Tips for Investing From Within an IRA

I don’t know a thing about you but I’ll bet you’re either investing from within an IRA, or considering investing from within an IRA.

How do I know?
Because most of us right now are having to provide investment guidance for our future retirement. This is pretty common since most companies and employers are no longer overseeing employee retirement accounts, and if they are it’s a safe bet that they are looking to discontinue the practice in the near future.

That leaves our retirement safety in our own hands.

Whether your experienced with investing from within an IRA or are looking for information on how it’s done you’ll find these tips useful.

First be very selective when choosing an IRA custodian. These are the individuals, brokerages and bankers that are administrators of IRA accounts. Like anything else not all custodians are equal.

The fact is some are light years ahead of others in there service, experience and know how. Don’t let just anyone oversee your account. You’ll want experience and comprehensive knowledge of IRA’s and the rules and regulations that govern them. Oddly there are actually few custodians that have this type of knowledge.

An example of this is that what you can invest in when investing from within an IRA is surprisingly broad. However most custodians allow only a narrow area of investment.

This is actually because most are only educated on the traditional IRA investment vehicles such as stocks, bonds and certificates of deposit(CDs). You’ll want to find a custodian that allows clients to invest in the full spectrum of possible investments options just as congress intended you be able to. The truth is that many things can be invested in using an IRA. One example is real estate.

In fact real estate is a Little known investment that makes massive use of the tax advantages of IRA’s. And as strange as it may sound most custodians themselves are in the dark as to the rules to investing in real estate. This is one of the main reasons that real estate is not often taken advantage of when investing from within an IRA.

With real estate it’s possible to double or triple the money invested in properties within 1 or 2 years when investing from within an IRA. The tax free and tax deferred advantages of IRA accounts can greatly speed large gains.

But the key to this secret is knowing which real estate is a good investment and which are bad investments, this type of expertise takes years of experience and often comes with some hard knocks.

This is why most custodians and administrators don’t want to deal with real estate. The territory is to foreign to them since most are skilled only in traditional IRA investment options such as stocks and bonds. This brings about the need for a self directed IRA account, with a self directed Roth or regular IRA account you are able to direct your custodian to invest in which real estate you want to invest in.

Some people may have knowledge in this area and are able to analyze properties, do market research and all of the other due diligence necessary to use real estate to build retirement wealth quickly. But most people are not experienced enough in this area,to adequately make use of real estate when investing from within an IRA.

But there’s a secret tactic that smart IRA account owners are using to great advantage.

That tactic is to enlist the expertise of real estate investors who are experienced in using real estate when investing from within an IRA and are willing to show IRA owners the ropes. These investing experts are also rare because just as with knowledgeable custodians, many professional real estate investors have never even heard of using IRA’s to invest in real estate or are unaware how to go about it.

You definitely don’t want the advice of your local Realtor here, only a few seasoned real estate investors can guide you in this area

A final peace of the puzzle that you don’t want to miss is the need for a self directed Roth or regular IRA account so that your custodian and your real estate consultant can work together as a team to grow your investment account.

Now that you’ve discovered these tips for investing from within an IRA you can look into taking advantage of these little known tips for large profits.

Give Me Ten Minutes and I’ll Make You Better at Real Estate Investing

Okay, ten minutes is a guess. You might absorb what I have to say and thereby become better at real estate investing in less time if you’re a fast reader.

Shall we get stared?

Acknowledge the Basics

Real estate investing involves acquisition, holding, and sale of rights in real property with the expectation of using cash inflows for potential future cash outflows and thereby generating a favorable rate of return on that investment.

More advantageous then stock investments (which usually require more investor equity) real estate investments offer the advantage to leverage a real estate property heavily. In other words, with an investment in real estate, you can use other people’s money to magnify your rate of return and control a much larger investment than would be possible otherwise. Moreover, with rental property, you can virtually use other people’s money to pay off your loan.

