All posts in wealth building
A self-directed IRA, first let’s backup and talk about traditional retirement plans. What a traditional retirement plan looks like is typically your 401(k) that you have with your employer, a lot of times held with Fidelity Investments. I think they’re probably the biggest sponsor of 401(k) plans in the country. Your employer encourages you to contribute money to your retirement plan, 5, 10%. That money goes into your 401(k) retirement plan held with a sponsor like Fidelity Investments. Fidelity Investments then gives you a couple investment options. They basically tell you you’re going to choose between the Fidelity Freedom Fund or the Fidelity Income Fund or the Fidelity Stock Fund, and a fund manager manages those mutual funds. The success of your 401(k) or your retirement plan is dependent on the fund manager’s ability to pick and choose the investments with inside that mutual fund, which is also inside the 401(k) that you have chosen.
Your investments are very limited. You usually don’t even have the option of choosing stocks. It’s usually between several mutual funds, which then chooses the stocks for you. In essence, your retirement is dependent on Fidelity and their ability to pick mutual fund managers, and the mutual fund manager’s ability to pick the investments. You are completely dependent on them for the day that you retire, and hopefully that there’s enough money in that 401(k) or that retirement plan to supplement your retirement.
What a self directed IRA does is give you a lot more control over your retirement planning. What you can do with a self directed IRA is invest in not only stocks, mutual funds, bonds, but also real estate, gold, antiques, anything that you feel is a good investment, it’s basically self directed, it gives you complete control over your retirement planning. Let’s go down the list. Number one, the self directed IRA needs to be held with a qualified custodian. There’s two ways that you can establish a self directed IRA. I have a self directed plan with the Entrust Group, E-N-trust Group is the platform, the custodian where my self directed IRA is being held.
There’s two ways that you can fund that. You could do a qualified transfer. A lot of times individuals will say, “I want to have more control over my retirement plan. I’m going to take my 401(k), cash it out and move it, t’s a qualified movement, it’s going from one qualified plan to the next, over to my self directed IRA.” The other one is basically a direct funding where you open up the self directed IRA and you start contributing on an annual basis that way.
Investments outside typical investments, you can invest, like I mentioned, in mutual funds, stocks, bonds, real estate, gold, antiques, other paper assets, anything that you think worthy, as long as the investment, and this is a real estate video so we are talking about real estate here, as long as the investment is non owner occupied, so you can’t use your 401(k) money and put it in a self directed IRA to fund your owner occupied single family home, that’s just not going to be the way it works. It needs to be in investment property.
The next line, as you can see, all of the assets, all of the cash flow, anything that the investment property generates, needs to go back inside that self directed IRA. You cash flow, you have expenses of 3,000, you are collecting $4,500 in rents, you cash flow $1,500 a month. That $1,500 needs to go back into your self directed IRA because it is, again, a qualified retirement plan and none of that money should be removed until you are of retirement age and you can make a qualified distribution to yourself. You can buy the property directly or make loans to other investors. One of the things that you can do with your self directed IRA is you can buy the property directly, you are the sole owner, or you can partner with other individuals or you can loan money to other individuals, other real estate investors, and charge them an interest rate and charge them points or whatever you and that investor agree upon.
You must stay within the guidelines of the custodian to stay in compliance, and again, it is a qualified plan, you want to make sure that you are not taking in your distributions, you are not using the investment or the assets for your benefit today. It is for the reason that this is a tax deferred and you are not paying any taxes on it, it is to benefit tomorrow, during your retirement, or excuse me, some time in the future. That is what a self directed IRA is. In summary, it gives you a lot more control over your retirement planning, your future. It takes the responsibility of your retirement out of somebody else’s hands, i.e. Fidelity, and their fund manager, and puts you in the driver’s seat and gives you a lot more control over your future outcome.
Hopefully that was helpful. If you’d like more information about self directed IRAs, some of the custodians that we use, and to be connected with their plan providers, please click on the link below in the video description. Tell us a little bit more about yourself, what you’re looking to do, how we can help, and we will certainly make that connection for you. All right, thank you.
First talk a little bit about what equity is. Equity is the value that you have in your home, the difference between the market value of the property and the debt on the property. If you have $100,000 home, a home that’s worth $100,000, you owe $60,000 on that home, you have $40,000 in equity. Simplest explanation, 100,000 minus $60,000 in debt. If you sold the property today, you’d walk away with $40,000. Million dollar home, you have $300,000 in debt, you have $6, $700,000 in equity. One million, pay off the 300,000. The equity that remains is 700,000, which is yours.
