Why depend on Uncle Sam to save you in your golden years, when you can make better use of the savings vehicles Congress gives you (and I ain't talkin' Social Security Reform, either)?
There is one little-known tidbit (that I originally wrote about back in 2005) called self-directed pensions that will allow you to leapfrog your retirement savings beyond the usual standard stock-and-bond offerings. Self-directed IRAs (both Roth and traditional), held at designated independent trustees’ offices, allow you to take advantage of a Congress- and IRS-approved law that allows you to invest your retirement money in real estate tax liens or deeds of trust, real estate options on land or residential rentals, discounted mortgages, land lease limited partnerships, and vacant land or lots.
The only things you CANNOT legally invest your IRA money in are:
--collectibles (wine, art, stamps, coins, cars, sports memorabilia, etc.)
--a business which you own more than 5%
--any investment where your IRA would be used as collateral for a loan (such as a mortgage).
If you buy real estate to keep (using your Roth IRA) through tax liens or deed sales, and hold the property for appreciation until retirement age, you can legally take “a house” as a distribution, making it a personal asset and no longer an IRA-held asset—and no taxes incurred until you sell (hopefully after two years to take advantage of new sales rules). Even those taxes can be forestalled with a property exchange or keeping the property proceeds under $250k for singles and $500k for couples.
If the real estate isn’t a keeper, then the property gets fixed up (using IRA money) and sold, with sales proceeds go directly back into the IRA account (through the trustee). The whole process gets repeated over and over—this is a way to make a $2k-$10k investment in someone’s back taxes and tax-forfeited property (through the trustee using your IRA money) into an $80k-$100k market-value investment in a short time.
If you wind up buying the tax note (lien) and the current property owner redeems it, you’ve at least made double-digit returns safely and quickly.
If you decide to use the funds from your traditional IRA to perform such maneuvers, taxes will be incurred the moment you take distribution of any money or property that comes from this IRA account.
It makes more sense to build up your Roth account and make it self-directed—more investing opportunity with less tax hassles later. You lose the traditional IRA deduction (up to $600), but make up for it with the Savings Credit (up to $2000).
With all this retirement fund opportunity available, who needs to rely on a Social Security check now, considering the shaky state of the system’s future, and the lousy options we're given to deal with it?
One last thought: can you imagine what this plan could yield when combined with the Stretch IRA method? If it’s legal (which I don’t know off hand), then it’s could make your heirs squintillionaires, depending on how long they were able to keep the machine going. If anyone has information about the legality of combining the Stretch IRA with the Alternative Investments method, please leave a comment.
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4 comments:
You a lawyer? Then you should consider long and hard before jumping into the Tax lien scam. I have successfully invested in them for over 15 years and I ain't rich yet, but I sure have seen a lot of folks get clipped- a lot of whom never understood how it works here in Arizona. I utterly despise the ease with which "financial gurus" suggest "investing" in tax liens. All they did was drive down my returns and clog up the auctions with stupidity.
I mean it too- ready to go to bankruptcy court to fight over your interest? Ready to determine if your new property might just have environmental contamination?
I just saw Maricopa County sell a huge parcel of land that is a superfund site- ready to fight with the State over a DUER? Ready to fight over easements that destroy the value of the property?
I was at my favorite tax auction last year and watched two fools bid down the interest rate on a road. I had checked the background on the parcel and it was essentially being given to the county by the lawyer/developer after he put on a nice perpetual easement for access to a bunch of lots. They had no clue as to what they are doing. They then proceeded to do the same on a lousy $200 tax lein on a trailer lot- one that would probably never make them one dime after fees- they bid against each other and put the interest rate down to zero.
Big returns, hah. I average around 7.5%- and I get my legal help for free since my spouse is an attorney, and the money I invest is destined for our son's college. I may be cynical, but I sure would think twice about tax liens. Everybody whom I have ever talked with about the entire process has stated, "Sounds good, but I don't have the time to babysit an investment like that."
Oh yeah, in that 15 years I have just one property- with at the time a very low value-6k and have had to enter litigation once. I am preparing to go to court again this summer if one doesn't pay out or turn over the property.
