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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
Purchase price: $20,000
Funding: Laurel’s LLC – $18,000 (90 percent) and Jason’s Roth IRA – $2,000 (10 percent)
Total expense: $28,000
Sale price: $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.
Video: Partnering Multiple IRAs to Buy and Sell Real Estate
Condo 2 – Sold with Seller Financing, Buyer Behind on Payments
Purchase price: $23,000
Funding: Laurel’s LLC – $20,700 (90 percent) and Laurel’s Roth IRA – $2,300 (10 percent)
Sale price: $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.