John: Tell us about this deal, which I know you like to refer to as “the making of a great room” deal.
David: The chimney that you see was in a wall between the living room and the kitchen. We removed the wall and tore down the chimney, took out all of the floor substructure, rebuilt the floor structure and put in took out the false ceiling that you see.
We put in new drywall, new flooring, new kitchen cabinets, new lighting, and ceiling fans. You see the final product there.
John: And on this deal, how much what was that total rehab cost?
David: I purchased this home for $25,000. And I put probably $30,000 in it. And it’s renting today for $1,200 a month.
John: Wow. Where did you find this deal?
David: It was just listed through a broker.
John: From what I look at, it’s almost like a complete tear-down.
David: No, not that bad. We had to redo all the floors. All the floors were rotten. So we dug a hole every six feet from the front end of the house to the rear of the house, stretched a line of string, poured concrete, laid block and then jacked the house up to that string, and then supported it with steel shims. So it made all the floors nice and level again.
John: These are some really extensive rehabs that you’re involved in. Can you walk us through how you go through that process?
Obviously, we know that with a self-directed IRA, you can’t necessarily be doing the physical work yourself.
Now, of course, David is handling the oversight. So he’s managing the contractor or contractors, he’s overseeing the transaction, and he’s getting money from his Equity Trust IRA through his online bill pay service to pay those contractors. So he’s handling the administrative duties, not the actual physical duties.
How do you select contractors? How do you work with them? Obviously, both in and outside of the self-directed IRA.
David: It was pretty easy, because I only have one contractor other than HVAC, and he does it all. And we’ve known him for 40 years. He’s like a family member to us.
John: So the contractor that you’ve known for 40 years there, you’re having checks sent from your Equity Trust IRA to that contractor. Your contractor is depositing those checks. And then they’re using those funds to pay for the materials, labor, etc., that are going into these properties.
John: That’s important for audience members to know from a logistical perspective, to make it easy and seamless, is funds coming from the IRA to a contractor or contractors paying for expenses. And then of course, these are rental properties. All the rental income is going directly back into the self-directed retirement accounts.
David, any other sort of tips or maybe best practices for people that are just getting involved in renovations in terms of working with contractors and renovating properties, particularly in this case, for the purposes of renting them out, not so much fix-and-flip type deals?
Use rental property to enrich people’s lives, and you will get rewarded greatly for it.
David, Real Estate Investor, Kentucky
David: One other thing people might want to understand, that I particularly like about Equity Trust is that I’m experiencing a great deal of gains on these homes, what we’re buying them for versus what they’re worth when we’re done. And because it’s in the Equity Trust IRA, when I sell that home, all that’s capital gains free, it just goes right back into my Equity Trust account.
John: There’s no recapture depreciation, there’s no long-term capital gains tax because it’s in his tax-exempt IRA, just like we mentioned at the beginning. There’s no special schedule or tax return for the income generated in your IRA, as it’s a tax-exempt account. I appreciate you sharing that, David.
Other than that, as I look at these houses, the one thing that I’ll comment on is, these appear to be properties – even though they’re rentals – they appear as if you are doing extensive rehab to where you would sell this property as a traditional retail sale.
And I know ahead of time, we were talking about your maintenance costs, what are your maintenance costs on these properties that you own in and outside of your IRA?
David: The 25 some homes that we have, we probably have less than $1,000 in maintenance a year.
John: And you’re including appliances in these houses for these tenants, right?
John: Any last comments on these properties that we’ve been talking about?
David: It’s just a lot of fun. I get up in the morning excited as to what’s going to happen today.
John: Obviously there’s a lot of payoff to this and you enjoy every single day getting up and doing what you do. And I certainly admire and respect that as a landlord myself, owning properties in my self-directed IRA. It’s great to see the money coming back in the account.
