ROI! Getting a Mortgage in your IRA | "Return On Investment"

So our intermission interlude. This is great. We'll come back to the 401k strategy and I'd like to kind of put a bow around this topic. This is pretty cool. Using debt in an IRA and looking at the cash on cash roi. This is where some naysayers out there say, oh, you should never put, you know, real estate in an IRA because you don't get the pass through losses. And then they'll even add insult to injury and go, well, you might have unrelated debt financed income. And we've got all sorts of ways, as we've talked about here on the show, to get around that. So let's set those aside for a minute and let's just look at cash on cash ROI and why leverage makes sense. So, Matt, I've got some numbers for you. I love it. Okay, okay. All right.

So in you. But I love when it comes out every once in a while. Letting them out math and letting them

out of the cage here. All right, so here we have everybody. The same property for 300 grand. Now let's say this is after purchase price, costs and any improvements, you know, we're taking some. We want to just compare apples to apples. I know there's a lot of moving parts in a, you know, an acquisition and what's going to end up on the books. But let's just, you know, so we have some Easy numbers here. $300,000 property with this one on the left. We're going to go without debt. We're just going to buy a rental in our IRA without debt. Now we've talked about, you could do this in a HSA. You could do it with a 401k Roth, a traditional, any sort of retirement account. I can go out and buy a rental. Typically we're going to do that in an llc. It's going to be easier to manage the property and create some asset protection for you as the manager of the. Not the property itself, but just involved. We want some asset protection. So all sorts of great topics. Please continue to listen to our podcast or the prior podcast on those. Okay, this other one we're going to use with debt. All right, we've got our Dave Ramsey crowd giving us a little leeway here. This is good debt. This is not bad debt. This debt's going to make us money. So let's do the first one. Let's say, and I think everybody out there, you can live with a 1% rent to value ratio. So that means we take 1% of the purchase price. We're hoping to get three grand in rent. So we've got 36 grand a year in rent. That's 3,000amonth times 12. And I was going to say, let's just look at expenses. Now we're looking at direct. We want to get to cash on cash, return on investment, cash on cash, Roi. I love that. If I have 100 grand in, put it in the bank and I get a 2% CD, they're going to give me 2 grand at the end of the year. That's 2 grand in cash against $100,000 investment. Cash on cash, Roi. So let's say I've got 500amonth in direct expenses, property taxes, property management. You know, who knows? What if I do a 10% property management fee, that'd be 360amonth, and that would be $6,000 a year in expenses. But you know what? Let's even be a little more realistic. Let's say it's 10 grand. I got 10 grand a year in expenses, direct expenses, property taxes, HOA, property management, whatever. So what did I net? I netted 26 grand. That's pretty much it. There's no tax. It's in my IRA. I made $26,000 on a $300,000 investment. What is my cash on cash? ROI. So if I take 26 grand and divide it by 300 grand, I'm going to end up with 8.6% ROI.

Not bad. Now, probably better in the stock market,

but could be very better than ETF or stock market. Now, let's say I get 5% appreciation. The property goes up 5% in value. So next year the property is worth $315,000. That's 5% of 300,000. Well, what does that turn in due to my ROI? Now, that's not cash on cash. That'd be another matrix quadrant that we love to talk about, appreciation. And I've got to sell the property, and they're selling costs. I get all that. But let's just say it's 5% appreciation. Well, that's pretty easy. You take 5% appreciation on 300 grand. It's. It's a straight. It's a straight shot. So that's 5% return. My investment's 300 grand. There's. There's no leverage. So, you know, leverage people. So I have now got a 13.6% return. Now, this is why I love buying real estate in an ira.

The hell? Yeah. Cash flow and appreciation.

Yeah. No, there's no udfi down the road. I've got selling costs. I get it, but that's pretty good. That's not chump change, you know?

Yep.

Okay. Now let's say I use leverage. Alright? Now, as Matt has discussed here, we could, some banks may allow us to put down 25%, 30%, 60%, you know, all sorts of banks. We have private lenders. What I went with was a 40% down payment, which would be, okay, fairly conservative. That's 120 grand. So I now have $180,000 loan. So I can. You're already seeing the writing on the wall, people. That's 180 grand of someone else's money, OPM, other people's money. So that, that means I can go invest that 180 on day three here in a minute. Just keep this in the back of your mind. Use that somewhere else.

Yeah. You down with opm?

I love opm.

Yeah, you know me. I mean, come on. You down with opp? You don't remember that one? No. Yeah, you know me.

