Real Estate Investors Can Use OPM to Build Their Wealth

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By Richard Desich, Equity Trust Company

The most common stumbling block to investing in real estate is not having enough cold, hard cash to act quickly to participate in the hot deals. What if you could create a hassle-free, never-ending supply of money to do all the deals you want? What if there were no red tape delays from big money lenders? What if you were finally in control of your own destiny? It would be just like tapping in to your own "private bank"...

The private bank is one the fastest growing concepts real estate investors are using to execute more deals than ever before.

The Private Bank Concept is simply borrowing money from an individual (not a financial institution) for real estate transactions.   I call it using "OPM" (Other People's Money) to build your wealth, but it is a win-win situation for both parties. An investor can borrow money from someone else's IRA to do the real estate transaction and pay the IRA back an amount of interest that is agreed-upon in advance.   Since IRAs are an exempt entity, interest earned on the money loaned is tax-free or tax-deferred, depending on the type of IRA.  

The Private Bank Concept is of appeal to both the seasoned, hands-on real estate investor (we will call him the "funds seeker'), and the investor who prefers hands-off transactions (we will call him the "silent lender").   The funds seeker has an opportunity to make a high percentage rate of return on a real estate deal but either does not have enough money to pay for the whole property or does not have all the funds for the repair or rehabilitation.   The silent lender just wants to make money and not do any physical work.

How do you use someone else's retirement plans to fund your deals?

The first step in creating your own private funding sources, independent of banks and other institutional lenders, is to cultivate your friends, relatives and business acquaintances, especially those with substantial retirement plans.

You will have to show them how they can earn excellent rates of return by lending you their IRA money, secured by your real estate transactions.  You will demonstrate that the returns in your deal(s) will be much better than their retirement plan assets can earn if deposited in banks, and a much more stable and predictable return than they can achieve by investing in common stocks or mutual funds.   That should not be difficult to show.

What do your private bank partners get?

By using their existing IRAs and pension funds, investors in your private bank can earn aggressive rates of return, secured by real estate, with no taxes on the income gain or sales profits. This can result in a phenomenal internal rate of return that, in turn, compounds tax-free within their retirement fund. Meanwhile, this has produced no negative effect on their current lifestyle or cash flow.

What do you get?

You get the opportunity to build your assets rapidly, by multiplying the potential number and value of deals you can do. It will also have the effect of attracting more investors to your deals. And, if you want to grow your own retirement account, you can reciprocate with your investors to assist them with their own real estate investing.

An example of The Private Bank Concept at work:

A case study from our files illustrates how one of our clients (we'll call him Bob) put the Private Bank Concept to work. Bob is a real estate investor who had the opportunity to acquire a property for $100,000.   He knew that this property was easily worth $150,000.  Mary was unhappy with the low fixed-income investments that the IRA custodian she had been using restricted her to.   Bob knew that if Mary transferred her IRA to Equity Trust Company, the funds would be available for him to borrow in his private bank. Bob told Mary about the property he wanted to buy and Mary agreed to loan Bob $105,000 from her IRA ($100,000 for the house and $5,000 for the repairs).   Bob and Mary agreed that he would pay her IRA back in one year with 10% interest, all due at the time of payment.  After receiving Mary's IRA investment from Equity Trust, Bob purchased the house for $100,000, put new carpet in the living room and planted flowers in the front yard.

A year later, Bob put the house up for sale and sold it for $150,000, just as he thought he would.   He paid Mary back the $105,000 plus the $10,500 in interest he owed her.  Mary made 10% on her money, tax-free in her IRA, just for letting Bob borrow from it for a year.   Impressively, Bob made $34,500 on the deal and didn't use any of his own funds.

That is why private banking is so popular – both parties involved in the investment can make huge profits.

Your four-step plan to unlimited investment money...

  1. Find and negotiate a good deal - try to achieve, at most, a 75% loan-to-value ratio, so you'll be able to give your investors safety for their investment. Build in enough gross profit to pay someone 10, 12, even 15% for the use of their money. Leave yourself enough time, through a contingency clause, to find your first money source.
  2. Present your deal to friends, relatives and business acquaintances who have, or want to have, a retirement plan IRA or pension plan. Offer them a good rate of return for the use of their money. Explain that their loan will be secured by a mortgage on real estate, with a good loan-to-value ratio. Put yourself in their shoes, give them a rate that you would like to have if someone was presenting this deal to you.
  3. Contrary to what some brokers or bankers might say, you are allowed to do these types of transactions in an IRA. If you are told by an IRA custodian that you cannot invest in real estate or other alternative assets, what they really mean is, you can't do that with them.  To enable the operation of your private bank, all that your financial friends need to do is to transfer or deposit their funds with Equity Trust Company, an IRA custodian that knows how to handle the paperwork for investments in real estate, notes, tax liens, options, and other alternative assets.
  4. Once the retirement accounts for the investors in your deal are all in place, your "private bank" is available to make loans and participate in other creative real estate transactions. To initiate the activity, the IRA owner(s) must simply submit brief paperwork that documents the desired transaction.

That's it! The start of your own "private bank"! The only limitation to the amount of money you want or need is your expertise in finding good deals. The funding will already be in place.

About the author: Richard (Dick) Desich is the founder and chairman of the board of Equity Trust Company, the nation's leading self-directed IRA custodian, and has been involved in the securities business for over 35 years. Equity Trust Company is an NASD/SIPC member firm with tens of thousands of clients in all fifty states, specializing in alternative asset investing (such as real estate, options, and notes) for IRAs.

Mr. Desich is nationally recognized as a pre-eminent authority on non-traditional investing in IRAs. He is also the author of Proven Wealth Building Secrets for You and Your Children, the how-to book on purchasing real estate in IRAs.

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