WHAT DO THE RICH PEOPLE KNOW THAT MOST PEOPLE DO NOT?
What Most People Do Not Know and Why That Dooms Them to Failure
- The Dow Jones Average is up only 0.70% over the last 10 years.
Instead of the opportunity to grow a retirement nest egg, investing in the stock market resulted in a decade of lost opportunity and a gain of only 0.70% of our hard-earned money (from January 1, 2000 to December 31, 2010).
- Some experts are now predicting another drop of almost 50%.
Unfortunately, this is not so outrageous. The Dow dropped almost 54% in 517 days, falling from 14,165 in October 2007 to 6,547 in March 2009. And who knows if the market will recover quickly again, or stay deeply depressed.
- Over that same 10 years, we could have earned an almost 475% return on the money we had saved. This is an annual return of 20% every year!
Our retirement accounts can grow at a far greater rate than the stock market. And we can do it while understanding, controlling, managing, and minimizing our risk.
Why the Old School Investing Approach No Longer Works
We used to ensure our financial future by saving some of our hard-earned money every month, investing in mutual funds and/or Blue Chip stocks, and then watching our accounts’ value grow into what we hoped would be enough money to secure a comfortable retirement.
Over the last ten years, however, we learned several very expensive lessons. Many of the Blue Chip stocks we thought were secure investments turned out to be a path to economic ruin (i.e., General Motors, Chrysler, Bears Stearns, Enron, MCI WorldCom, Washington Mutual, Indy Bank, AIG).
We lost virtually all our investments in these companies in an effort to be financially responsible corporate citizens.
We gained only 0.70% of our money by investing in the stock market over the last ten years. Now we have lost ten years of growing our savings for a comfortable retirement and need to work several more years, if not decades, before we can retire.
Are we willing to bet our future on this? There has to be a better way to invest our money, one in which we have more control over how much we make, and one that offers far less risk than the stock market.
What Wealthy People Know That Most People Don’t
There are opportunities to invest money earning significantly higher rates of return than the stock market, while fully understanding, managing, and minimizing the risk.
Investing in real estate
Those who have acquired wealth understand the value of investing in real estate. Yet even if we do not have the money to invest in prime properties, we have the opportunity to generate wealth investing in real estate.
We can lend our money to real estate investors to generate a significantly higher return than the stock market, while allowing us to understand, control, and manage our risk. Investing at the then current rates over the last decade would have yielded an annual return of 20%. By starting with a $100,000 investment, with the compounding effect we would have finished the decade with almost $575,000 in our account! And these investments are backed by actual real estate, which is a far safer investment than the stock market.
Using self-directed IRAs
Using the stock market to generate a measure of long-term wealth has not worked over the last decade. Yet most of us believe we are required by law to invest our retirement plans in the stock market, individual stocks, or mutual funds. This belief is widespread, but untrue.
We can control how and where we invest our retirement accounts by using self-directed IRAs that are subject to a very limited set of restrictions (see Note 1). Because it is perfectly legal to use the money in these self-directed IRAs to provide funding to a real estate investor, an opportunity exists to earn a healthy rate of return while having the loan backed by the underlying real estate. Also, all of the earnings from these transactions are deposited back into the self-directed IRA account, 100% tax-free. These earnings do not impact your annual contributions to your IRA, so it can grow by the amount of your annual contribution, as well as your investment earnings.
Maximizing both methods can quickly build a solid nest egg. Seek advice from a fully-qualified legal and tax adviser for your individual situation, your eligibility, and the advisability for you to engage in such transactions.
How Does This Work?
Let’s look at two examples based on actual investments. These are only illustrative, so potential investments might be similar, some might involve more risk, and some less. However, the investor controls where and when his or her money is invested, thereby managing risk.
The process involved in investing in these real estate projects is fairly straightforward. When Owner Finance Homes identifies a potential real estate project, investors are notified of the opportunity and provided all of the most current financial estimates. When the estimates are finalized, investors are notified and negotiations begin on the Financing Agreement. At the closing, the investor provides the agreed-upon funds.
Owner Finance Homes will then make the property ready for sale, which could include remodeling. Upon the acceptance of a Contract for Sale, the investor will be notified of the property resale closing date. At this closing, the investor will be paid the full and complete balance of the loan, as well as any financing fees incurred under the Financing Agreement.
