As some of you may know, I quit a $70,000/year university job with my own office, benefits, and great coworkers to dive head-first into real estate. I worked there for roughly 15 years and built up a pension and a few retirement accounts with Fidelity which added up to about $30,000.
While I worked at the university I did inquire about how I might be able to use those retirement accounts to invest directly into real estate. The only options they could offer was 203(b) plan which let's me take out a loan on a fraction of my retirement account. In my particular case that was around $2000. LAME!
So how was I going to use those accounts to invest directly into a real estate deal? I was going to have to transfer them over to another custodian and the only way I can do that is if I left my current job. So 30 days after I left my job I was able to roll over those funds to a Self-Directed IRA custodian. Now there is a catch, I decided to roll-over my funds into a ROTH IRA in a "conversion" and paid the taxes on that income this year since my income will be much lower than it was my previous year.
I met Brett at a Santa Barbara Real Estate Investor Association(RIEA) meet up. Brett is a broker and investor who has done deals all over California and Arizona. As I spoke with him he seemed very knowledgeable and open about all his dealings. When I went to him for help he was always happy to give some of his time and advice. Earlier this year, I decided to give him a call to update him on what I was doing and he mentioned that he was looking to close on a pair of residential lots at the bottom of the "American Riviera", Santa Barbara. I had lived in Santa Barbara for 20 years and was very familiar with the area. Brett sent me a deal package for "Bella Vista Estates". The plan was to merge two parcels into a 21,000 SF parcel and build 4 condos. The condos are over 2100SF and we are estimating sales at $1000/SF for new construction in that area resulting in each condo selling for over $2,100,000. If you want full details from the deal package, please contact me!
The first thing you should determine before doing a deal is Do You Trust the Investor? As I mentioned before, I had known Brett from events and fellow investors. Also, he is a licensed broker in Arizona and California with no reported complains. From his deal package, I looked up his company to search for any complains, of which I found none, to see if the company was in the transaction record of some of the properties he claimed to have developed. I also verified the acquisition loan he was using to purchase the parcels. Having lived in Santa Barbara for 20 years I know that housing is and always will be in demand here, and that $1000/SF is actually reasonable for new construction in that area based on comps.
Return and Terms
Now, I won't publicly disclose the return and terms that Brett and I agreed to for investing in his deal. Let's just say it was 25% (it's higher!!!) for 22 months with the option to pull my money out after we secure the construction loan or through the end of the terms. What will my return be at the end of the 22 months? Let's calculate it:
Interest Earned per month: ( $30,000 x 25% ) % 12 months = $625/month
Total Interest Earned: 22 months x $625/month = $13,750
Projected Principle + Interest after exit: $30,000 + $13,750 = $43,750
When I looked back at what I was making for the last