The Self-Directed Real Estate Professional

By Jennifer D. Meacham

RISMEDIA, May 2008–Despite the shakeup in many sectors of the mortgage industry, demand for real estate financing will remain strong through the third quarter of 2008, according to the Mortgage Bankers Association’s February “Mortgage Finance Forecast.” With lenders tightening restrictions, individual investors are using their self-directed retirement accounts to bridge the financing gap.

Realtor Bob Law has been growing his retirement account this way for 31 years, making him a self-directed forerunner. “Because you have a lot of flexibility with IRA self-direction, you can do things that make sense but might not fit into a lender’s square peg,” said Law, a broker for The Meadows Group’s Tigard, Oregon , office and a past member of the Washington County Board of Realtor’s Ethics Committee.

Law uses his Keogh plan, a tax-deferred IRA for the self-employed that allows higher annual contributions-up to $46,000 in 2008 for those 49 and younger and $51,000 for those 50 or older. For private loans out of his Keogh he charges 12% interest, the state maximum for non-bank lenders in Oregon, plus 2 to 5% in origination fees.

“I don’t expect the cream of the crop borrowers,” said Law, whose borrowers are largely referrals from local mortgage lenders, “but I do expect there is going to be security someplace, either with equity in the property (he checks out the title company’s report) or money down or by securing other property that they have.”

The downside, said Law, is that his loans are not in first position on the mortgage. This gives him limited recourse if the property used as collateral goes upside down. “To this point, I’ve not actually foreclosed on anything myself,” Law said. “Usually I can just ride out the storm, but there have been times when I have been foreclosed out and lost the money.”

He takes this all in stride. After all, he says, “if you haven’t lost money in some of your investments, you’re not an investor.” But it’s one reason he’s now keeping closer tabs on his investment collateral.

“Virtually all of the people I loan to are local,” Law said. “I feel that I know the market here, and if I have to go look at the property I usually can.”

Most loans are relatively small, in the $20,000 to $50,000 range. However, Law has loaned up to $200,000 for a commercial building buy-out and apartment-complex renovation-projects mainstream lenders aren’t as likely these days to fund.

“Even though it’s expensive to borrow money from me,” Law said, “they don’t get hit up with a whole bunch of fees and don’t have to go through a whole bunch of hoops.”

Plus, the borrower can elect to pay back the loan only after the property has sold. The way Law looks at it: “I have a job, so this is something I get paid for in the long run, not the short term.”

Nominate a “Self-Directed Real Estate Professional” to be profiled here, or e-mail your self-directed retirement investing questions to Jennifer at jd@self-directed.info.

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