The owners of a four-bedroom, two-bath home in a Dallas neighborhood encountered a variety of major financial hardships. Unable to make the mortgage payments for almost one year, the property fell into a state of disrepair. The owners abandoned the home and were willing to let the bank foreclose on the property.
Along with another partner, Owner Finance Homes entered into a contract with the owners and began negotiating on the owner’s behalf with the bank for a short sale. In a short sale, the bank agrees to release the mortgage at the actual market value, which is less than the outstanding balance on the loan.
After negotiating with the bank to establish the actual market value, the Bank agreed to accept Owner Finance Homes’ offer to buy the property. After completing the remodeling, Owner Finance Homes located and secured a buyer for the home within a month. The buyer purchased the home within three months of Owner Finance Homes acquiring the property, one month ahead of the estimated time.
Comparable properties in the area sold for as much as $166,200. In order to maximize the potential to sell the property quickly, the house was listed at a 3% discount or $161,200.
The financials of this project were as follows:
Owner Finance Homes negotiated the Financing Agreement with an investor who agreed to provide a line of credit of $120,000. Once negotiations on the acquisition price of the property were completed, the investor was notified of the closing date, and provided the agreed $114,800 funding at closing while taking first lien holder status on the property. This means that if anything were to go wrong with the loan repayment, the investor has the right to take the property and sell it, keeping all the profits.
Upon reselling the property, the investor was again notified of the closing date and time. At this particular closing, the investor released the lien on the property and was repaid his loan and the agreed-upon financing fees. In total, the investor received his $114,800 outstanding loan balance, plus the financing fees totaling $5,800. Calculating this against a total loan of $114,800 yielded an Annual Percentage Rate of 20%.
A similar property was acquired by Owner Finance Homes, which had been previously foreclosed upon. Owner Finance Homes remodeled the property and sold it within the estimated time frame of four months. The same procedures as the previous example were followed with the single exception being the investor’s personal money, from a self-directed IRA, funded the investment.
All of the same procedures were followed and the same finance terms were negotiated. Upon completion of the Funding Agreement, the investor notified his self-directed IRA Plan Administrator of the transaction. Prior to closing, the investor simply completed a Buy Direction Letter, which instructed the IRA Plan Administrator on the specifics of the transaction. The investor’s self-directed IRA provided the funding for the project, while being granted the first lien on the property.
The total line of credit was $155,000, with an outstanding loan balance of $145,500 over four months. When the property was resold to a third-party at the conclusion of the project, the Investor’s IRA loan was repaid in full with the additional $9,000 in finance fees for an APR of 19%. The slightly higher fees were due to the higher loan balance than the previous example. The slightly lower APR was due to the longer loan period.
The finance fees of $9,000 were paid back into the self-directed IRA. All of the earnings generated from within the IRA, as well as the income earned from finance fees were completely tax free. By using his self-directed IRA, the Investor was able to build wealth within his IRA tax free, earning far more than if using the stock market.
Investing in real estate projects is one method to generate wealth in our personal savings and retirement accounts, while controlling and minimizing our risks.
Note that market rates are lower today than they were throughout the last decade, so your yield could be slightly lower as well.
Why the Wealthy Stay Wealthy
The wealthy retain wealth by using all the avenues and opportunities available to earn high rates of return while minimizing risk. One method to acquire long-term wealth is investing in real estate to earn rental income while the property appreciates. This method requires a large amount of upfront capital not readily available to most people.
The opportunity to invest in real estate projects using both our personal savings as well as our retirement funds, however, is available to us. Having investments backed by real estate ensures the control and ability to manage risks, while regularly earning high rates of return.
If controlling when and how your money is invested, minimizing and managing the risks, and consistently earning high rates of return interests you, contact Owner Finance Homes and begin building your wealth for your future. Ask to be placed on Owner Finance Homes’ preferred investor list, and get ready to receive information on the next opportunity to start making a solid return on your investments.
Note 1: See IRS Publication 590, pages 43 and 47 for a complete description of prohibited investments; but summarily the prohibited investments are collectibles such as artwork, rugs, antiques, metals, gems, stems, coins or alcoholic beverages; or refer to the IRS tax code U.S. Code Title 26, Subtitle D, Chapter 43, Section 4975, Tax on prohibited transactions.