Monday, March 8, 2010

Cross-Cultural Mutual Benefits

When we talk about use of self directed IRAs to fund real estate transactions, as I have mentioned in a couple of earlier posts you don't have to be purchasing the real estate yourself. You can be a hard money lender to someone looking at alternative financing programs to get a project jump started.

But even an outright purchase of a property by an investor using their SDIRA funds can be turned into a "mailbox money" situation. That is, where the owner is truly a passive investor and receives checks monthly from another party. This is increasingly a way for people from different cultures to mutually benefit, depending on how the deal is structured.

Let me give you a very real example.

All over the United States, refugees from Somalia have immigrated, adding a rich new culture to our existing melting pot. Some somali immigrants have money to invest in projects, others do not. Some came for a better life. Some escaped war and famine and are hoping for something better in the United States. A place where hard work and dreams can be turned into something very special.

Somalis, because of their moslem faith, do not and cannot pay bank interest on loans. It would be a violation of their religion to do so. Therefore, they don't qualify for traditional bank lending programs.

A way around this that benefits both the somali entrepreneur/investor, and someone with SDIRA monies -- or someone using traditional financial means to purchase a commercial/investment building operates as follows:

- The traditional investor uses private funds, or a bank loan, or SDIRA monies to purchase a building.
- A somali entrepreneur/investor buys it on a land contract from the new owner. The new owner is, in effect, the bank. The entrepreneur/investor makes monthly payments for the building and is responsible for all costs -- insurance, property taxes, all utilities, interior and exterior maintenance, maintenance of drive/parking lot, etc. Factored into the monthly payment is the monthly principal AND the interest on the loan as granted by the traditional investor (from Point 1) who bought the building. Only "interest" is never mentioned in the document. That money is incorporated into the monthly payment.

All sides win. The person who bought the building is acting as the bank, and the "New American" entrepreneur can fill the building with tenants, manage it, and ultimately own it when the land contract is paid off. In Ohio, land contracts usually are paid off in just under five years. The risk to the traditional investor is mitigated by being able to take the building back if the entrepreneur/investor misses any payments.

There are many opportunities like this out there these days. It takes thinking creatively, and cash on cash returns can easily approach or exceed 20 percent, depending on the project. Here in this office, one of my colleagues is doing quite a bit of work in the somali community, and pairing individual investors with immigrant entrepreneur/investors who can benefit from each other's knowledge, enthusiasm, access to capital, and access to a community of potential lessees.

It just takes a little big of out of the box thinking.

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