- Hi, Clint Coons here with Anderson Business Advisors.
And in this video, we're going to discuss
how to dramatically increase your returns
on your real estate held inside of your retirement plan.
Okay, let's get started.
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Now many of you are probably familiar with the fact
that you can buy real estate inside of a self-directed IRA.
I mean, there's plenty of companies
out there that talk about this technique
and back many of you that are listening
to this video right now, watching this
may have already done that.
Now the typical way which people go
about purchasing real estate in their IRA
is to take their money and go out
and find a couple of homes and use as much of that money
they can in order to buy those properties.
For example, let's say you had $300,000 inside of an IRA.
So you had 300K inside of an IRA.
What you would do is you would open up a self-directed IRA,
roll those funds into it now they're sitting
in that environment, we could go out and buy real estate.
So let's assume that I'm looking at properties
and I find two properties, average price is 150K each.
So you're able to buy two homes.
So with our IRA, we buy these two properties right here,
at 150 each, 150k each.
So now our IRA's sitting on two properties.
Now those properties generate say $1,600 a month
so that means that we're gonna be earning
on a monthly basis, our monthly income
would be $3,200, okay, with me thus far.
So we're making 3,200 bucks, $1,600 each.
Now we've got to look at taxes, insurance of course,
we have real estate taxes and insurance.
So let's just throw out their number of say 670 a month.
So our net income on a monthly basis is about,
I don't know $2,800 off of that, $2,800.
So a total throughout the year
we'll make close to about 30k on this investment.
Now that investment because it's held in an IRA
that money is tax deferred until we pull it out
or if it was possibly in a Roth IRA
it would be tax-free when we pull it out.
Now, the problem with it is that you're limited,
you've got two properties working for you, you know what?
It can be better and the way we can make it better
is we can actually use leverage
inside of our retirement plan inside of a self-directed IRA
if you'd like.
So the way you would do that is you would find
a lender who's willing to loan in order for you
to go out and buy more properties.
So if I had $300,000 inside of a self-directed IRA
and I'm using leverage and most lenders are looking
at about a 30% debt to equity ratio
so you got to come with 30% down.
With the money that I have inside of my account,
the 300k I could buy six homes
at $150,000 each using leverage.
So now what I'm gonna do is
rather than buy the two properties here,
I'm going to purchase six homes, right?
So I'm going to dramatically increase my monthly income
off of this because now I'm buying six properties.
So let's say those six properties of course
using the same that we used before,
the monthly income then
is going to be $9,600 a month
coming in off those six properties at $600 a piece
but in doing that, our taxes insurance
is gonna go up as well.
So let's say our taxes insurance.
Now we're looking at 2k a month for taxes and insurance.
Now because the properties are leveraged,
we also need to factor in the mortgage on those properties.
So say we got a 30 year mortgage on these properties,
we're going to have to be making that payment every month.
So I'm go throw in another 4k for the mortgage on that
and so now we have about $6,000 in expenses
so that's gonna bring our income down
to about $3,600 a month which is pretty close,
slightly more than what I mean,
it's gonna be more than what we were getting off
the two properties.
So our annual income here is now gonna be looking
at about 43k on an annual basis.
Now people have done this,
maybe some of you that are watching this video
have already utilized this technique, right?
You're going wow, 43K versus $30,000
that's an extra $13,000 a year.
In 10 years, what does that equate to?
Well, that could equate to $130,000 extra income
because you're using leverage inside
of your retirement account to buy more real estate.
Now, the problem with this strategy
in using an IRA to do this technique
is that what most people don't factor in is income taxes.
Unfortunately, when you use an IRA,
you have to pay attention to unrelated debt financed income
or what we refer to as UDFI.
And in this particular case since we're leveraged at 70%,
the way the IRS calculates this as they say, all right,
how much income did you earn?
What is your net income?
Then we're going to take 70% of that
and we're gonna tax it and if it's over $13,000,
you're at 37%.
So after you do the calculations,
add in the depreciation that you get to back out of this,
your rough tax estimate on this type of money right here
is going to be $11,000 a year, right?
So we've got to back that out.
So now we're down to earning 32k a year,
still more than what we did
without the leverage, but not significant, right?
So you're looking at these numbers going well, wow.