No. Oh, come on, you're younger than me. That's before my time. All right? After my time. Sometimes that ain't the time. All right, now let's compare apples to apples. So we have 36 grand in rent, 10 grand in expenses. I net 26 grand. Oh, but Mark, you got a mortgage payment in there. Okay, so I got to take that cash off the table because I got to pay that mortgage payment now. I just ran the math here during our podcast. I came up with $1,138 mortgage payment. I think it was a 6% interest rate. And if you'll just give me a little latitude, everybody. It could have been lower, higher, whatever you're saying. Well, I got to get a commercial loan because it's an ira. Whatever, Just chill. Okay, so let's just say I came up with this loan of $1,138 a month. That's approximately 13,000 a year. So I'm going to take out $13,000 in cash off the table. It's gone now. Yes, it's paying down the mortgage. It's another roi. But we're not going to worry about that today. We're just dealing with cash on cash. So now my IRA is only getting $13,000 in cash. Now the novice investor would go, oh, I get $26,000 here. I get $13,000 here. $26,000 is bigger. That must be better. I am not going to use leverage.

Right. Yeah. Well, is the appreciation different?

Nope, appreciation is the same. We'll come back to that.

Okay, do I Get all of it.

Yeah, yeah. So before we get to appreciation, look it. Well, 13 grand is less, so that must be bad. Oh, we got to do the math. 13 grand is divided by your investment. 120. So what is my return on my investment? You didn't invest 300 grand. You invested 120. So when I take that 13 grand and divide it by 120 grand, that's a 10 point or. No, no, no, Sorry. Oh, my gosh. I've got 12.5 down here. Oh, that's a 10.8 rate or 10.8%. Oh, my gosh. Let's get our. Gotta make my little diagram here look pretty. Okay, here we go. That's a 10.8% ROI. That is a big deal. So when I compare 10.8% to 8.6%, I'm making 3% more because of leverage. But according to Ginsu Knives, it gets

better because there's more.

Yeah, there's more because. Let's go back to appreciation. If we're going to really compare this, I get the same 5% appreciation. So the property is going to go up in 15,000 by $15,000. On paper, we know we got to sell it down the road, but we're going to compare apples to apples. So that 5% appreciation. Oh, we should just add that 5% to 10.8. Oh, no, no. You made 15,000 more dollars on 300 grand using OPM, other people's money. So 15,000 divided by $120,000 is now a 12.5% return, not 5%. When we add this up, the whole package, there is 23.3%.

I like the sound of that.

Yeah. I'm comparing 23.3 to 13.6. Now the leverage is even looking better. And we're not done yet. It gets better because I still get to go out and invest that 180 grand. So if I can go out and make 20% on the 180 grand. Oh, my gosh, I just made another $36,000 that I wouldn't get an option A. So I'm getting a 23.3% return on my. On my 120 grand. Plus I got another 180 to go invest and get who knows what. This is how rich people get richer. Yeah.

Yeah. Debt is a tool. It can hurt you if you use it wrong. But it can also build great things like a real estate portfolio. Every good real estate investor is using debt to leverage their purchasing power. Because. Because you can buy more, you can get more, and you're still getting all of the appreciation.

Yeah. And one last counter argument before we wrap this up, is the non debt gurus out there, and I love Dave Ramsey. He does a fantastic job helping millions of Americans. He's helped me. But in this situation, how much risk are we really taking? We put down 40%. I mean, if this property even went down 10% in value, 20% in value, you can still sell it tomorrow and pay off the debt if you had to. This is not a 0%, you know, junk bond, crappy mortgage loan that got us into the debt crisis of the 2007 and 8 crash. This is a well thought out strategic loan where you're not, you're. This is a non recourse loan. Your, your credit's not even on the line. And that's why banks are willing to loan this. Because you put down so much money, they know they're protected. They would love you to default. They want the property back from you. So this is, this is. So Matt leveraging an ira. Do you endorse this? What do you think?

It's okay, I'm for it. I signed the petition. I vote in favor. Aye. You know, whatever vote's being taken, I'm in.

I'm in. So this is exciting and I just wanna challenge all of you out there. If you're not listening regularly to the directed IRA podcast, please do so. Because this strategy of using leverage to get a better rate of return, to use your money wisely and carefully is doable. We go through the part in the podcast, the prohibited transactions, the functionality of an llc, how to get around udfi. Folks, this is a win, win, win, win, IRS lose strategy. Every day, the weekend, on Sunday.

And I love the math because people love to give the simple answer and love like a sexy little, you know, don't do this. And I know. And they don't give you the details. They don't show their work. You know, like my, you know, my fifth grade math teacher that hated me, I wouldn't show my work. You know, so what if I, my friend sitting next to me had all the right answers and I just wrote them in? Well, show your work. And sometimes it's the guru saying what the other guru said that the other guru said and no one freaking did the work to figure it out. What's better? We've just shown you the work.