a high-risk strategy, which this is not.

That's why.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 10:10 am 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
Let me show you how a typical deal would be set up and maybe you can share your thoughts on how it would work with an IRA?

Property Value = $100,000
Repairs = $10,000
My Purch. Price = $50,000

This is a loan-to-value of only 60%. If desired, I could just pay $50,000 for the property and sell it AS-IS for $55,000 to a cash buyer in a week. Instead I elect to borrow the full $60,000 to cover repairs and the purchase amount from an "Investor" so that I can sell it for more profit.

So I borrow $60,000. It takes 3 months to fix up the house, then we price the house below market value and sell it in under 3 months for $95,000. I pay the "investor" back their $60,000 plus their interest of $3,000. After Realtor costs, holding costs, taxes, etc. the profit I would generate is $25,000.

----------

Why this is a safe investment:
    1) The Investor gets a mortgage in 1st position on the property, so if anything were to happen, they would get their money plus the interest.
    2) If the property wasn't selling, we could drop the price of the property up to 75% BELOW market value, and STILL pay the Investor their loan amount plus their interest.
    3) There is Zero liability on the part of the Investor if someone is injured or the homeowner is sued. A mortgage secures their interest no matter what.

Why i can pay 10% APY to the Investor:
I am making 20-25k on each flip, 3k is almost nothing in terms of costs. Who wouldn't trade 3k for 20k?

Why I want to Include IRA's:
You now see how SAFE it is, and how it makes sense to pay 10% interest on the loan. It's a solid investment which, if more people knew about it, would have people banging the door down to get in on.

If someone won't be able to retire on their IRA because they're only earning 2-5% interest, it would be disservice to withhold this strategy from them. This has the potential to take someone who cannot retire, and turn them into a wealthy person (or at least someone who CAN retire that originally could not.)

I look at this as a WIN/WIN for everyone. I can buy/flip more homes safely, and the old lady who is panicking about not retiring gets to rest at ease knowing her money is both safe and growing sufficiently to allow her to retire happy and secure.

Why am I posting on this site about this?
To try to overcome some possible issues that old lady might run into with the IRS so that she can relax.


SOOooooo, HOW do I help grandma invest her IRA money safely in this investment SO THAT she can increase her retirement Tax-Free?
I see how we have to be careful not to pay too much but 10% is well within that limit. Is a loan the only option?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 11:21 am 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1135
Location: Illinois
That strategy seems different than what you were initially indicated, in that you don't have non-IRA money invested along with the IRA money. That might be fine. But, you seem to only be focusing on the interest rate aspect of it rather than the other aspects could make something a prohibited transaction.

However, I think you are overstating the "SAFE" aspect of this. There certainly are risks. And if your goals is getting investments from "panicky little old ladies", I doubt you are going to find many that are willing and able to jump through the hoops and keep the records necessary to ensure a self direct IRA investing in real estate doesn't run afoul of any requirements.

Also, I always wonder this (or an appropriate variation thereof) when someone posts a "absolutely safe and incredibly profitable" investment strategy: if the property is worth $100,000, why is the original seller willing to sell it to you for $50,000? And if you can immediately sell it for a profit without any work, what incentive does the original seller have to sell to you rather then the next buyer?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 12:38 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
bpgui wrote:
That strategy seems different than what you were initially indicated, in that you don't have non-IRA money invested along with the IRA money. That might be fine. But, you seem to only be focusing on the interest rate aspect of it rather than the other aspects could make something a prohibited transaction.


Yes, i'm modifying the strategy based upon your input to ensure it's safe for the investor.

bpgui wrote:
However, I think you are overstating the "SAFE" aspect of this. There certainly are risks. And if your goals is getting investments from "panicky little old ladies", I doubt you are going to find many that are willing and able to jump through the hoops and keep the records necessary to ensure a self direct IRA investing in real estate doesn't run afoul of any requirements.


Old ladies are one example. Smart business people with money would see the wisdom in this investment as well.

How is it that i'm overstating the "safe" aspect of this? There certainly are risks, yes. However, if we involve a good financial planner on the lending side of things I'm certain we'll be fine. I don't plan on having Grandma do her own paperwork. On the risk of loss side of things, they are also very safe.

bpgui wrote:
Also, I always wonder this (or an appropriate variation thereof) when someone posts a "absolutely safe and incredibly profitable" investment strategy: if the property is worth $100,000, why is the original seller willing to sell it to you for $50,000? And if you can immediately sell it for a profit without any work, what incentive does the original seller have to sell to you rather then the next buyer?


