Investment Financing
Financing A Phoenix Multi-family Investment In Your Self-Directed IRA
One of the benefits of investing in real estate is leverage. When used properly leverage will increase your return even in a low to non appreciating market.
Obtaining financing for a self directed IRA real estate purchase is a bit different then a normal purchase. First and foremost the loan must be a non-recourse loan in the name of the IRA account. In other words it’s not the borrower obtaining the loan but the IRA plus some other procedural items.
A lot of people purchase real estate using their entire funds from the IRA: cash, but it’s important to know that financing is available.
There are only a couple of lenders that will financing real estate purchases through a self directed IRA. It’s easier to buy a house or 2-4 unit multi-family property then a commercial property.
If you would like to discuss the process, the benefits and procedures in more detail please call me to schedule a time we can meet. We have been through the process several times.
Read: Using Your IRA To Invest In Phoenix Real Estate
Multifamily Financing: Positive Leverage
Positive leverage: use of borrowed funds that increases the return on an investment.
Why would anyone go for negative leverage? This was done by tens of thousands of people for speculative reasons, it was a bet that what you’re losing on the property from negative leverage will be made up by asset appreciation. In a steadily growing market this works because the value of the appreciation makes up for the losses due the larger outflow then inflow, but the risk is simply too high if you mistime the buy and sell cycle: if you don’t have appreciation you essentially have an money loosing business because the cost of financing soaks up any cash flow. If you the cap rate is 4.75 and you cost of financing is 6% your losing money unless you have appreciation.
Positive leverage is almost immune to fluctuation in real estate prices if your investment is long term and your goal is cash-flow rather then appreciation.
Here is what it looks like. If your net return on the investment exceeds the total cost of leveraging: interest and expenses, then you have positive leverage: borrowed funds need to return a positive number: calculating in risk and possibly opportunity costs -of financing- if you want get more detailed.
Borrow the funds at 6% and the return on the cash flow investing is 7.5% then you have a 1.5% spread. That is a very simple view of things. You cost of leveraging and your return can change depending on tax consequences so really it’s the after tax numbers that really count because those are moneys that stay with you: pocket money.
The next question is, is it enough, is the return good enough versus other investments, real estate or not: that’s why some calculate in opportunity costs to determine if and how much to leverage. We’ll take this on in another article.
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Financing Residential Multifamily Properties in Phoenix.
Financing multifamily properties has been and is difficult but it can be done. It’s hard enough to get people qualified for owner occupied home loans. Part of the reason for is multifamily or any investment real estate for that matter is riskier for the lender. If you have to make a choice on skipping payments or maintenance its usually not going to be on your home: it will be the investment property that takes the hit. There are quite a few restriction on financing like no more then 4 properties owned by the buyers including the properties being purchased: higher assets, reserves, and down-payments are required.
While there are some properties out there that are cash flow cows with proper management and other properties that cash flow and require less intensive management its not easy to purchase them so be aware when you start looking.
Please speak with a lender about your ability to obtain financing. Unless you have cash the financing portion will be of greater importance then the property itself. There are quiet a few sources for loans. A good start is with the bank with which you have a relation ship. If they don’t have loans available for you the we can provide you with several lenders with whom you may speak.
