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Real Estate

91-Percent ROI Real Estate Investment: From Tax-Deferred to Tax-Free

January 8, 2020
I have not had to deal with the emotional ups and downs that I would experience when my retirement savings were invested in mutual funds and stocks…I have made more return on my IRA money in the past four years than I thought possible.
Kay, Real Estate Investor, California

“I could see that my return was substantial, however, I could also see that my future tax bill would also be substantial,” Kay recalls. “That’s when I decided that a transition to Roth would be best for my long-term financial growth.”

Kay was drawn to the Roth IRA’s potential benefits – such as tax-free distributions after age 59½ and the account being open five years.

When she decided to open a Roth IRA, she had already purchased the distressed house in her Traditional IRA. She spoke with Equity Trust about converting the property to her Roth IRA. She had the property appraised so she could complete the necessary Fair Market Valuation and conversion paperwork.

The house appraised at $70,000 in the same distressed condition, which meant that Kay had to pay taxes on an additional $5,000 of value above her purchase price.

“I believed that to be a small price for the tax-free 91-percent ROI that I received when the property investment was sold out of my Roth IRA in 2018,” she says. “That is over $50,000 of investment income that will never be taxed by the IRS.”

Kay was so excited about the benefits of her Roth account that she moved several other assets from her traditional to her Roth IRA in the past couple of years.

A recent asset she moved to her Roth IRA was a rental house that appraised at $8,000 more than when it was purchased in her Traditional IRA. However, $675 a month in rent is now flowing into her Roth IRA tax-free.

“In a little less than two years I have been able to convert, transition and build my Roth IRA to where it can produce over $5,400 of tax-free rental income when all properties are fully rented,” Kay says.

Getting creative to make investments happen

The property needed work, including drywall, appliances, broken windows, and cabinetry, at a cost of about $10,000. Any costs must be paid from the IRA that holds the asset. There was one issue: Kay’s Roth IRA didn’t have enough funds.

She teamed up with a real estate broker/property manager that agreed to complete and fund the rehab with his costs coming out of the sale escrow. He did this with her promise that he would be able to list the property for sale when the rehab was completed.

In other instances, when Kay has paid bills related to IRA investments from her Equity Trust account, she has found the process to be simple.

“Equity Trust Company is a dream to work with,” Kay says. “So many tasks like bill pay and distributions are done online with no paperwork needing to be faxed or emailed. Customer service always answers my questions or routes me to the person who has the answers.”

91 percent returns and Improvement in the community

After being rehabbed and converted to Kay’s Roth IRA, the property was sold in 2018 for a 91 percent ROI in her tax-free Roth IRA.

The house, which was once damaged, is now in “near-new condition” and owned by a family that was new to the community. This investment property is the fifth shuttered house she has rehabilitated and restored into a home since opening her IRA in March 2015.

With the proceeds from the house, her Roth IRA purchased a duplex which, when fully rented, produces over $1,700 of tax-free, monthly passive income to her Roth IRA.

Not only has she rehabbed several properties through her IRAs, but her accounts have also provided hard money loans to other investors so she can affect more change in her community, even when she doesn’t have the time to oversee a project herself.

“It is wonderful that my IRAs grow, but I get great satisfaction in seeing a home come to life and return as a viable part of my community,” she says.

“More return on my IRA money than I thought possible”

Kay continues to use her Roth IRA to purchase and rehab duplexes to help improve the community. Also, several hard money loans remain active in her accounts.

What sparked from listening to a radio show about retirement investing has evolved, in a relatively short amount of time, to retirement security for Kay and her husband. Between the pair, they have five accounts at Equity Trust.

Others have taken notice.

“My family has become interested, and the broker that handled the rehab on the trustee sale property was so impressed with what was accomplished within my IRA that he opened an Equity Trust SEP IRA in 2019,” Kay says.

Kay tells those wondering if they will be able to afford retirement that now is the time to get a self-directed IRA.

“I have not had to deal with the emotional ups and downs that I would experience when my retirement savings were invested in mutual funds and stocks,” she says. “I lost a lot of value in the 2008-09 crash. I have not lost a single penny with my self-directed account. I have made more return on my IRA money in the past four years than I thought possible.”

Read More Real Client Stories: Access Free Guide Now

 

Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.

It is possible to transfer funds from an IRA you hold at another custodian or a retirement plan from a prior employer, provided the tax environments are the same. A traditional IRA held by another custodian needs to have its funds transferred to a traditional IRA. A Roth IRA needs to have its funds moved to a Roth IRA. Our retirement account specialists can help you determine what type of account you need to open at Equity Trust to move your funds in an approved manner.

Rental payments are sent to Equity Trust for the benefit of (FBO) your IRA. The checks or money order should be made payable to: “Equity Trust Company Custodian FBO [Your Name] IRA.” Once received, the checks or money orders are deposited into your IRA. All checks must be sent to Equity Trust with a payment coupon.


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