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Old Time Investments

Apartment Buildings and Condominiums in IRAs and Keoghs

Apartment buildings and condominiums have been somewhat elusive over the last few years among retirement plan investors. In all cases, the investors have spent a significant time searching for units, which have a positive cash flow, while at the same time having a longer-term appreciation potential. Because retirement plans are long-term tax-deferred investment vehicles, the investor has more than just a few years to realize such potential. With private mortgage rates from nine to 13 percent in the current market, income plus appreciation rates of about that total rate of return over time are important for the real property investor.
 
What we have seen in the past, as just one example, was a 16-unit apartment sold at $380,000 in Phoenix. The down payment from the plan was $180,000; with the balance of $200,000 financed at the time for 7.25 percent. The property had a positive cash flow of $2,264 after mortgage payments. The approach the investors used is to spread risk over a number of properties, or, as in this case over a number of units. With annualized gross rates or return of 26 percent, it allows a buffer for vacancies, and capital reinvestment in the property.
 
The obverse of this scenario is a client who is looking for multiple-family units to invest in her Keogh (Profit Sharing) account. The property was $420,000, with two units, in Los Angeles. The maximum rental would be $2,850, with financing on $340,000. The best results could have been a one-percent return, with a potential of a negative cash flow with one tenant less. After analyzing this property and the long-term potential, the client elected to continue to look. This was a matter of looking at one's own risk tolerance and long-term potential, which is different for each of us.
 
Condominiums seem to have risen as investment potential. As in the cases above, careful shopping is the order of the day. A commercial Realtor saw potential in the condominium project where he lived. It is particularly interesting that in the very proximity of where one lives this scenario could occur, and it does more than one thinks. The complex consists of 240 units in six separately established buildings. The project is tastefully executed and maintained. The broker decided to look at what was available in the complex, just as a matter of curiosity. What he found was quite interesting: many residential brokers were marketing different areas of the same complex, and at startling different prices, as much as $100,000 differences for similar units with similar amenities. Resales of the units had been brisk over eight years. He concluded that he would purchase the lowest cost units and resell them to compete with the higher-priced units of approximately them same type.
 
He used his IRA and Profit Sharing funds to purchase the units. On the first resale, he made a profit of $50,000 on a property he purchased for $219,000. His down was $60,000, with financing being a commercial bridge loan at eight percent for less than one month. The other three units he purchased sold for about $20,000 over his purchase price, after the other agents discovered what was happening. Nevertheless, the theory is applicable in similar situations elsewhere.
 
The bottom line is to look for some of the choices made in past years that may be great opportunities now. When the real estate economy begins its recovery in various regions of the country, look for these opportunities. A number of clients physically take trips to other parts of the United States to look for investment opportunities, and find them. This process takes time, but this personal visitation process is a good one. We find more and more that the discriminating Self-Directed Plan investor actually visits his or her potential real property investment before the purchase.
 
When you look at the tax-deferred return on these investments, you really want to make sure that the investment isn't too good to be true, and that the earnings will last. We certainly support the notion that it's best to be able to touch and feel the investment in any market place.

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