But aside from leverage, real estate investing provides other benefits to investors such as yields from annual after-tax cash flows, equity buildup through appreciation of the asset, and cash flow after tax upon sale. Plus, non-monetary returns such as pride of ownership, the security that you control ownership, and portfolio diversification.

You’ll need capital, investing in real estate does have risks, and investment real estate can be management-intensive. Nonetheless, real estate investing is a source of wealth, and that should be enough motivation for us to want to get better at it.

Understand the Elements of Return

Real estate is not purchased, held, or sold on emotion. Real estate is not about love; it’s about a return on investment. As such, prudent real estate investors always consider these four basic elements of return to determine the potential benefits of purchasing, holding on to, or selling an income property investment.

1. Cash Flow – This is determined by the amount of money collected from rents and other income less operating expenses and loan payment. Furthermore, real estate investing is all about the investment property’s cash flow. You’re buying income stream, therefore be certain that the numbers you use to calculate cash flow are truthful.

2. Appreciation – This is the growth in value of a property over time, or future selling price minus original purchase price. The fundamental truth to understand about appreciation, however, is that real estate investors buy the income stream of investment property. It stands to reason, therefore, that the more income you can sell, the more you can expect your property to be worth. In other words, make a determination about the likelihood of an increase in income and throw it into your decision-making.

3. Loan Amortization – This means a periodic reduction of the loan over time leading to increased equity. Because lenders evaluate rental property based on income stream, when buying multifamily property, present lenders with clear and concise cash flow reports. Properties with income and expenses represented accurately to the lender increase the chances the investor will obtain a favorable financing.

4. Tax Shelter – This signifies a legal way to use real estate investment property to reduce annual or ultimate income taxes. No one-size-fits-all, though, and the prudent real estate investor should check with a tax expert to be sure what the current tax laws are for the investor in any particular year.

Do Your Homework

1. Form the correct attitude. Dispel the thought that investing in rental properties is like buying a home and develop the attitude that real estate investing is business. Look beyond curb appeal, exciting amenities, and desirable floor plans unless they contribute to the income. Focus on the numbers. “Only women are beautiful,” an investor once told me. “What are the numbers?”

2. Develop a real estate investment goal with meaningful objectives. Have a plan with stated goals that best frames your investment strategy; it’s one of the most important elements of successful investing. What do you want to achieve? By when do you want to achieve it? How much cash are you willing to invest comfortably, and what rate of return are you hoping to generate?

3. Research your market. Understanding as much as possible about the conditions of the real estate market surrounding the rental property you want to purchase is a necessary and prudent approach to real estate investing. Learn about property values, rents, and occupancy rates in your local area. You can turn to a qualified real estate professional or speak with the county tax assessor.

4. Learn the terms and returns and how to compute them. Get familiar with the nuances of real estate investing and learn the terms, formulas, and calculations. There are sites online that provide free information.

5. Consider investing in real estate investment software. Having the ability to create your own rental property analysis gives you more control about how the cash flow numbers are presented and a better understanding about a property’s profitability. There are numerous software solutions to choose from online.

6. Create a relationship with a real estate professional that knows the local real estate market and understands rental property. It won’t advance your investment objectives to spend time with an agent unless that person knows about investment property and is adequately prepared to help you correctly procure it. Work with a real estate investment specialist.

There you have it. As concise an insight into real estate investing as I could provide without boring you to death. Just take them to heart and you should be fine. Here’s to your investing success.

Selecting a Real Estate Investing Guide

Many people have the desire to invest in real estate as it can be a very lucrative venture but in order to be successful you should seek the help of a real estate investing guide. Successfully investing in real estate can build your credit rating, create cash flow, and eventually net you a lot of money. But the world of real estate investing is not one that should be entered into lightly as it takes a lot of knowledge to be able to profit from real estate investing. A good real estate investing guide will help you to succeed in your real estate investing ventures. Many people who jump in to the world of real estate investing end up failing, incurring debt, and ruining their credit, all because they did not arm themselves with the proper knowledge before they started. A real estate investing guide is a great way to learn about the business before you dive and will increase your chances of success.

