Your Assets - Performing or Not?

Not having enough assets for start up capital is one of the biggest road blocks to making your first real estate investment purchase if you ask most new investors. As we discussed in the credit score section, it is not absolutely mandatory to have cash in order to invest, but in the beginning, it does offer a certain level of comfort.

So what exactly are under performing assets?

IRA's only earning between 5-9% annually

Untapped home equity (primary or investment properties)

CD's

Money Market accounts

Bank Savings accounts

Most real estate investments provide a MINIMUM 10% ROI (return on investment), and this is quite conservative when you consider all the different ways you can get a return on your money in real estate (cash flow, appreciation, tax depreciation, principal pay down). So any asset earning less than that for you should be analyised to see if it would be worthwhile to convert it to your wealth fund account for investments.

A Wealth Fund Account is an account you set up for the specific purpose of real estate investing. I use a money market account for mine since there is a much higher interest rate than savings accounts and your money is completely liquid (available). Any money that you reallocate for investing should go in to this account and be used only for your next purchase. Also, any cash flow from your investments should be deposited in here as well.

If you are considering using your IRA for investments, you do not necessarily have to sell them and therefore pay capital gain taxes and penalties. Many people do not realize that there are custodial companies that can hold your pre-tax dollars that you can then use for non-recourse loans (called self-directed IRA's), i.e. purchasing real estate, businesses, creating notes, etc. This way, all of your profit is also tax free.

Having said that, you can also consider selling your IRA's now, paying your capital gains and penalties, and not worry about having to get approval from the custodial company for all of your purchases or not having access to any of your profit until retirement. In fact, if you become the rich and successful investor that we know you will be, it may be more advantageous to pay your capital gains taxes in your current tax bracket rather than when your 70 1/2 and using your millionaire's tax bracket (just food for thought-not endorsing one way or the other).

Home equity could be an option for you if you have enough of it and the cost of refinancing plus the extra monthly payment out weighs the return you could realize by utilizing the money for a real estate investment. If you already own investment properties, you may have equity that would make sense to pull out and reinvest. Each person needs to look at their individual situation and make the best decision for them - there are no cookie cutter answers here.

Obviously any money you have saved that is over and above your six months living expenses (you do have reserves, right?) could be converted to your wealth fund, as can cd's when their term comes up.

Before you do anything, obviously consult with your tax strategist and/or financial planner to make sure you have all your questions answered.

So start looking at all of your assets - who knows, your first deal may be just waiting for you and you didn't even know it.