Client Capitalizes on Investment Opportunity in Popular Vacation Spot Thanks to Retirement Account

By Heather Taylor0 Comments
Stock imageThe resort area of Bear Lake, which spans from Idaho south over the Utah border, is sometimes referred to as “the Caribbean of the Rockies” due to its crystal blue waters. It’s a popular warm-weather destination for water recreation, camping and more, and attracts skiers, snowboarders and ice fishers in the winter months.

Utah resident Colin lives a few hours from the spot and owns a vacation home in the area. He heard about an acre of land on the market and saw the investment potential – possibly as a rental property for passive income.

“From past experience, I know that there is a hot rental market for cabins or campgrounds during the warm weather in the area,” Colin says, adding, “A friend of mine built a cabin and is financing its construction through seasonal rental of the property.” 

Seeing the investment potential, he wanted to seize the opportunity. The only problem: he was in between jobs at the time and didn’t have enough capital in savings.

Colin turns to self-directed IRA for investment
Fearing he would regret not buying the property, he researched funding options. That’s when he discovered he could use his retirement account to fund the investment.

A self-directed retirement account provides the flexibility to invest in a range of assets beyond stocks and bonds, including real estate. (More information can be found in IRS Publication 590.) There are other rules Colin became of aware of when investing with an IRA, such as he can’t live in a property his IRA owns, not even for short period of time.

Due to the unique record-keeping required for investing with self-directed accounts, not all IRA providers offer the option to self-direct a retirement account. Colin’s search for a self-directed IRA custodian led him to Equity Trust Company. He opened an Equity Trust IRA and transferred money from another retirement plan.

Investment becomes a future campground rental
After negotiation, Colin’s IRA purchased the property for $39,000. His IRA still has money left over for property taxes and to pay for modest improvements. He envisions renting the spot for camping.
“There had been a house on the land previously, but it burned down,” he says, adding, “It has a septic tank that hasn’t been used for a decade. There’s city water connected to it. I’m hoping to hire someone to build bathroom facilities. You’d have a toilet and running water – for camping in warm weather, it should be sufficient.”
For the time being, Colin rents the property to a man who pastures horses there and makes repairs as part of the rental agreement. This works out for Colin, because IRS rules prohibit him from performing any work on property that his IRA owns. Any expenses incurred must come from Colin’s IRA, and the rent he receives goes back into the IRA, tax-free.

Colin hopes to eventually rent the space to campers and possibly have a cabin built there at some point, but he wants to keep the expenses relatively low to be consistent with his initial investment.  

Based on his acquaintances’ experience and his knowledge of the tourism in the area, Colin doesn’t anticipate having trouble finding renters. 

For others considering investing in real estate with an IRA, Colin adds that a little due diligence can make the self-directed investing process less intimidating.

“I think anybody who is willing to do the work and research can put something like this together,” he says. “That’s the whole self-directed thing.”

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.

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.