Appreciation and Financial Leverage

One of the major reasons for self directing your IRA is to make the most of your investments and to INCREASE your retirement funds.  The best way to do that is to invest in real estate and to use the power of appreciation and financial leverage.

When you purchased your residence, you most likely didn’t pay cash for it.  Instead you got a mortgage with 10% or 20% or even 0% down and you are repaying the lender each month.  You can do the same thing with investment properties to leverage your returns.

While you must use a non-recourse lender and they may require more down than a residential lender would, you can still put down part of the purchase price in cash from your IRA and finance the rest at market interest rates.  If you have $100,000 in your IRA and the lender requires 25% down, you can purchase four $100,000 properties with your IRA funds. 

Because real estate will traditionally appreciate over time, you will benefit not only from the income received from your investment but also from the increase in the value of the property.  In our example above, if you have four properties that are appreciating in value at a rate of 5% per year you are gaining not only the money from the rents you receive but also the 5% appreciation.

If you were to sell the property, the profit received by your IRA would include the difference between what you paid for it and the appreciated value at the time it is sold.  Most investors don’t sell their properties.  Instead they use the property appreciation to obtain further financing and purchase other properties which, in turn, appreciate so they can buy more properties.

The attached Buyer’s Net Proceeds Sheet will help you determine what costs will be associated with the purchase of the property and how much money you will need at closing.