But there’s something about working with those tenants, especially during very different times that we’re in right now, and being able to provide a safe home, a home that has all the necessary amenities. And of course, do well while we’re also doing good for someone else.
With that said, what would what has been the biggest challenge for you? In terms of just real estate investing in general, what has been the biggest challenge for you, throughout the 20-plus years that you’ve been in this business?
David: Well, there really have not been many challenges because the Lord God has directed every bit of what we’re doing. The landlord-tenant relationship is a very dark world. And God has chosen Katherine and I to bring light into that dark world. The first thing we tell people is never call us landlords, there’s only one Lord, and His name is Jesus. We’re just David and Kathy, and we are not special because we own property.
John: Any challenges that you’ve had with using a self-directed IRA, and how have you overcome some of those challenges?
Video: Watch the entire interview with David
David: The biggest challenge I had – it wasn’t much – was convincing our vendor for HUD to send a check directly to Equity Trust, instead of sending it to us, they didn’t really want to do that.
John: But eventually, you got it, you were able to overcome that and get them to send that to Equity Trust directly, correct.
John: And that’s very common with working with the housing authorities, is having money sent directly into the Equity Trust IRA. And we do have accommodations for that. And we work with clients and housing authorities to provide instructions to send an ACH direct deposit, or have a check made payable to the IRA and mailed for deposit.
For anyone out there that’s looking to do deals where they’re going to have a housing authority involved, we have the capabilities and the technology systems set up to accommodate those transactions.
So challenges out of the way, David, what would you say is the most enlightening or eye-opening moment that you’ve had thus far, in using a self-directed IRA to invest in real estate?
David: It was very easy process. It, it was a learning process at first, but now it’s just very, very simple.
John: I can attest to that. Working with a lot of clients and investors and actively owning properties myself with a self-directed IRA, the first transaction is different.
Because you’re working with a custodian, money isn’t being sent from a personal checking account or an LLC checking account, it’s being sent from the Equity Trust IRA. So there’s certainly a process there of learning how to interact with Equity Trust as the custodian and using the online system.
But of course, as David has mentioned, you can see the payoff can be substantial. And then of course, in addition to that is not needing to have special tax returns or schedules filed associated with the returns on investment, that’s money just going directly back into the IRA. So I appreciate you mentioning that, David, because a lot of investors go through that process that you went through that learning curve, I have as well.
Video: How to Receive Property Income in an IRA
My goal here, as an instructor, and as a teacher, is to also help shorten that learning curve for people. So certainly for all of our audience members, we have a lot of training, YouTube videos, education, home study courses, we have a lot of content out there, as well as our support of nearly 400 associates nationwide, to be able to get on the phone with you and walk you through a process or watch a video and get a better understanding of how it works.
Log into your account online and have us walk you through in a tutorial fashion, how this process works and how you can get funds from the account how you can get money back into the account, so on and so forth.
That being said, David, where do you go from now? You obviously have a rental property portfolio over 25 houses, some of those are in your self-directed IRA. What’s the next big adventure for you in real estate?
David: We still have four houses left in Lexington we’re working on currently that we purchased from a 1031 Exchange of selling some older townhomes. So that’s what we’re doing right now. Until we get those four houses done, we probably won’t be doing anything different.
John: And, and beyond that, beyond just real estate, on a personal level, what you’re obviously accruing capital and you’re building wealth and preserving wealth, as you’re using the self-directed IRAs because they’re tax-exempt, but, what do you intend on doing with these assets and this capital, what’s the long-term plan for you and your wife, Kathy?
David: I’m bringing our son and our daughter into it, so they can benefit from it, as well as our grandkids. And then we’re going to be starting to do some traveling.
John: It’s outstanding, I can’t admire enough the concept of legacy planning. I’ve worked with so many investors who have children that want to be involved, and then some that don’t want to be involved. So that’s excellent that you have children that want to be involved. And, you know, hopefully, the grandchildren will want to be involved as well.