There are many real estate investing guides available on the market today, and you can benefit from the knowledge and advice contained in most of them. A good real estate investing guide will include the risks and benefits of real estate investing and will give you information on how to minimize the risks increase your chances for success. A real estate investing guide that does not realistically portray the amount of time and work involved in real estate investing is probably not the best choice as the world of real estate can be extremely rewarding but not without a lot of work. The real estate investing guide you choose should also give you a good idea of what to expect throughout the process and what type of loss or gain you can expect from various situations.

You should also look for a real estate investing guide that is tailored to your individual investing needs. Simply buying your first home is an investment, and reading a real estate investment guide that is designed for homebuyers looking to purchase a primary residence will help you to select a home that will build you the most equity. It is easy to learn the basics of home buying from a real estate investing guide and you will gain the knowledge you need to build your credit and maximize the equity in your new home if you read one prior to buying.

There are also many other types of real estate investments, and all have unique risks and benefits and should be approached differently. It is important to pick a real estate investing guide that is written with your unique needs in mind so that you can learn about the specific investment type you are interested in. Flipping real estate is much different than investing in a duplex or apartment building, and buying land or an empty lot is different still. After you have decided which investment type you are looking to explore, you should then pick a real estate investing guide that will teach you about your specific type of investment. A good real estate investing guide will help you to understand everything you need to know about purchasing properties, working with tenants, making improvements and renovations, and determining the value of the property as well as estimating its future value.

Give Me Ten Minutes and I’ll Make You Better at Real Estate Investing

Okay, ten minutes is a guess. You might absorb what I have to say and thereby become better at real estate investing in less time if you’re a fast reader.

Shall we get stared?

Acknowledge the Basics

Real estate investing involves acquisition, holding, and sale of rights in real property with the expectation of using cash inflows for potential future cash outflows and thereby generating a favorable rate of return on that investment.

More advantageous then stock investments (which usually require more investor equity) real estate investments offer the advantage to leverage a real estate property heavily. In other words, with an investment in real estate, you can use other people’s money to magnify your rate of return and control a much larger investment than would be possible otherwise. Moreover, with rental property, you can virtually use other people’s money to pay off your loan.

But aside from leverage, real estate investing provides other benefits to investors such as yields from annual after-tax cash flows, equity buildup through appreciation of the asset, and cash flow after tax upon sale. Plus, non-monetary returns such as pride of ownership, the security that you control ownership, and portfolio diversification.

You’ll need capital, investing in real estate does have risks, and investment real estate can be management-intensive. Nonetheless, real estate investing is a source of wealth, and that should be enough motivation for us to want to get better at it.

Understand the Elements of Return

Real estate is not purchased, held, or sold on emotion. Real estate is not about love; it’s about a return on investment. As such, prudent real estate investors always consider these four basic elements of return to determine the potential benefits of purchasing, holding on to, or selling an income property investment.

1. Cash Flow – This is determined by the amount of money collected from rents and other income less operating expenses and loan payment. Furthermore, real estate investing is all about the investment property’s cash flow. You’re buying income stream, therefore be certain that the numbers you use to calculate cash flow are truthful.

2. Appreciation – This is the growth in value of a property over time, or future selling price minus original purchase price. The fundamental truth to understand about appreciation, however, is that real estate investors buy the income stream of investment property. It stands to reason, therefore, that the more income you can sell, the more you can expect your property to be worth. In other words, make a determination about the likelihood of an increase in income and throw it into your decision-making.

3. Loan Amortization – This means a periodic reduction of the loan over time leading to increased equity. Because lenders evaluate rental property based on income stream, when buying multifamily property, present lenders with clear and concise cash flow reports. Properties with income and expenses represented accurately to the lender increase the chances the investor will obtain a favorable financing.

