Realize huge profits, through real estate, with your IRA.

During the last 35 years, real estate has proven to be one of the safest and most consistent investments available. Most investors however, are unaware that it is permissible to hold real estate inside of a retirement plan. An IRA has had the ability to hold real estate since it was created in 1974. The stock market’s poor performance over the last five years has led more and more people to look at non-traditional investments, such as real estate, for their retirement accounts.

Real estate is a phenomenal investment because there are so many strategies that can be implemented to make money. Regardless of the size of the account, real estate can be very lucrative with the right strategy. A wise attorney once said, “control everything, but own nothing.” That may not have been directed solely at real estate, as it has many benefits of ownership; however, for the IRA holder who has $5,000 - $25,000, control could be the ticket to financial independence.

With Guidant Financial Group’s Auriga, an investor can maximize one of the most powerful real estate strategies around – the lease option. There are many variations to this strategy, but when discussing investment opportunities to an IRA investor with less than $25,000, the sub-lease option strategy is the most attractive investment alternative.

In order to understand how lease options, work there are a couple of basic definitions that should be addressed:

OPTION: In real estate, an option gives the right, not the obligation, to buy a specific property, at a specific price, on or before a specific date.

LEASE: In real estate, a lease gives a tenant (or renter) the exclusive use of a property for a specific period of time.

A brief example of how this works would be as follows:

A homeowner puts her home up for sale because she is moving to another part of the country. The owner is asking $150,000 for this property. The home sits on the market for months until finally one day the owner is approached by a couple presenting a unique offer. The offer is $3,500 for the option to buy the home from her for the full price of $150,000 within the next 24 months. In the meantime the couple will rent the home from her, covering her mortgage plus a little cash flow until the property is finally purchased outright by the couple.

The seller needs to move and the home, which has sat on the market for months, is costing her money every month. The homeowner decides to accept this offer for a couple of reasons:

• The tenant/buyers are coming in with $3,500 plus first and last months rent at $1,000 per month. Their $5,500 is significantly more than a traditional tenant comes in with, adding financial protection for the seller in this transaction.
• The seller would get top dollar for the home if the option is exercised because she will receive the full $150,000 (which she expected to negotiate) plus the $3,500 option payment AND does not have to pay a real estate commission on the sale. Up front this saves, and ultimately makes, her THOUSANDS more!
• The tenants’ ultimate goal is to buy the home. They have a vested interest in the property from their option fee. This means that they are more likely to take excellent care of the property.
• If the tenant/buyers cannot exercise their option to purchase, the seller gets to keep the equity increase over the two years during the lease option term while the tenants occupy the home. This is due to appreciation. She also gets to keep the option payment and enjoy the tax benefits of ownership during that time period. She can then sell the property for a greater gain OR offer to lease option it to another prospective tenant/buyer.
• For an IRA that is sizable enough to buy a home in its entirety, this is a tremendous way for the IRA to protect itself from the hazards of rental real estate. There are many benefits to holding lease options inside your IRA. Today, however, we are going to focus on sub-lease options. Like tax liens, sub-lease options offer a wonderful alternative to the stock market for investors with smaller retirement accounts.

A sub-lease allows an investor or IRA to obtain the option, or right to buy a property, and then rent or lease it to another party. Many sellers are willing to offer this type of sub-lease because they need to move quickly or are financially burdened. Bankruptcies are at an all-time high and many people have found themselves in a financial trap. Unfortunately, many of these individuals fall behind on their mortgages. Sub-lease real estate options are a way that you can not only help rescue a person from near financial ruin, but also make a profit. In this way, sub-lease options can create win-win situations for the seller and IRA investor.

Let’s assume that reading through the local discount newspaper you come across an advertisement that says, “NEED TO SELL TO AVOID FORECLOSURE. BRING ALL OFFERS!” In placing a call to this seemingly motivated seller you discover that this single parent lost his job and is on the verge of losing his home. Above all he does not want to go into foreclosure, which would complicate buying a home in the future. This home is nestled in one of the area’s premier family communities and boasts many great features like a remodeled kitchen, large master bedroom and enormous backyard.