It sounds like one of us needs to go back to lax lien school--either that, or someone needs to look beyond his/her own borders for a tax lien investment.
If "sheeple" are dumb enough to go to an auction, bid on something SIGHT UNSEEN, and end up with a PUD lot fraction, then they get what they deserve. The stupidity will burn itself out and move on--it did for day-traders and other investment outlets. I'm surprised they aren't clogging up the BK/Foreclosure auctions like they are here in Virginia--here, people are bidding on burned-out hulks of houses without realizing the cost of cleanup AS WELL AS the cost of building something on top of it (to newer, more expensive codes with much higher property taxes).
My advice? Get re-educated on what's going on NOW for investment tricks in the lien market (things have definitely changed in 15 years), and expand your horizons to less idiot-polluted and more return-paying markets--we have 50 states, for heaven's sake! I know that not all have lien markets, but there are definitely more than just your corner of the Wild West. I have a lawyer B-I-L in Phoenix, and he tells me that AZ is still a crapshoot for many things, just as it was in the Wild West days.
Also--consider what it is you're buying into. Trailer lots vs. a celebrity late with property taxes...hmmm...sounds like a no-brainer to me--are you evaluating risk as well as reward? Are you evaluating the likelihood of speedy repayment to prevent loss of value through time? Celebrities are more likely to pay their bills quickly than some broken-down trailer court out in the desert.
The only scam I see related to liens is when people try to promote that they're "government guaranteed" when they aren't at all. If the government guaranteed them, then Uncle Sam himself would be at each and every auction.
As with all things for sale, people should carefully scrutinize what it is they're buying, whether it's a car, food, clothing, or a tax lien. There's always a better deal to be had somewhere else, and it's up to you to find it.
Dearest Wenchypoo, in your expert medical opinion (got that from the O.J. trial) is their a definitive book/guide to the purchasing of tax lien properties? You seem to have some faith in that area of R.E. investing.
Where might one gain some insight and understanding in this realm where many fail and are poisoned with infomercial fodder.
Wenchypoo is NOT a doctor or a RE agent--she recommends anything by Lillian Villanova or anyone NOT included in the John T. Reed "guru rating" site: http://www.johntreed.com/Reedgururating.html
I avoid all auctions, especially those involving the courthouse--it's much easier to buy a foreclosed home through REO than it is to find a parking spot downtown! :) Besides, you can haggle with a banker, get the keys to perform inspections, and you have nearly zero competition than if you went to a pressure-cooker auction to buy something sight-unseen. Tax liens also have this "after-market" sale of leftovers from previous auctions, and this is where you can find some real gems others have bypassed because they ran out of money to bid, the bill was higher than they could afford to spend, or there was no interest (the crowd went home, for example). Again, the competition is nearly zero, the sense of urgency to buy is gone, and you have time to go out and actually FIND the property in question to determine whether or not you'd like to own this through tax liens. Best of all, the tax officer who keeps records of past auctions will have auction leftovers going back three years or more--it's likely you can buy past liens as well as present ones, making your ultimate timeline for property collection much shorter (some states have a 3-year timeline before you get to have the property signed over to you--I don't know what your state's timeline is). If you keep buying one single homeowner's tax liens for X number of years, and hold onto them for X number of years (the timeline for your state) then the state signs over the property to you.
This goes on all around the country in those states with tax liens.
Another way to invest, although much riskier, is to do it by mail--find celebrities that owe back taxes, and buy their debt. Celebrities (especially young ones and athletes) usually pay up promptly --they just missed their mail because they were out of town, in the hospital, or rehab...you get the point. The quickest way of getting the highest return on a lien is with quick reimbursement (as you probably already know). Those who buy specific debt are usually looking to get hold of the underlying property, not so much a quick return, and here's where looking into past auction leftovers can be really helpful.
All auctions are meat-grinders, and anyone who attends them runs the risk of getting ground into hamburger. Never NEVER buy anything sight unseen, or at least not without the chance to inspect and research what you're about to purchase. Let the "lambs" go to slaughter in front of the courthouse--you now know where to find information to keep you intact.
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