4. Tax Shelter – This signifies a legal way to use real estate investment property to reduce annual or ultimate income taxes. No one-size-fits-all, though, and the prudent real estate investor should check with a tax expert to be sure what the current tax laws are for the investor in any particular year.

Do Your Homework

1. Form the correct attitude. Dispel the thought that investing in rental properties is like buying a home and develop the attitude that real estate investing is business. Look beyond curb appeal, exciting amenities, and desirable floor plans unless they contribute to the income. Focus on the numbers. “Only women are beautiful,” an investor once told me. “What are the numbers?”

2. Develop a real estate investment goal with meaningful objectives. Have a plan with stated goals that best frames your investment strategy; it’s one of the most important elements of successful investing. What do you want to achieve? By when do you want to achieve it? How much cash are you willing to invest comfortably, and what rate of return are you hoping to generate?

3. Research your market. Understanding as much as possible about the conditions of the real estate market surrounding the rental property you want to purchase is a necessary and prudent approach to real estate investing. Learn about property values, rents, and occupancy rates in your local area. You can turn to a qualified real estate professional or speak with the county tax assessor.

4. Learn the terms and returns and how to compute them. Get familiar with the nuances of real estate investing and learn the terms, formulas, and calculations. There are sites online that provide free information.

5. Consider investing in real estate investment software. Having the ability to create your own rental property analysis gives you more control about how the cash flow numbers are presented and a better understanding about a property’s profitability. There are numerous software solutions to choose from online.

6. Create a relationship with a real estate professional that knows the local real estate market and understands rental property. It won’t advance your investment objectives to spend time with an agent unless that person knows about investment property and is adequately prepared to help you correctly procure it. Work with a real estate investment specialist.

There you have it. As concise an insight into real estate investing as I could provide without boring you to death. Just take them to heart and you should be fine. Here’s to your investing success.

Are You Investing or Speculating? Your Answer May be Detrimental to Your Future Wealth

Oil prices are high, real estate is down, the dollar is flat, unemployment is high, your investments are down, and no one really knows what’s going to happen with the elections in November. The future is uncertain to say the least, and for many the fear of uncertainty can lead them to make poor investment decisions that will have a rippling effect into their future. It is times like these that separate the well prepared investor from the panic stricken speculator. Let’s explore the difference between the two and the consequences.

An investor is someone who invests using a consistent, long-term strategy to secure their financial future using well diversified investments. Generally the focus is on minimizing risk while maximizing return.

A speculator or market timer is someone who is less concerned about consistency and who switches investments on an emotional whim.

During a bull market most people would say that they are investors, but when the stock markets are jittery investors get tested, revealing many closeted speculators. This may include you, if you liquidated your investments and are waiting for the markets to recover to get back in.

Why This Strategy Does Not Work

You simply cannot predict when the markets will rally and when the markets will hit rock bottom. And missing the upswings of the market can be very damaging to your long term returns as seen in the following graph.  

Understanding Risk

Investing in the stock market is not risk free. You should understand and feel comfortable with the level of risk in your portfolio so that when the market goes through its cycles you are well prepared. Let’s explore this further. Let’s use a hypothetical portfolio ABC with the following risk and return criteria:

Standard deviation = 10% (Standard deviation is a statistical measurement that sheds light on historical volatility.  This is a good measure of the portfolio’s risk.  The higher the standard deviation, the riskier the portfolio.)

Expected return = 12%

If you own portfolio ABC what can you expect going forward? To answer this question we must go back to statistics. If you are a long term investor you expect that the average return will be 12%. This does not mean that you will earn 12% every year. After all, there is market risk to consider.  For example, one year you may earn 6% another year 25% or anywhere in between, and so forth.

At any given period you can be 68% confident that your portfolio’s return will fall within a range of 2% to 22%.  And you can be almost certain that your portfolio’s return may fall anywhere from -18% to 42%. Can you deal with this? Most investors enjoy the up side of risk, but seldom enjoy the downside.  Case in point, an investor that earns 32% on a portfolio whose long term expected return is 12% is a happy camper.  But, is that same investor happy when the same portfolio (whose expected return is 12%) earns a crummy -8%?  