The quick answer is "Motivated Sellers".

The long answer is that we pay cash for the property, we buy it as-is, and this kind of buyer is not easy to find in a hurry. Sometimes we are the ones who find the seller and not the other way around, so there are fewer buyers to compete against. We deal only with properties in foreclosure which means sellers are under a time pressure and if they like our offer, they accept it. If they don't think it's fair, they reject it and try to get a better one. Frequently they'll come back and take our original offer when they find out nobody else will pay as much or move as fast.

Is it hard to believe it's both safe and profitable? It might be. Even so, it happens all the time no matter what you choose to believe.

Who sets the standard on what is a "safe" and "acceptable" return on investment? If the answer is a 401k or IRA at 3-5%, then you are probably asking someone who is investing in an IRA or 401k at 3-5%. Ask the clerk at the store and they'll tell you their bank account at 1-2% interest.

The point is that if you want to be happy with the 3-5%, hang out with people who believe it's safe and the standard, then these figures will always be true.

However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 12:56 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
PS. I understand this mentality of safe and good returns runs contrary to the GetRichSlowly.org theme. But you must understand that there are these types of situations ARE out there and they happen hundreds of times per day throughout the country, legally, with many happy customers. Yes, there are scams out there like in any industry but for the most part we're good honest people trying to share the wealth.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 1:29 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1135
Location: Illinois
Quote:
Frequently they'll come back and take our original offer when they find out nobody else will pay as much or move as fast.

I can understand a speed discount. Value is determine by how much people will pay for something. If no one will pay as much as you, the value isn't as high as you say it is, and it takes away part of your example of being able to resell it in a week at a profit, without any repairs, if you wanted to.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 1:37 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1135
Location: Illinois
RealInvesting wrote:
However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.

You just said that this was a newly modified strategy based on our input, so how could you know of anyone that has used this strategy?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 1:42 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
bpgui wrote:
Quote:
Frequently they'll come back and take our original offer when they find out nobody else will pay as much or move as fast.

I can understand a speed discount. Value is determine by how much people will pay for something. If no one will pay as much as you, the value isn't as high as you say it is, and it takes away part of your example of being able to resell it in a week at a profit, without any repairs, if you wanted to.


I'm glad you're showing interest on how it all works...

Well, just because you have people calling you to buy houses doesn't mean that everyone would pay the same amount. We pay less than some and more than others. We have a list of several people that pay cash for homes too, over 150 of them actually, and they pay about 5% more than we do for properties AS-IS.

So, if we get a property purchased, we just email everyone and the first one to make another offer could have the house. This is not the preferred method because we only make 5% or so, but it's an option if we decide we don't want to fix it up ourselves but still want to make a profit. It's more used as a backup plan.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 1:46 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
bpgui wrote:
RealInvesting wrote:
However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.

You just said that this was a newly modified strategy based on our input, so how could you know of anyone that has used this strategy?


"Newly Modified Strategy" can be defined as: "I guess my original idea wasn't such a good idea, maybe we should stick to what people in this industry normally do and try not to reinvent the wheel."

Hence, I'm more reverting to the "norm" rather than trying to find a "new" method which you have helped clarify will not work without taking significant risk. I was just trying too hard to make it tax-free income I suppose.

The "norm" is to use cash, an IRA, or 401k to loan money for 10-12% APY.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 6:43 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1144
bpgui wrote:
RealInvesting wrote:
However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.

You just said that this was a newly modified strategy based on our input, so how could you know of anyone that has used this strategy?

That's a damn good question.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 6:44 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1144
RealInvesting wrote:
I'm glad you're showing interest on how it all works...

Well, just because you have people calling you to buy houses doesn't mean that everyone would pay the same amount. We pay less than some and more than others. We have a list of several people that pay cash for homes too, over 150 of them actually, and they pay about 5% more than we do for properties AS-IS.

So, if we get a property purchased, we just email everyone and the first one to make another offer could have the house. This is not the preferred method because we only make 5% or so, but it's an option if we decide we don't want to fix it up ourselves but still want to make a profit. It's more used as a backup plan.

