Laurel of Colorado was interested in using her retirement funds to invest in real estate. She didn’t have enough in her retirement account to cover the purchase of a piece of real estate she identified, but as she discovered, that wouldn’t hold her back.
Laurel and her husband, Jason, each used their self-directed Roth IRAs to invest in two condos, but neither had enough to cover the full amount of their respective purchases. To come up with the remaining funds, the couple also looked outside of retirement accounts and combined funds with another source.
Self-directed IRA investing: starting small and partnering with different funding sources
Laurel had previous real estate investing experience and discovered the ability to use qualified retirement accounts to invest in properties. She and Jason transferred some of their retirement savings to Equity Trust, each opening a Roth IRA.
Looking for opportunities that fit their price range, Laurel searched the real estate market in North Carolina. After completing due diligence they found two condos they were interested in purchasing, but their IRAs did not have enough money to purchase both. They learned they could partner their IRAs with outside funding sources to complete the investments.
Partnering on self-directed investments is possible, as detailed in IRS Publication 590
. When partnering two or more funding sources, any expenses have to be paid from the funding sources in the same proportion as the purchase. Likewise, any profits flow back to each funding source in the same percentages.
Laurel’s existing LLC provided additional funding to complete the purchases - Laurel’s Roth IRA was invested in one and Jason’s Roth IRA in the other.
Below are the condo investment details. As Laurel also learned, real estate investing doesn’t always go according to plan. The Condo 2
purchase shows how Laurel’s planning for different scenarios came in handy:
Condo 1 – Sold with Seller Financing, Buyer Paying on Note
Laurel’s LLC – $18,000 (90 percent) and Jason’s Roth IRA – $2,000 (10 percent)
$39,500 with seller financing: 30-year loan to the buyer at 8.9 percent (monthly payments of $315)
Profit after expenses
– The buyer is currently paying the loan off in monthly installments. After 30 years, total interest will be almost $75,000 on top of the buyer paying the $39,500 principal. In accordance with partnering percentages, 90 percent of any income from the property goes back to the LLC, and the other 10 percent goes to Jason’s Roth IRA.
Condo 2 – Sold with Seller Financing, Buyer Behind on Payments
Laurel’s LLC – $20,700 (90 percent) and Laurel’s Roth IRA – $2,300 (10 percent)
$30,000 with seller financing: 15-year note
Profit after expenses
–Similar to Condo 1
, the property sold with seller financing, but the buyer didn’t stay current on payments. Fortunately Laurel was prepared for this risk.
Laurel’s loan servicer began the foreclosure process on Condo investment 2 with a few potential outcomes. Before foreclosure is complete, the buyer can catch up on payments, or the buyer could sell the property and pay-off the loan in full. If those don’t occur, Laurel can see the foreclosure process through and receive the property back.
“It’s important to have a lot of exit strategies,” said Laurel.
Self-directed investing growing in popularity
Laurel found that she had to educate some of the people involved with transactions about self-directed investing. For example, when she closed on one of the investment properties, other parties at the closing weren’t familiar with the unique titling required on the purchase agreement associated with a retirement account. On top of that, the IRA was partnering with another entity, which resulted in a purchase agreement most title agents don’t often see.
Investment titling was one of a few differences when using a self-directed IRA (the property is titled in the name of the IRA), but Laurel says she wasn’t intimidated by the process.
“Sure there’s a learning curve, but there’s a learning curve about everything in life,” she says.
Continuing to build wealth with self-directed IRAs
Laurel plans to continue to make self-directed investments and gradually add more properties to her Roth IRA. Her goal is to “grow my IRA so that it can buy a property outright, without partnering with my LLC,” she explains. If Laurel is able to use just her self-directed IRA on a purchase, all investment profits would be in the tax-advantage account, with hopes it will grow future wealth.
But for now, she is content successfully partnering her Roth IRA and her LLC to purchase real estate.
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This case study is 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.
Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.