As I write this newsletter, the media is hawking the slow down in the real estate market. Most of the historically "hot" areas of the country are experiencing a 10% slow down in resales and new construction permits, with the Midwest being the positive exception. If new construction real estate speculation, based on rapid appreciation, was your game plan, you may now be rethinking your strategy. Perhaps it’s time for not just a new strategy but a new game plan.

Here’s a thought for you. Instead of buying and selling real estate, what about being the Lender? A new light is being cast on the role of being the Lender instead of the owner of the property. Let’s take a look at some of the options being the Lender and holding notes in your IRA or self-directed retirement plan.

Case Study 1

John B., a top producing agent with Coldwell Banker, has had a long relationship with a small custom builder that constructs 3 homes a year. The builder has already purchased the land and has his crew on payroll. While it is not an ideal time to be building another "spec" home, he will "trade dollars" if that’s what was required to keep his company viable. He is looking for "cash partner" to complete a home on one of the lots.

John has been offered an opportunity to buy the home, but doesn’t want to purchase the "spec" home directly because he believes the marketing time for the custom home may exceed 6 months. John agrees to partner with the builder but not own the property directly. He will act as the construction or "mezzanine financing" in the transaction. Current construction financing rates are 9.75% from most traditional banks and lenders.

John and the builder negotiate and agree to a rate of 8.25. This is substantially more than he could receive from a money market or CD. They come to an agreement on the interest rate but now needed to iron out the terms of payment. John could be paid:

• monthly,

• quarterly or

• in a lump sum when the property sold.

Not surprisingly, the builder opts for the latter and John agrees to be paid at closing for all of the accumulated interest and repayment of the original principle balance. John’s attorney drew up the note that indicated the note holder as "Chicago Trust Administration Services LLC, FBO John B. IRA". His attorney asks if he wants to collateralize his note by placing a lien on the land with a mortgage. Wanting to maintain compliance with IRS guidelines, John contacts our office and asks what his options are. The answer is that either way, with or without a mortgage, he will still be in compliance with the IRS.

Being a prudent investor, John opts to have a mortgage prepared and recorded with the County. One year later, the property sold after being on the market for 8 months. John’s attorney prepared the payoff letter and proceeds were sent to the IRA custodian directly from the title company at closing.

John was satisfied with receiving a short term return of 8.25% on his IRA funds instead of the riskier proposition of carrying the property of its operating expenses for 8 months. The 8.25% return represented a 4.00% higher return than a bank certificate of deposit would have given him. Was John’s option to act as a lender worth the additional risk? Well that is for each individual investor to answer. Each investor must apply their own criteria to the evaluation of risk in each investment made.

Page 1 of 2 :: First | Last :: Prev | 1 2 | Next