By J.P. Dahdah, Founder & CEO of Vantage IRA
Most people assume investing in real estate requires a large nest egg. In fact, it doesn’t. Even if you have less than $50,000 in retirement savings, there are clever strategies that can help you access real estate opportunities, grow your wealth, and diversify your retirement portfolio.
At Vantage, many of our clients have turned modest balances into smart, strategic investments that steadily grow their retirement savings. Here are three creative ways to do the same.
1. Team Up with Others
Real estate investing doesn’t have to be a solo journey. By partnering with others — like family, friends, or financial partners — you can combine resources, reduce risks, and access investment opportunities that would otherwise be out of reach.
How It Works:
Your SDIRA pools funds with other investors to buy a property. Its ownership percentage is based on the amount invested, which determines its share of rental income and profits. Legal agreements define the ownership structure and distribution of returns.
Why It’s Effective:
- Your SDIRA can invest in higher priced properties.
- Your SDIRA shares the investment risk with others.
- Your SDIRA can increase its diversification.
Example: Let’s say a property costs $200,000. Your SDIRA puts in $50,000, and your partners contribute the rest. Your SDIRA owns 25% of the property and receives 25% of the rental income and profits.
2. Be the Lender
Instead of buying a property, your SDIRA can lend money to fund someone else’s real estate purchase or renovation. You don’t have to worry about being a landlord, and you can start with smaller amounts, like $10,000 or $20,000.
How It Works:
Your SDIRA lends money to a homeowner or real estate investor through a promissory note (often called a “real estate note.”) You set the loan terms — such as the interest rate and repayment schedule — and receive fixed payments over time. Once the loan matures, your SDIRA collects the principal along with any remaining interest.
Why It’s Great:
- You don’t have to manage the property.
- Your SDIRA gets a steady, fixed income from interest payments.
- Your SDIRA is the “lender” on the promissory note, giving you total control to set the terms of the note.
Example: Your SDIRA lends $40,000 to a homeowner looking to make upgrades. The loan includes a 12% interest rate. After a year, your SDIRA earns $4,800 in tax-free interest, plus the original loan amount when the loan matures.
3. Buy Tax Liens or Deeds
When property owners fall behind on their taxes, local governments often sell tax liens or deeds at auction. Your SDIRA can purchase these for a relatively low cost, offering the potential for strong returns.
How It Works:
Your SDIRA purchases a tax lien or deed at auction. If the property owner repays the taxes, your SDIRA earns interest on the lien. If they don’t, your SDIRA may acquire the property, often for less than market value.
Why It’s Great:
- It’s a low-cost way to start investing in real estate-based strategies.
- Your SDIRA can make money from interest or even own the property.
- This low-risk investment strategy is backed by tangible real estate.
Example: Your SDIRA buys a $5,000 tax lien with a 12% interest rate. After a year, the owner repays the lien, and your SDIRA earns $600 in interest.
Hopefully, these three creative real estate strategies helped expand your understanding of how to effectively self-direct your IRA. They show that you don’t need a large amount of retirement savings to achieve meaningful investment victories with your Vantage Self-Directed IRA.
Happy investing!