Use a Roth IRA to "pay taxes on the seed, not the crop"
According to Jeff Desich, chief executive of Equity Trust Company, one of the big players in the industry with $12 billion of self-directed IRAs, choosing a Roth IRA over a traditional IRA is a "no brainer" for most real estate investors because although a traditional IRA allows for tax-free contributions, the earnings are taxed when pulled out for retirement down the road.
"My dad would always say would you rather pay tax on the seed or on the crop," Desich said.
Buy in your comfort zone
"We stuck to Lehigh, which everyone said don't do it," said Lorraine Walls, adding that the couple now owns a total of nine properties in Lehigh Acres, Fla., one of nation's hardest-hit real estate markets. "I went with what I was comfortable with. We don't need to make millions straight away."
Plan your exit strategy but be flexible
Although she purchased the Lehigh Acres homes primarily for the long-term cash flow, Walls said steady gains in home price appreciation have her rethinking that strategy.
"Actually I'm thinking about selling because the prices have almost doubled in the last two years," she said, noting that her real estate agent is urging her to list one home in particular. "I paid 58 thousand for this property and he wants to list it for about 105 (thousand)."
Consider creative investing strategies
Early in his investing career, veteran real estate investor Stan Brady said he focused mostly on fix-and-flip properties that he sold to owner-occupant buyers. But his strategies have evolved over time to focus on optioning investment deals that he finds and negotiates for other investors who don't have the time to find and negotiate those deals themselves.
"A typical transaction for me would be taking an option contract ... and then turn around and resell the property to a group of investors," said the Atlanta-based investor. "Now they have a portfolio rental and I get back the profit in my IRA."
Set up a 401k under real estate investing business
While a normal employer 401(k) plan won't allow you to invest in real estate, every person who invests in real estate is in business for themselves, Desich noted, which gives him or her the right to have a retirement plan for that business.
If someone is investing in real estate and finding success, then that person can set up a 401(k) that permits real estate investments and which allows for contributions of up to $50,000 per year plus $50,000 for a spouse.
Make it a family affair and multiply your purchasing power
Investors have the option of partnering their IRA with others, according to Desich. For example, a husband and wife might each have a Roth IRA, and both may have a 401(k). Add in two kids who each might have a Roth IRA and the family can use all six accounts to purchase a deal and share the percentage.
Pay all cash or make a large down payment to compete with institutional buyers
Besides the tax breaks that allow investors to build their retirement nest egg, self-directed IRAs give buyers the option of paying all cash or making a sizable down payment -- helping to compete in a market where multiple bids are the norm.
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