Let’s talk a little bit about how to use home equity loans and home equity lines of credit to tap into the equity in your home and to accelerate your wealth building process. First, let’s talk about home equity loans. A home equity loan you borrow at a fixed amount. The payments are fixed. Your interest rate is fixed. The payments are fixed. You get a lump sum today and you are basically making payments over the 10, the 15, the 20-year term of the home equity loan, so you know what your payments are every month, and it’s predictable. No closing cost is listed on this screen, but please pay attention to that. You’re never going to take out a mortgage and have there be no cost. A lot of times, it’s just rolled into the back end. You take out 100,000, but your mortgage goes up by 103,000 or 104,000. There are always going to be costs there. Just pay attention to what they are and how does it affect your overall loan.
Interest, usually tax deductible. As of right now, the current laws in the United States allow for interest on mortgages to be tax deductible. The word usually is thrown in there because who knows if those laws are going to change in the future, but as of right now, interest on mortgage or your mortgage interest expense is tax deductible.
What is the difference between a home equity loan and a home equity line of credit? A home equity line of credit, you do not receive a lump sum. Basically, what you do is you’re basically taking $100,000 and tying that up. You basically are using the equity almost as a credit card. In that sense, you charge or you write a check for $5,000 and then you pay off that $5,000. Now you have $100,000 in available credit once again. You buy a car with your line of credit, and you spend $25,000 on that car. As you slowly pay off the $25,000 loan, that credit becomes available again. It’s like a credit card. It’s a more revolving line of credit than it is a loan. A loan you get a lump sum, payments are equal over the term of the loan. The line of credit acts more like a credit card, and also your interest rates are variable. They are usually capped or tied to an index.
You’ll have, I would say, if you start off with a 6% interest rate, it may be capped at 9, but over the life of this home equity line, you may not know exactly what your payments are. Your payments are going to be based on how much you spent or how much you borrowed and what the interest rate is at that particular time. Why would you use one versus the other? I’ll give you two examples of how they are used by investors to accelerate wealth building. Let’s say, for instance, I have a neighbor who wants to sell their property to me. They’re in no particular rush. I am very interested in the property. It’s maybe a multifamily and I know it’ll cash flow if I can just get in and rehab the property and put it back on the market with some new tenants. I’m going to tell my neighbor, “I’m going to take some equity out of my home, and I’m going to now use that equity as a down payment for a new mortgage so I can buy your property.”
In that case, I’m going to go after the home equity loan. I have a purpose. I already know what my purpose for taking this equity out of my home is to go purchase a new home. I would rather my payments be fixed so I can calculate them and I know what they are every single month. I”ll have two mortgages to worry about, two additional mortgages to worry about, the home equity loan, plus the new property loan. I’m most likely going to use the home equity loan as a down payment for my new loan to purchase my neighbor’s property. Depending on where you are in the country or how much equity you have in your home, if you have enough, you can borrow the entire purchase price from your home equity loan.
Why would I use the home equity line of credit? I do not have a neighbor who’s looking to sell, but I know I want to buy and investment property in the future. I want to have access to the cash. I know that when I make an offer on a property, a lot of times, I have to move quickly. I want to have access to the cash immediately and be able to write a check with no going to the bank. I already want my funds to be available so I can move quickly, and I do not know my purpose as of yet. I’d probably be in that situation be looking for a home equity line of credit that I can take, borrow against my house, and in anticipation of using that for some future purpose.
To sum it up, I would say home equity loan is I understand my purpose. I’m going. My purpose is there. I have an existing need for this money or an existing want. I’m going to go take out the loan. I’m going to make my payments fixed and predictable. I know that I want to do something in the future, but I’m not quite sure what it is just yet, but I want to have access to quick cash, I’m probably going to use the home equity line of credit to do that in the future.
One other way that you can tap into your home’s equity that’s not exactly listed here is doing a cashout refinance. Let’s say you have a house. It’s worth $500,000, and you owe $200,000 on that piece of property. Instead of having two mortgages, instead of having your first existing mortgage and then a home equity loan on top of that as a second mortgage, you basically do a cashout refinance. You want to pay off the existing 200,000 and then take out an additional 100,000 or 50,000 or whatever it may be into one new mortgage. My new mortgage is going to be 300,000, paying off the old mortgage of 200,000, and putting $100,000 into my pocket. That is called a cashout refinance of your mortgage, and that is another way that you can tap into cash, as well.
Hopefully, this was helpful. If you are looking for mortgage brokers that you would like to speak to about home equity loans or home equity lines of credit, we work with some of the best in the business, especially here in Boston. Please click on the link below in the video description. Fill out the quick form. Tell us what you’re looking for. We would love to connect you with some of the people that we work with on a regular basis. Thanks for watching.Read more
Cheryl Ricketts and Kate Brennan of The Mandrell Company take you through “10 Things Every Landlord Must Do Find Great Tenants”. While the information is geared toward Boston area landlords, must of the tips and tricks can be used anywhere in the state of Mass. For more information or for questions, you can contact them at Kate@MandrellCo.com or Cheryl@MandrellCo.com.Read more