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How to Buy a House (for Cash!) When Broke

You may have found yourself in a predicament like mine a few years back.

I wanted to invest in real estate, but was facing a few minor barriers:

I was broke

The houses in the market I was looking at required all cash offers.

Even if the seller would accept a mortgage, I could hardly qualify for one, given my massive debt load at the time.

You may find yourself in similar situation, perhaps even with added complications like bad credit, possibly a felony conviction, etc. … yet you still hunger for an income producing real estate empire.

Not to worry, there’s always a Contrarian solution.

It starts with an account call a Self Directed IRA (SDIRA) – ever heard of it? It’s like a regular IRA or other retirement account, except you can invest in virtually anything – from collectibles to businesses, to yes, real estate. All you need to get started is to open a SDIRA account at a qualifying custodian, transfer enough money into it to cover the house and the closing costs, and you’re off to the races.

“Au Contrair (ian)!”, you may protest. “Where do I get the money from to transfer?” Well, you roll it over from an existing retirement account. And given that the average retirement account balance is approximately $103k, I have helpfully provided a list of US markets with median homes prices under $100k. So if your retirement account has an average balance (or less, really), there are still many places where you can use the money to invest in real estate.

Sound simple? For the most part, it is. However, even though I really love my little self directed IRA, in the interests of full disclosure, I feel like I should detail the benefits and disadvantages.

First, the benefits:

  • You can buy a house even when you have no savings. Scaring up a down payment is often the biggest barrier to getting started in real estate investing. This lets you use cash that’s probably been sitting around, so you won’t have to give up all those lattes (or Pradas) to dive into real estate investing.
  • You are making all cash offers: this means your bid is the most competitive, you can close faster, and you save thousands in closing costs (by the way, I believe you can buy a house with a SDIRA and a mortgage, but I think this is a more complicated process.)
  • The revenue you receive remains in the IRA account: so it accumulates tax free until you retire

The drawbacks:

  • All the revenue and expenses with the account have to stay within the account. You cannot use the rent payments to pay for a European vacation (at least until you retire). All revenue needs to stay in that account and all expenses (e.g., a new roof) need to also be funded from that account.
  • As I said, using a mortgage is more complicated so you better have the whole sales price (and closing costs) available to buy the place
  • Most SDIRA custodians charge an annual fee (in my experience, usually less than $1000); from what I’ve seen, I believe this is similar to custodial fees most IRA and 401k custodians charge.
  • You are tying up your rental income until retirement – which can be viewed as a good or a bad thing

“But Contrarian”, you may say, “this is the money that will keep me from eating cat food in my old age… and you want me to blow it on a 3 bedroom in Dayton Ohio? What if the market crashes a la 2009?”. 

I actually feel like this is a much safer bet than the stock market, which also declined precipitously in the Great Recession. And, you will continue to get those rental payments until you die and beyond.

Of course, the final caveat is that you must check with your accountant before you start transferring funds or buying up West Virginia. The last thing you want is an unintentional distribution (I have had these, they are painful).

And lastly, in case this is all new and scary to you, here’s some evidence that SDIRAs are a “thing”, as per Forbes and and New York Times. Explore away and let me know what you’ve found!

Have you used a SDIRA? What has been your experience? Please let me know in the comments!

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