I love to work. I’ve loved to work since I was little. I’m not really sure if it was the people I loved. Maybe it was watching my bank account grow or seeing what I accomplished. I’m sure it’s a combination of a lot of things but I will say as I’ve gotten older some things have changed for sure. I still love to work but my strategy about how I want to get from point A to Z and the realities of life woke me up a long time ago.
Before we go much further I have a confession to make. I’m not a kid 🙂 In my mind I’m still 18 years-old. Maybe you wish like me to go back to not having a worry in the world. I quite literally grew up on the back of a horse all over Montana roping arenas with my super cool dad and not so cool sister. Just kidding 🙂 That lifestyle teaches you to work and I mean work hard until you’re tired to the bone. The swing from 100 degrees in the summer to 40 below in the winter with often feet of snow didn’t exactly help. But as I said, I loved it.
No, it’s not like I all of a sudden started hating work. I still love it, but what I’ve realized is there is only so much of me to go around. My brain can only think so much. I can only do so much and when I’m too old to work, then what?
I decided to put my MONEY to work.
That is what builds wealth. Putting other people’s money to work can still build wealth for all involved and we do that too! But do you know what I love more than work? Watching my bank account and my retirement account grow when I’m doing absolutely nothing!
Whoa…hold on. Retirement account? I thought we all had limits on our contributions to our IRA’s. Yes, that is correct….but we don’t have limits on our profits! Talk about putting a retirement account on steroids!
Disclaimer: I am NOT a financial advisor. I am NOT telling you what you should do with your money. I am not asking you for your money. I am NOT an attorney providing any kind of legal advice. I am NOT a tax accountant. I’m just sharing with you what I did and what our business partners do with us. My financial advisor didn’t give me the idea. I told him what I wanted to do and he helped facilitate the proce
This is what I did after realizing I really didn’t want to work even MORE to top off my contributions each year. I had a portion of one of my IRA’s put into a solok which is a form of a self-directed IRA. I then used that solok to lend to another real estate investor I trust. (Solok’s and the like have all sorts of rules about WHO you can lend to so make sure you check that out for yourself.) I lent it for 12 months at 10% annualized interest with no prepayment penalty and no extension penalty. When is the last time your money made 10% in the market? Just saying…
Then, with some of the rest I took a “loan” against to buy another property. (There are also rules about how much you can take out as a loan to yourself that you’ll need to check out…and also make sure you don’t co-mingle retirement funds with your personal.) I charged myself interest which is automatically taken out of my bank account and into my solok account. That interest earned is profit not a contribution.
That is just one example of what I do. I also lend my money that is not in retirement accounts to investors I trust. When I do that I have a first deed of trust on the property I lend on as well as being listed as the loss payee on the insurance policy to secure my investment. When is the last time a stock you purchased was secured by a hard asset you could foreclose on if it didn’t perform?
There have also been times when I started an LLC with a business partner to purchase a property so if something were to happen to one of us there was no “process” to go through to take over the property. One reason people have LLC’s with a bunch of people is for more security of assets so here’s an example of what can be done if you’d like.
Let’s say you have 4 friends with $10,000 each who want to grow their assets and you need to borrow the majority from another lender who will not allow a 2nd position. You can all own an LLC together where all 4 put in $10,000 plus $10k from you making a $50k “skin in the game” down payment. Your friends get 10% annualized interest for the 6 months it will take to renovate and sell. (It usually takes a bit longer but let’s keep it here for simplicity.)
If all of your friends leave their money alone and you actually renovate and sell the property by the 6 month mark they will each make $500. You may scoff at that but when’s the last time you made that from your money sitting in your bank account?
But…while this renovation is going on you’re looking for more deals and find property #2 to close on shortly after selling property #1. Your 4 friends wisely use the 8th wonder of the world, compound interest, and invest their $10,500 each into the next one. By the time the year is out and property #2 is renovated and sold in 6 months, they have all make $1,025 from doing NOTHING. When is the last time you made money doing nothing? For a more thorough understanding of compound interest check this out https://www.teachmepersonalfinance.com/how-does-compound-interest-work/
You can make this as easy or as complicated as you’d like.
The next thing you can do is a bit more time intensive and complicated. I’ll keep it short and sweet considering there are a wealth of articles about this. You can keep your renovated properties, rent them, refinance them (yes, rent first so the income can be used to qualify for the mortgage and the bank will look at it as the income-producing property that it is), pull your cash out tax free, and enjoy the income and various additional tax breaks they afford.
I have also done this with vacation rentals. I will tell you this is a bit tougher simply because not all lenders will lend on them and if you’re in the middle of say…a global pandemic…they won’t even touch them. So why do I keep these?
Several reasons. Because they make a ton of cash even during a global pandemic. Each guest has to purchase a $3,000 insurance policy at the time of booking which is then refunded if there is no damage. They can’t just stay claiming any kind of tenant rights. While they can certainly destroy your property, they usually don’t and if they do at least you have $3,000 to put towards damages. You don’t have to go through evictions or anything like that. Non-payment is well, a non-issue. They pay before they check-in.
Some people want ZERO contact with tenants and that is doable with vacation rentals as well. We have ours managed through Evolve and we have cleaners that are also the emergency contacts who take care of any needs and requests from guests. The only contact I have is with the cleaners and that is only them letting me know the property has been cleaned and the damage status.
There are more ways to invest in real estate, of course, but if you want your money to work for you without you having to work more all the while having it secured with a real asset then maybe it’s something to take into consideration. The vast majority of wealthy people have real estate as part of their portfolio. If you have more questions feel free to shoot me an email at [email protected] I’d be happy to try to answer any questions you may have. https://www.biggerpockets.com/blog is also a great resource 🙂
Happy investing! -Teresa