A topic of conversation we have time and time again with our clients is how they want to purchase their dream home in Costa Rica but due to limitations with their current investments or retirement funds, they feel that their hands are tied.

The truth is, there are many options out there that allow you to use your current investments and retirement funds to purchase foreign real estate.

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You can indeed put your investments to work for you when purchasing a home in Costa Rica, but finding a financial advisor who knows how to set things up properly, is vital. In the last year alone, we have worked with three different clients who have used their self directed IRA’s to invest in rental properties here in Atenas, Costa Rica. As more and more baby boomers look forward to retirement, we expect these numbers to increase exponentially.

IRA’s-

Most people think that using their IRA’s for anything is forbidden, much less using it to purchase a home in Costa Rica. NOT TRUE! You can indeed use your IRA to purchase foreign property but you will either need to go through a custodian and/or establish a self directed IRA. A self directed IRA gives you the ability to direct the investment of your funds but you will still need to go through a custodian to do the investing on your behalf.

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Another option is to establish a checkbook IRA. This entails creating an account with a self-directed IRA custodian that will allow non-traditional investments. You will then need to create an LLC that will be used to invest your funds. Using this structure eliminates a lot of paperwork and the review process required when using your self directed IRA.

Once you are ready to make a purchase, you simply write a check from your LLC account. Not only can your self-directed IRA be used to purchase real estate, it can be used to purchase a business as well.

Having said that, there are very strict and specific rules set by the IRS on how you can use your IRA funds. Some of the IRS’s prohibited transactions when using your IRA include:

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  • The IRA owner borrowing money from your IRA,
  • The direct or indirect sale, exchange, purchase or leasing of property between your IRA and a disqualified person.
  • Paying unreasonable compensation for management of your plan.
  • The direct or indirect furnishing of goods, services or facilities between the IRA and a disqualified person.
  • Using it as security for a loan.
  • Buying property for personal use (present or future) with IRA funds.

401k’s

Another asset that most people are unaware that they can use to help fund their Costa Rican real estate adventure is a 401k. Although you cannot invest directly in real estate with your 401k account, you can borrow against it, pulling money out to use as a down payment towards you Costa Rican purchase.

Not every plan allows for loans, but if your employer’s plan allows it, you can take a loan from your 401(k) plan, invest it in real estate, and take up to five years to pay the loan back with interest. Another option is to rollover your 401k into an IRA tax-free (self-directed IRA) and then use the proceeds to invest in real estate.

Securities Backed Lending-

Several weeks back, I met with a senor portfolio manager at Wells Fargo to learn more about financial options for clients who want to use their investment funds to purchase properties abroad. He filled me in on another viable option for investing in Costa Rican real estate that’s called securities backed lending.

Securities backed lending is a form of lending that uses a securities account instead of a property for collateral when lending money. It is safe and easy with minimal requirements and interest rates that are competitive or lower than a traditional mortgage. Another advantage is that closing costs are inexpensive.

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The process is simple and looking at the numbers, it is one of the best ways to use your investments to purchase Costa Rican real estate. Depending on the risk tolerance of how you invest your portfolio, conservative returns run around 5.5%, with more aggressive investors seeing up to 8.5% annual returns. In terms of lending, annual interest rates range from 5.5% to as low as 2%, even lower, depending on the size of the loan and the portfolio being used as collateral.

For example, say you have a portfolio with a value of $2,000,000, invested with a annual return of 6%. You take a $1,000,000 loan against your portfolio at an interest rate of 3.75%. The numbers would look like this:

  • Portfolio value $2,000,000
  • Return on your portfolio (6%) $120,000
  • Portfolio return 6%
  • Loan Interest (3.75%) -$37,500
  • Loan value $1,000,000
  • Net return after 1 year $82,500
  • Loan interest 3.75%

In this scenario, you have purchased a home in Costa Rica, still have your portfolio invested with a modest 6% annual return, pay your annual interest of 3.75% and still make $82,500 on your investment. If you are using your Costa Rican real estate purchase as an investment, such as a rental property, your ROI will change dramatically.

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Securities backed lending is relatively easy with minimal qualifications. Some of the advantages of using a company such as Wells Fargo are:

  • No setup, non usage or termination fees
  • Interest only payments
  • No prepayment penalties
  • Easy access to funds, often just in a few days
  • No credit qualification
  • Competitive interest rates

For more information on securities back lending, contact me directly and I will be happy to put you int ouch with some for a free consultation.

Life is short. You have worked hard so that you can enjoy everything you have ever dreamed of. Don’t wait to start living your dreams. Put those hard earned investments to work for you and start living your dreams in Costa Rica today.

Using Your Investments To Buy Your Dream House In Costa Rica – IRA’s, 401K’s and Securities Backed Lending

Article/Property ID Number 4879

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