Since 1998 I have been trying to assess the damage the stock market fluctuations have had on my dream of retirement. My wife continues to ask me if living under a bridge or in a van down by the river is our future. I try to reassure her that our retirement investments are not in the dire situation she thinks.
I feel that I have no control of how my retirement funds will go and I'm at the mercy of a very fickle stock market. So, over the past five years I have been exploring different types of investments with none of them meeting my financial expectations until now! I have written in the past about how an individual can make money in Commercial Real Estate -- cash flow, appreciation and principle build-up through paying down the loan, but how can I use this type of structured investment for retirement?
In Kansas City most financial advisors I talk to agree, commercial real estate investments, as part of a balanced portfolio, can reduce investment risk and increase cash-on-cash return. A big question that keeps coming up is "Can I use my existing IRA funds for the purchase of a commercial real estate investment?" For individual investors looking to diversify, your IRA funds can be rolled over to acquire an income producing commercial property. But there are stipulations like using a qualified plan, an IRA Custodial Account, and Trust Company. Additionally, investors are limited in the types of private equity investments that can be made. As complicated as this may sound the steps are easy and you can control the return on your retirement investments.
The company that was most referred to me was Sterling Trust, not only because their fees are affordable but also because of their flexibility. So, let's explore how to go about the process of opening a Self-Directed IRA account and using real estate as a private equity investment in your account.
The first step is to select a financial institution that administers IRA accounts. There are many companies out there to choose from but through Sterling Trust I found it to be easy to start an account.
You'll need to fund your account by making a contribution or by rolling over or transferring funds from another IRA. Again the Advisor should be able to help.
Commercial real estate property, remember that the property should be income producing and your Commercial Real Estate Broker should provide a pro forma on the investment and due diligence.
What Type of Building:
OK, that made it all sound very simple but the most difficult part is finding the right property. In a recent article I wrote:
"Single tenant triple-net-lease properties are usually buildings in which a tenant agrees to take responsibility for maintenance, taxes and insurance during a long lease-leaving the investor with little to do but collect checks. Through limited partnerships, investors are now grouping together and acquiring buildings with qualified long-term leases. And, here in Kansas City the types of buildings look to have great appeal.
These triple-net-lease ventures continue to out-perform not only the rest of the commercial real estate market but also the financial markets with less risk. "In Kansas City triple-net-lease properties are generating incredible annual returns that just can't be ignored", stated Mike Nicholas, a local Kansas City investor. "We have certain criteria that we use to evaluate properties and right now we are only looking at the Kansas City area market, it's an investment that we can control with minimal management responsibilities."
It is a critical element to conduct the due diligence on the property that will be part of a long term investment strategy. It starts with analyzing the potential of the property and developing a pro forma to provide a cash-on-cash return for your IRA. As I stated above, with these investment properties, investors need to evaluate the Net Operating Income on the property. The crucial elements to consider are the financing, interest and amortization, the Capitalization Rate, and finally credit worthiness of the tenant.
Most people understand cash flow. It is the money left from rental income after the investor pays his mortgage and expenses. Investors often refer to the term "cash-on-cash return." This is the cash flow divided by the down payment the investor needed to make. So a property that cost $1,000,000 would have a 12% cash-on-cash return if the investor put down $200,000 and had cash flow of $24,000. But, many investors do not realize that the cash-on-cash return is different than the capitalization rate and greatly impacted by the loan terms they are able to negotiate.
Like many things in real estate investing, there's a lot of detail here that it doesn't necessarily make sense for you to master yourself. Understand the basics, and hire a professional Commercial Real Estate broker to help you with the specifics.
For more information contact: Bruce Re -- 913-323-5408