Why would I leverage if I'm only going to make
an additional couple thousand dollars a year
because the IRS is gonna hit me with taxes?
Well, what you're not considering then
is the increase in value of the assets which you're holding.
Granted, we invest in real estate for cash flow
but there's also appreciation there.
Let's assume that we add in 2% appreciation
to these assets, right?
That they're gonna grow at 2% a year for the next 30 years.
So if we grow at 2% a year for the next 30 years,
this is where the numbers really start to work in your favor
and why you should consider the strategy.
So if I grow at 2% a year for the next 30 years,
let me just clean this up a little bit here.
All right, so we had a leveraged asset over here,
let's call this times time six
and we had 32k here but look at growth.
So if we grow the, our assets grew at 2% a year,
here we had $300,000 in assets right,
now over here, I had $900,000 in assets
because I use leverage.
So if $150,000 for each property times six equals $900,000.
So you have to look at it from what is the value
of the real estate that you're holding.
So between these two numbers,
after 30 years assuming a 2% annual increase,
the value of those properties with the traditional IRA
where you bought for cash would be $543,000
so this would be the value of your account
for retirement purposes.
Now, on this side since you had
an additional four properties or three times as many,
it's actually going to be 1.6 million.
Look at that, you have triple
the amount of income now wealth for your retirement
to carry you through retirement by using leverage.
But we also need to look at the income
that we made off these properties as well.
Now, roughly what we're gonna have here
if you add up all the income over 33 years,
you'll have about 1.2 million
and that's gonna be
about the same 1.2 million right there as well.
So the total value here 1.7,
total value here $2.8 million
and total retirement value for ourselves.
So we've generated an extra $1 million
in retirement income by using leverage
inside of that self-directed IRA retirement plan.
Now, those who are doing this, good for you,
you figured out the numbers,
you know that they work in your favor
but for those of you that are doing this,
there's a better way.
Those of you that are considering it,
there's also a better way
to look at putting these numbers together.
And the way you do that is by using a solo 401k.
Now the solo 401k as you know if you watch my other videos
is a retirement planning vehicle.
You can take your existing IRAs with the exception
of your Roth and you can roll them into it, right?
You can roll the money in and you have complete control
over those investments.
I talk to self-directed IRA custodians a lot
and they say, well, people should just use an IRA
'cause it's hands-off, we can manage it for them
and that makes sense, I get it.
However, when you run as usually solo 401k,
the reason why we're using it is to take advantage
of the unique features that it provides us,
namely in this context, if you were using a solo 401k
which you're able to do is eliminate those federal taxes.
And what I showed you, just you were making $42,000 here
and so in this case right here,
I said it was 32k because we had $11,000 in federal taxes
because of UDFI, the Debt Financed Income.
Well, guess what?
When you're using a 401k plan, add that 11k back in.
You don't have to pay it.
Now on this side with my 401k doing it,
I'm generating $43,000 in income on a monthly basis, okay?
So you can see where the numbers are gonna go here
with the $43,000 or that extra $11,000 in income,
it's going to bump my numbers for me here by a large amount.
So what happens then is you still get
the same amount of properties.
You're still going to get the same growth there
so this is gonna be 1.6 million
but where the numbers are gonna change
is on the income because you get that extra $11,000 a year,
the income accumulation inside of this plan
will be 1.7 million.
So it turns out that the end of the day,
you're gonna have $3.3 million here,
3.3 million for your retirement
versus 2.8 using a self-directed IRA
with leverage versus 1.7 with not using leverage
at all inside of your IRA.
I mean listen, if you're banking on real estate
for your retirement, it's a great strategy, I get it
that's what I've done in my own investing
but consider the numbers.
Look at those, sit down with someone who understands
that they can analyze your portfolio
and come up with a solution for you
based upon your timeframe to really pump up those numbers
so then when you retire,
you can live the lifestyle you want
rather than probably down here,
you're gonna have to give up a few vacations
you decided you wanted to take.
Up hear we're going to be able to take those same vacations
because we have more money.
If you'd like to learn more about how this would affect you.
Be sure to click on the link
to sign up for a free strategy session
where one of our advisors will go through this with you
and help you set up this type of plan.
So you can take your investing to the next level.
My name is Colin Coons with Anderson Business Advisors
and I wish you the very best with your investing.
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