This seller is willing to sell for what he owes on the property. Four years prior, he purchased the home for $148,000 which he paid down to $140,000 during that time period. The payments on the property are $1,050 per month and he is behind $3,450 (three months’ rent and $300 in late fees). Essentially, he needs the mortgage balance ($140,000), his back payments ($3450) and excise tax for the transfer of title ($2,520 at 1.8%) paid in order to get out from under the overwhelming debt.

In the last four years, homes in that area have appreciated at a rate of 6% per year. This means that the home he originally purchased for $148,000 is now worth approximately $185,000. Upon a quick walk through the home, you decide to offer this man $148,000 for the home. Your offer to him is to make up his back payments of $3,450 and have your IRA rent the home from him for the next 5 years. Within the five years, you will cash him out. The back payments you have made and the mortgage reduction over the lease period, will net him over $5,000 when your IRA purchases the home. The key is, he will not get paid until your IRA does AND he has to sign over a deed of trust to the property to protect your investment. It is also crucial that you be given the ability to sub-lease the property.

This gentleman has few options and realizes this is the best case scenario for him and his family. He will get caught up on the mortgage, the payments will be made every month, and he will be able to downsize to a more affordable home or apartment. This makes sense to him, and he accepts your offer.

Shortly after having the deed signed over to you and recording it with the county, you place the following advertisement in the newspaper: “Lease with the option to purchase. No bank financing required. Bad credit? OK!” The advertisement results in many calls. You are able to find a young family that you think would be perfect fit for the home. The father of the family is self-employed. Although business is going well, he cannot get an attractive loan because he has less than two years of self-employment history.

The home for which you are offering the option to purchase is now worth $185,000. You are willing to sell that home, within the next two years, for the current market value! For that right (option), you are charging $5,000 which you will credit toward the purchase of the home should the tenant/buyers exercise their option. You are also asking $1,250 per month for the lease of the home. The buyers are able to come up with the $5,000 plus first and last months’ rent. Your IRA has an immediate profit of $1,550 because you paid $3,450 to catch up the back payment for the previous owner and you took a $5,000 non-refundable option payment. You realize an instantaneous 44%, cash on cash return. It gets better yet! The tenant is going to pay $1,200 per month and you only owe $1,050 per month. That is a positive cash flow of $150 that your IRA realizes each and every month. If the tenant/buyers exercise their option to purchase, then the IRA would realize the net difference between the purchase price from the original seller at $148,000 and the sales price after the option credit of $180,000.

So why are so many investors enthusiastic about these sort of hypothetical investments? If the tenant/buyer did end up purchasing the property, your IRA would have profited $37,150 on its original $3,450 investment or 1008% in just two years… tax deferred! What if they do not exercise their right to buy? Then you can do it again! You keep the option payment of $5,000 and the monthly cash flow of $3,600 ($150 over 24 months), and you can acquire another lease option tenant! You negotiated a five- year option and then you sold a two-year. That means you have three years left on your original deal. Also, if they don’t exercise the option is it likely the home has appreciated another 6% over those two years? Probably! So the next time your IRA sells the option on that home, the new purchase price could be adjusted to $205,000.

What if you have a ROTH IRA? With a ROTH IRA all of those gains would be TAX FREE! This can be done using your IRA, SIMPLE, ROTH, SEP or even a Coverdell Educational Savings Account.

The ROTH is an amazing investment vehicle because you can build unlimited equity, cash and income within the account and never pay any taxes on the growth! You are only limited in how much you can contribute each year, not in how much your investments can profit.

Having a Guidant Auriga allows you to take full advantage of this strategy. By having checkbook control and no transactional fees, you can make a deal happen when it arises without having to gain permission from the custodian. You can do this as many times as you like – with no transactional fees!

This example was slightly oversimplified to bring awareness to this unique and powerful investment strategy.


Great write up--great info--- I have done several Lease -options on both sides of the fence. I normally get 10k down but have recieved as much as 25k. Almost all the people walk away from thier money due to a life situation. I find it amazing.