Have you ever considered late night infomercials?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 7:10 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1135
Location: Illinois
Tightwad wrote:
bpgui wrote:
RealInvesting wrote:
However, if you ask people who are investing in real estate USING THIS METHOD, you'll find that they're extremely happy and find it much safer than a 401k, stock market, etc. even though they make 2-3 times more money.

You just said that this was a newly modified strategy based on our input, so how could you know of anyone that has used this strategy?

That's a damn good question.

Thank you!


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 7:34 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1135
Location: Illinois
Tightwad wrote:
Have you ever considered late night infomercials?

:rofl: It does fit the pattern. He's trying to sell a "low risk, great returns" investment, just like those infomercials.

I still think the risk is much more than you realize, or maybe you realize it but aren't disclosing it. Just a few examples: You still face price risk, demand in the area could fall and prices with it. You face the risk that your holding time is more than you expected, costing you more in taxes, insurance, interest, etc. Your repair budget could skyrocket. And many more.

Plus your reasons that it is safe aren't really that valid.

Quote:
Why this is a safe investment:

1) The Investor gets a mortgage in 1st position on the property, so if anything were to happen, they would get their money plus the interest.
2) If the property wasn't selling, we could drop the price of the property up to 75% BELOW market value, and STILL pay the Investor their loan amount plus their interest.
3) There is Zero liability on the part of the Investor if someone is injured or the homeowner is sued. A mortgage secures their interest no matter what.

1. A mortgage doesn't guarantee they get their money plus interest. If things go bad, they have to spend a bunch of money and time foreclosing on the property and sell it. There is no guarantee they will get their investment back. We all know the effect worthless mortgages played in the current economic situation.
2. If it isn't selling, that is a pretty good indicator that market value is not what you thought it was. What guarantees you'll sell the property for an amount equal to their investment plus interest?
3. The mortgage holder can still be sued. It's common for a plaintiff to sue every party with an interest in the property. They may not be found liable, but if they are sued, they'll still face thousands of dollars in legal fees defending themselves. And see #1 in response to "a mortgage secures their interest no matter what"


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Wed Jul 13, 2011 8:53 pm 

Joined: Sun Oct 14, 2007 11:10 am
Posts: 317
RealInvesting wrote:
Why this is a safe investment:
    1) The Investor gets a mortgage in 1st position on the property, so if anything were to happen, they would get their money plus the interest.
    2) If the property wasn't selling, we could drop the price of the property up to 75% BELOW market value, and STILL pay the Investor their loan amount plus their interest.
    3) There is Zero liability on the part of the Investor if someone is injured or the homeowner is sued. A mortgage secures their interest no matter what.

1) Didn't the current financial institution -- your seller -- have a mortgage on the property in first position? How's that working out for them?

2) Using your 'typical deal' above, show how this works in real life.

3) The lender still needs to ensure adequate insurance coverage is continuously in place, and even then, there's no guarantees the long arm of the tort system won't get a good smack in (same goes for taxes -- you may think you're in first position, but don't pay your taxes and see who your landlord really is).

I think you're dramatically understating the risks involved here.

You throw out statements like:
  • "[s]mart business people with money would see the wisdom in this investment as well." Well, why aren't they doing it? Or at least, why aren't they paying you to do it?
  • "...we're good honest people trying to share the wealth. This is business code for "we're keeping most of the profits, you get all the risk".
  • "these types of situations ARE out there and they happen hundreds of times per day throughout the country" Then why don't you just scale up yourself and leave Grandma's retirement out of it?

Also, you're comparing a risky real estate endeavor to a conservatively invested IRA. Well, of course the RE yields are higher. Hey, I have a real estate deal* Grandma can buy in her IRA with no hoop-jumping or anything that currently yields just under 19%. There's no guarantees there either, but at least they have a track record.

There's more red flags here than in Beijing.

*Agency-backed Mortgage Real Estate Investment Trusts, which only hold government-backed Agency paper (FannieMae, FreddieMac, GinneMae). One of those, American Capital Agency (AGNC) has a current yield of 18.92%
Disclosure: No current position, but I trade in and out of AGNC using the put selling technique under discussion elsewhere in the forum. And no, I won't actually let Grandma invest in that either.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Thu Jul 14, 2011 6:51 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1144
bpgui wrote:
Tightwad wrote:
Have you ever considered late night infomercials?

:rofl: It does fit the pattern. He's trying to sell a "low risk, great returns" investment, just like those infomercials.

I wonder if Amway might be a better gig for him. ;)


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