The biggest hurdle people have when investing in real estate is that they believe they have no money to get started.
A lot of the time, people have money, but they do not realize that they do. This can come in many forms: they have family who have money and would like to invest or friends in the same situation. This is referred to in the investing community as private money.
Many people have money sitting in an IRA, a retirement account. In many cases, people have tens of thousands if not hundreds of thousands in a retirement account.
A common misconception is that you cannot withdraw your retirement money until you retire. While in some cases you can withdraw only the contributions and not the gains of the retirement account, in most cases you can withdraw the money by placing it into a self-directed retirement account, and then use the money to invest it in real estate.
The IRS allows first-time home buyers to withdraw up to $10,000 from their retirement accounts penalty-free for a first-time primary residence purchase. I did this when I purchased my first home, which I now house-hack. It also allows people with retirement accounts to invest money in real estate by transferring the money to a self-directed account that will then be used to fund deals.
Having talked to several money managers, the gains of the real estate venture will remain in the retirement account, as would the value of the asset. Meaning cash flow from the property would stay within the account until eligible for withdrawal, and any gains from the sale of the property as well.
Non-eligible accounts can also be made eligible with approval from the institution where the account is held.
This is great news for you, as either a first-time homebuyer or an investor. The average amount held in a retirement account for people ages 65 and older is close to $280,000. Many of these accord holders do not know that they can withdraw the money to fund real estate or even provide the money to an investor who is able to fund deals with it.
You should always speak to an accountant and attorney and understand the specific laws to be able to do this. However, it is common practice among investors.
The point is that the money is out there to fund investor deals. Many people who hold retirement accounts look for ways to diversify their holdings, with many of them curious about investing in real estate without ever having come across the opportunity to do so. The volatility of the stock market doesn’t sit well with them (for good reason), and they look towards real estate for a safer investment.
The biggest obstacle is identifying these account holders who have a great deal of savings and wish to invest in real estate. Which is why it is a good idea to start with family and friends. It makes sense to register an LLC and also develop an online presence where you show people past deals and provide them with educational materials that they can see. This will establish trust and develop rapport between you and the investors you wish to work with you on funding your deals.
The money is out there. It’s your job to help people invest in real estate and grow their wealth.
