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Investor Insights Blog|Sweet 16 and Investing in Real Estate

Real Estate

Sweet 16 and Investing in Real Estate

At just 16 years old, Brittany is well on her way to building herself a financially secure future with tax-free investments, with help from her real estate-savvy mother.

It’s common for parents to say they don’t want their children to make the same mistakes they did. It’s safe to say 16-year-old Equity Trust client Brittany is learning from that lesson.

Unsatisfied with some of her past retirement saving strategies, Brittany’s mother, Jan, has been helping her daughter take control of her own financial situation for years now. So far, so good: Jan predicts that if Brittany stays on pace, she will retire a multi-millionaire.

Learning From Her Mother’s Real Estate Expertise

Jan has had success buying, fixing up and selling high-end real estate in the suburbs of St. Louis and Los Angeles for decades, but she admitted that she made some bad choices when it came to her retirement savings strategy.

She had heard about self-directed IRAs decades ago, but it wasn’t until 2008 – when she lost an unsettling amount of money in the stock market – that she decided to seriously research them.

“I decided it was time to take control of my IRA…I converted everything (in my retirement account) to a Roth IRA when the account balance was at its lowest.”

With Roth IRAs, the account holder pays taxes when the account is opened, as opposed to the Traditional IRA, which is taxed when distributions are taken.

Jan focused her investments in the area in which she has more than 25 years of experience. “My business is real estate, so I understand it very well,” she says.

“My expertise is in renovating houses — finding properties, hiring contractors, making decisions and selling properties.”

Investing is a Family Affair

Ever since she can remember, Brittany has enjoyed helping her mom out with the business. That interest only grew when she was 13 and Jan and Brittany’s dad, Gary, gave her a check for the work she’d done for her mom.

Her first thought was, “this is a lot of money…I’m going to go shopping!” That’s probably what a lot of teens would have done. But when her parents introduced her to another option, Brittany realized a new level of excitement. With the help of her parents, Brittany opened a Roth IRA and partnered the money in it with her parents’ accounts to buy two houses.

“I enjoy being able to go see homes, help out with contractors and give opinions on things; it’s a great learning experience…it’s what I want to do when I’m older.”

Brittany admits that she was apprehensive about self-directed investing at first because, as a budding entrepreneur, she was used to receiving quicker returns from her business ventures.

Her other businesses include dog walking, babysitting and teaching retirees in her grandparents’ community how to use technology. Unlike the pay from those jobs, the profits from self-directed investing aren’t available to Brittany right away.

“I can’t access that money for several decades,” Brittany says, acknowledging that she has come to terms with the idea.

“I’m absolutely interested in reaching financial security so I don’t have to work as long and so I can help others.” She explains that during a recent service trip to Haiti, she realized she needs to be financially successful if she is going to be able to give back in a big way.

Family Project: Self-Directed Real Estate Investment

Illustrating that you’re never too young to begin self-directing, Jan and Gary have been involving their 16-year-old daughter, Brittany, in their self-directed real estate deals for a few years. Here’s one example of the effect her small role in an investment can have on her financial future.

The family used their Roth IRAs to buy and renovate a single-family home in St. Louis County.

IRA funding source:

  • Gary: 65 percent
  • Jan: 30 percent
  • Brittany: 5 percent

Purchase price: $132,000

Sale price: $349,000

Profit after all expenses (renovation, commission, property taxes, utility, and other expenses): $80,000 tax-free profit back into the IRAs

Bottom line for Brittany’s account: Her contribution was $9,800 (5 percent). A 5 percent portion of the total $80,000 profit was $4,000.

Her IRA increased in value by 40 percent from February to July, taking her balance from $9,800 to $13,800

To learn more about partnering IRAs to purchase real estate, watch our video on YouTube “Partnering Self-Directed IRAs.”

Even if she only makes half that (40 percent), a 20 percent return, she’ll have oodles of millions of dollars by the time she is able to start withdrawing funds at age 59 1/2,”

Jan, Brittany’s Mother

Never Too Early…or Late

Jan says some of their investments achieve returns as high as 40 percent. Jan knows that with the power of compound interest, Brittany’s early start will have a huge impact on her financial future.

Jan also hopes that with this early start, Brittany will be able to teach others these financial lessons, and they will carry on to the next generation.

“You can do this with your kids and grandkids,” Jan says, adding it’s easy – and can even be beneficial – to get children involved in the work involved in the investments.

“Brittany sends mailings, meets with contractors, and helps me buy properties I wouldn’t have been able to purchase otherwise. Plus, people trust me more when they see her involved.”

Increasing Children’s Financial Literacy

Brittany began learning to budget her money when she was in fifth grade. “Before the budget, my mom and I would go into a store and it was a game to see if I could get her to buy things for me,” she says.

This helped Brittany develop her negotiation skills, but little else. Now her mom works as her consultant and Brittany makes all the decisions and enters her transactions in a phone app to track her income and expenses.

“Whether children are in fifth grade or in college, investing isn’t out of the question,” Jan says.

1

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

2

Am I eligible to make a contribution? How much can I contribute?

The IRS publishes maximum IRA contribution limits and catch up provisions each year. Summaries for each type of contribution can be found on Contribution Limits.

3

Should I wait to open an account if I don’t have an investment ready right now?

There are several reasons to open your self-directed account at Equity Trust Company, even before you have selected an alternative investment.

  1. If you are transferring cash/assets to your account from another custodian, you should allow time for the resigning custodian to process your request and deliver the account holdings to Equity Trust.
  2. You have the ability to invest in traditional assets while you are researching other opportunities.
  3. Once you have selected an alternative investment, you will not have other actions in process that may delay the funding processing.

Case studies provided are for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal.


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