The point of this example is to understand that returns will vary from year to year.  Depending on the standard deviation of your portfolio, those figures will fluctuate within a given range and you must be willing to live with that volatility.  Just like you will not get 12% returns every year, you will also not get negative returns every year.  Long term investors must understand and accept this risk if they want to be appropriately compensated.

Remember you are a long term investor. It’s the long term strategy that matters. Over the long run when you average the positive and negative returns your portfolio’s total return will approximate 12%. All the bumps in between are just part of the investment process.

Quoting Warren Buffet “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

The Importance of Diversification

As investors, we must understand that markets are cyclical and that there is risk involved in investing in the stock market. While that risk never completely goes away, we can do a lot to minimize the portfolio risk to the best extent possible.  The best way to do this is to diversify our investments across different asset classes (or categories of the stock market) The key here is to identify investments in segments that perform opposite to one another under different market conditions (known as negative correlation), or at least have low correlations to each other.  The result is higher returns and lower risk over time.

One common example that simplifies this concept is that of suntan lotion and umbrellas:

If you own a store that sells suntan lotion in Florida, more than likely you will do very well when it’s sunny out and people are going to the beach or outdoors. However, we all know that it rains in Florida, so on rainy days your store may not do so well. To diversify the risk of not selling any suntan lotion on rainy days you could consider also stocking up on umbrellas. That way you will make money whether it rains or it’s sunny out. This is the concept of diversification. Market conditions that cause one asset category to perform well, often cause another asset category to have average or poor returns. If properly executed, diversification will smooth out the unsystematic (market) risk events in your portfolio.

What About Asset Allocation?

Asset allocation describes how you choose to distribute your investments among investment vehicles such as stocks, fixed income, alternative assets, cash etc. According to  Roger G. Ibbotson’s The True Impact of Asset Allocation on Returns“for the long-term individual investor who maintains a consistent asset allocation and leans toward index funds, asset allocation determines about 100 percent of performance—regardless of whether one is measuring return variability across time, return variation between funds, or return amount.”

How you decide to distribute your assets among investments is a personal choice that needs to be looked at very carefully. In making this decision you should take the following into consideration:

Time horizon: how long will it be before you need to start withdrawing money from your portfolio? You don’t want to find yourself in a position where you need the money and you have to sell part, or your entire portfolio at a loss. The longer your time horizon the more risk you may be able to accept. The closer you get to your investment goal i.e. retirement; you can reduce the level of risk by reducing your equity exposure and  increasing your fixed income levels.

Risk tolerance: You may want higher returns, but when your ABC portfolio is negative you feel like you’re going to be sick. You may be taking on more risk than you can stomach. You have to be realistic with yourself and face the fact that you need a portfolio that will not deliver huge returns but will help you outpace inflation. 

Conclusion

When it comes to investing and life in general, it always pays to do your homework and have a plan. As a long term investor your goal is to diversify your investments to reduce risk and maximize your long term results. This involves the careful selection and distribution of assets among investment vehicles that support your risk tolerance, time horizon and individual needs, as well as the appropriate mix of negatively correlated asset categories.

There is no denying the sexy allure of timing the market, or the fact that speculators can make money, and do get lucky investing in what’s “hot”. However, the reality is that they can’t consistently beat the market.  More times than not, speculators end up buying high and selling low in a panic. You will always hear how much money a speculator made on one or two investments, but you will rarely hear how much money they have lost on their other not-so-“hot” investments.  It is wiser to develop a long term strategy and remain consistent even when the market misbehaves. After all, if we do our homework we would know what to expect in the long run and this includes expecting, that at some point or another, our portfolios will experience a few bad periods. What matters is the long term performance of our investments and most of all our peace of mind.

Market risk is not predictable nor avoidable that is why stocks have higher returns than “safe” savings and fixed income investments.