One thing I mentioned for everybody in terms of legacy planning and estate planning, is a self-directed IRA, Roth IRA, Traditional IRA, Solo 401(k), can be a great estate planning or legacy planning tool.
Because see, you can leave your IRA to your children or grandchildren, even skip a generation, skip the children and leave it to the grandchildren. And even while the grandchildren are under the qualified retirement age of 59 and a half, the grandchildren can take money out in a tax-exempt fashion.
Now, with a Traditional IRA, you’ll learn that’s tax-deferred. So when you take money out, you’ve got to pay taxes. So if you left a Traditional IRA to children or grandchildren, they would have to pay taxes when they take the money out, of course, but the account would be inherited in a tax-exempt fashion, and they could continue to use the account and invest in real estate for 10 years.
Video: Bud shares his real estate investing experience
Now, a Roth IRA, you’ll learn about in some of our other training, is funded with after-tax dollars. And you could also convert from a traditional IRA to a Roth IRA.
So for David, if he wanted to, he could convert some of his money from his traditional to his Roth, get the taxes out of the way now, buy more properties, create cash flow, and then leave those Roth IRAs to his grandchildren and his grandchildren. Let’s say they’re in their 30s, when, when David passes away, the grandchildren will pay zero percent tax on that inheritance.
And they can continue to use the inherited Roth IRA as a Roth IRA for 10 years under the current law. Now, the benefit there is they can continue to create tax-free profit, create tax-free cash flow, and all that cash flow is tax-free to them. So that’s just a quick lesson for everybody on Traditional versus Roth IRA.
And then, of course, the capabilities of leaving those Roth IRAs or Traditional IRAs to your children or grandchildren. Keep in mind, if you don’t already have a self-directed IRA open and funded and when you open and fund your self-directed IRA to start, you’ll want to make sure that you select your beneficiaries in an appropriate fashion.
So David, thank you so much for joining us. Any last comments or remarks or tips or words of wisdom for investors out there?
David: Use rental property to enrich people’s lives, and you will get rewarded greatly for it.
John: Outstanding quote, I appreciate that, David. We couldn’t end on a better quote than that.
So I’ll pause there and say if you have more questions, you need more information, check us out on the web. You can also check out our YouTube channel. We have a variety of YouTube videos on a variety of different topics, as well as interviews with other Equity Trust clients like David sharing their experiences, and how they’re actively investing with self-directed IRA funds.
Reach out to us as well. We have agents that work with clients and prospective investors one on one to help you through the process to learn more about how a self-directed IRA could potentially work for you. And then of course to establish and fund your account.
Keep in mind that if you want to make offers on real estate transactions, that your account needs to be set up and funded well in advance before you begin making offers on properties. Just like David mentioned, he opened his account and rolled over money from a 401(k) with no taxes or penalties. He did this well in advance so that he could execute on his very first real estate transaction.
So again, David, thank you so much for joining us.
If I invested in a rental property with my IRA, how does the rental income get into my account?
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.
Can I use funds from my IRA to renovate property to sell it at a higher price?
Yes. However, your IRA must pay all expenses associated with a property that it owns, including renovations. Further, all proceeds from the sale of the renovated property must be deposited into your IRA.
How do I sell a property owned by my IRA?
When you’re ready to sell a property that’s owned by your IRA, you need to request the original documents from Equity Trust. This is done by completing an investment form, which can be found on myEQUITY. Once the property has been sold, all funds from the sale must be deposited into your IRA. These funds must be sent to Equity Trust with a payment coupon.
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 Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company 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. Equity Institutional services institutional clients of Equity Trust Company. Brokerage Services Available Through ETC Brokerage Services, Member SIPC, and FINRA. *Founded in 1974 | Self-Directed IRA Custodian since 1983. The predecessor business to Equity Trust Company was established in 1974 and the IRS approved as a custodian in 1983. **Assets under custody as of 8/31/2021.
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