Your 401k or IRA Can Make You Rich in Real Estate
Your 401k or IRA Can Make You Rich in Real Estate-
While Every Cent Stays Safely in Your Retirement Accounts
Ever heard of wholesale real estate lenders? Probably not, and your bank likes it that way! An insider explains why they're your secret weapons for success-and why you should seek financing before you find your investment property.
Phoenix, AZ (October 2004)-You open up your latest mutual fund earnings statement and shake your head. If only there were a better way to fund your retirement! You've always heard that real estate is the smartest investment. After all, it generally appreciates and is "tax-friendly" to boot. You'd love to buy, say, a small apartment complex and sit back, letting the renters pay the mortgage and watching your property value climb upward. The problem is coming up with the 20 to 30 percent down payment required by the bank. So you've pretty much resigned yourself to counting on your (let's face it, disappointing) 401k to get you through retirement. It's all you can do, right?
Wrong, says real estate investing insider F. Michael Johnson, author of Borrow Your Way to Wealth: How to start with nearly nothing and end up rich in real estate! (Acacia Publishing, 2004, ISBN: 0-9666572-6-8, $11.95). There is a whole world of alternate financing methods out there that the banks don't want you to know about. (After all, they want you to purchase their products.) And these little known methods can make you-yes, you-wealthy.
"As hard as it may be to believe, you can buy an investment property with little or no money down and make up to an 800 percent cash return on your original investment in the first year alone," asserts Johnson. "For instance, an up-front investment of $1,500 or less for closing costs and fees can yield an end-of-the-year return of $12,000 in rent and appreciation. It kind of makes that 7 or 8 percent you're earning on your mutual fund look anemic, doesn't it? I have clients who started out with average nine-to-five jobs, very little in savings, and no real estate experience who have dramatically increased their net worth five years after they started working with me. People think it sounds too good to be true, but I assure you that it isn't. It's just the average public doesn't know that these strategies exist. Discovering them opens up a whole new realm of possibilities."
It's like this: there is a hidden world of wholesale lenders out there who cater to investment property realtors. These "alternative lenders" have financing products undreamed of by most of us average Joes and Janes who've been conditioned to think in terms of conventional Fannie Mae/Freddie Mac loans. These financing products make it possible to purchase an investment property-say, a duplex or a four-plex that would normally require a down payment of at least 20 to 25 percent of the selling price-for 10 percent, 5 percent, or even no money down.
Interestingly, Johnson says real estate investors should find a lender first and look for a potential property second. "For decades real estate experts have recommended finding the right property and then trying to get it financed," he explains. "But I believe you should reverse that process. A pre-approved loan gives a prospective investor incredible leverage. If a seller refuses to make certain concessions, you just take your loan elsewhere. It puts you in the driver's seat."
The existence of these alternative loans-coupled with techniques that boost credit scores and IRS laws that let you defer tax payment on your profits and reinvest that money-means that you can qualify to purchase very lucrative investment properties. As those properties appreciate in value (real estate usually does), and as the rent payments keep rolling in (people have to live somewhere), and as you acquire more properties (which is shockingly easy to do), you'll quickly see that investing in real estate beats anything Wall Street could ever offer.
Okay, you're thinking, that does sound fantastic. But even though I may qualify financially, it must be so complicated that I could never figure it out. Not true. Johnson says his method is actually quite simple. Here's how to get started.
1. Educate yourself. Find a free hour and read Johnson's Borrow Your Way to Wealth. It's a quick, concise, easy-to-follow read (less than 100 pages) that will open your eyes to a variety of "tricks of the trade" that can help you start building wealth, whatever your current financial reality. Your wholesale lending broker will do the legwork for you, but it's always a good idea to have a grasp of the "big picture."
2. Find out your credit score and take steps to elevate it. Your credit score, assigned by the three major credit bureaus, Equifax, Experian, and Trans Union, plays a major role in your success. Having a high one dramatically improves your odds of securing the best financing deals. A one-point change in your score can help you qualify for a lower interest rate, which in turn results in a much greater return on investment. Steps you can take to improve your score include paying bills on time, closing lines of credit you aren't using, limiting credit inquiries, and so forth.
3. Seek out a lender and get pre-qualified. Remember, you should take this step before you ever set foot onto a prospective property. You find these lenders through brokers, and in turn, you find brokers through investment real estate agents. Your best bet is to meet with the lender, do an actual application and get an underwriting approval with no particular property identified. Then, the seller will have no doubt that you can purchase his property, and you are in an excellent position to negotiate both the price of a property and any possible seller concessions to pay for your loan closing costs.
4. Be thinking about your reserve requirements. Lest you think these people who are willing to lend you 100 percent on the value of your prospective investment property have completely lost their minds, be aware that you do have to come up with at least six months' PITI (principle, interest, taxes, and insurance) reserves. In other words, they want to know that you have at least six months of liquid money in case of vacancies or other sudden costs. The good news is that you don't actually have to have the hard cash. A 401k, IRA, stocks, bonds, insurance policy with cash value, or even equity in your home can be used as these reserves. The better news is that such funds never need leave the account they're in; they must simply be available. The best news of all is that you can use the same reserves to close on a second property just thirty days after you close on the first one!
Borrow Your Way to Wealth explains in great detail the techniques used by wholesale lenders. Readers learn such esoteric strategies as reconfiguring oddball properties to make them more finance-friendly, taking advantage of the 1031 exchange (an IRS regulation that lets you defer tax payment) when you sell, and negotiating seller concessions.
But despite all the facts Johnson provides, he admits that investing in real estate is not for everyone.
"There are plenty of people who just aren't cut out for dealing with problematic tenants or maintenance issues," he says. "That's okay. Some people can't take the ups and downs of the stock market, either. But the reality is that wealth is never built without risk and hard work. My goal is to help people understand that real estate investing is a much more lucrative and viable option if you understand the financing options before you set out to purchase your investment properties. After all, you don't go to the mall and attempt to buy something unless you already have a pre-determined way to purchase it. If you do this on a small purchase, doesn't it make sense to do it on something that involves hundreds of thousands of dollars?
If you're worried about how you're going to retire or pay for your kids' education, or if you just want to live more comfortably, you should definitely consider acquiring real estate investment properties. All it takes is the open-mindedness to reverse the conventional thinking about investment real estate you've been taught for so many years. As Johnson says, "Learn the financing techniques first; then buy." With pre-approved money in your pocket, your real estate investing goals do become a reality.
About the Author:
F. Michael Johnson spent his early years as a Hollywood writer, as well as co-founder and executive vice president of a publicly-held entertainment company. During that time he appeared in such publications as The New York Times and Premiere magazine, and was featured on HBO and KFYI. Since transitioning to real estate in the early nineties, he has been creating successful real estate investment portfolios in one of the hottest markets in the country for clients from all over the U.S. He's helped hundreds to master a method of acquiring real estate investment properties using 100 percent financing from wholesale lenders, tax deferments from the IRS, seller concessions to offset most closing costs, and help from the big three credit reporting agencies in obtaining the best interest rates possible.
About the Book:
Borrow Your Way to Wealth: How to start with nearly nothing and end up rich in real estate! (Acacia Publishing, 2004, ISBN: 0-9666572-6-8, $11.95) is available at bookstores nationwide and online booksellers.
For more information, please visit Borrow Your Way to Wealth