IS REAL ESTATE INVESTING SAFE?
How To Invest With Greater Security
Many people are afraid of investing in real estate. Why?
Some think it is risky.
Some don’t want to deal with tenants and toilets.
There is a simple solution.
Without having to deal with tenants and toilets.
Be the bank.
That’s right. Cut out the middleman and let your money work harder for you.
You already know the banks don’t pay much on certificates of deposits. Then they turn around and loan it out at higher rates.
Did you know that there are real estate investors who would rather pay interest to private lenders than a bank? And many will pay a higher interest rate for the privilege.
Some people are using this strategy to grow their retirement accounts. Tax Free.
HOW DOES IT WORK?
It’s really very simple. First let’s consider your personal residence. A bank will lend you 80-percent of the appraised value with a conventional mortgage. And not charge a mortgage insurance premium, or PMI.
Why 80-percent? Because that is what makes the bank feel safe.
What is the bank’s security?
The bank places a lien on the property in the form of a mortgage, It also gets an appraisal to determine the property value before loaning the money. So the bank knows there is enough equity to foreclose and still get repaid for the loan if a borrower defaults.
A second mortgage is similar.
A bank lending on a second mortgage will have a loan to value, or LTV, that they want to stay below. So maybe the total first and second mortgages must total no more than 90-percent of the value of the property.
In exchange for taking the higher risk the lender in second position wants to get a higher interest rate than the original lender.
What happens when the property is sold?
The first lender gets paid first.
Then the second lender gets paid.
Then the homeowner or investor gets paid.
Can you see how the second lender has a greater security than the investor?
PRIVATE INVESTORS AND PRIVATE LENDERS PARTNER FOR SECURITY
For larger purchases people frequently choose to partner. For example, an apartment complex may be financed with a $1 million down payment. Most people don’t have that kind of money to put down on a real estate purchase, but they can come up with part of it.
Partners can be either equity partners or debt partners. You can have both in the same transaction.
Typically debt partners are passive, meaning they have no active role in the management of the property.
Equity partners may be either active or passive, depending on the partnership agreement. When the property is sold, the mortgages are paid off and the lenders get paid first. After paying off the loans, closing and selling costs the remaining proceeds are split between the equity partners.
As you can see, the lending partners have a greater security than the equity partners.
The equity partners take on the greatest risk and therefore also receive the greatest potential rewards.
EARN PASSIVE TAX-FREE MONEY
Not only can ordinary people earn more by being the bank, it can be tax-free. That’s right. Over 40-percent of Americans have money sitting in an IRA or old 401(k) account. All earnings in a Roth account are tax-free with a few exceptions. So anyone can use their Roth account to be a private lender and grow those funds tax-free.
Funds in a regular retirement account can still be used for lending. Those proceeds would be earning tax-deferred, meaning taxes are paid when the money is withdrawn from the account. If you would prefer to earn the money tax-free then there are custodians who can help you convert funds from a traditional to a Roth retirement account.
Most IRA custodians won’t tell you this. Why? They do not support you being able to choose alternative investments. But there are some that specialize in allowing alternative investments and they are happy to help you do it.
CONCLUSION
It’s easy to be the bank. And you can do it with the security of a lien on a property. It can be the easiest way to make money in real estate, and you don’t have to be a landlord. You can even do it tax-free in a Roth retirement account.
LET’S GET TO KNOW EACH OTHER BETTER
Attune Investments provides a better return for our investors. And we make a positive impact in people’s lives and in our world.
If you want to learn more about how others are investing with us then I invite you to join our club and request a conversation with us.
Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.
Or you can choose to loan money, get in with a clear return, and get our earlier, putting your money to work.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.