Investor Insights Blog|Real Estate Investors with Small-Balance IRAs Turning to Master Lease Agreements

Real Estate

Real Estate Investors with Small-Balance IRAs Turning to Master Lease Agreements

Many real estate investors know they can use their retirement accounts – known as self-directed accounts – to invest in real estate. But some wonder what to do if they don’t have enough in their accounts to purchase a property. There’s a strategy growing in popularity that can help even small-dollar IRA investors profit from real estate.

Master leasing consists of renting a property from a landlord that no longer wants to deal with the tenants, management, and tasks that go along with managing rental properties. Many times, they prefer just to collect a monthly check for the rental income and have someone else handle the day-to-day activities. A landlord will enter into a master lease agreement with an investor, who then subleases that property to a tenant.

The concept of master leasing has been around for many years, but you’ll learn from this example how an Equity Trust IRA investor has created one of the first blueprints for master leasing with a self-directed retirement plan. Although this property is in Ohio, this strategy is working across the country.

Keep in mind: with an IRA, particularly a Roth IRA, which this investor is utilizing, you can create tax-free profits. As long as you follow all the rules, when you withdraw the money from the Roth IRA, it’s tax-free.

Master lease agreement in a Roth IRA: An example

A client used her Roth IRA to enter into a master lease agreement with an exhausted landlord who no longer wanted to deal with midnight telephone calls, vacancies, leases, background checks, and everything else that goes into managing a rental property. This was an ideal arrangement for the landlord, who was not interested in selling the property at this point.

The property has an appraised value of $125,000 to $130,000. Even if the landlord wanted to sell, the IRA investor didn’t have the capital to buy the property and manage it as a rental. But as you’ll see, her small balance was enough for a master lease agreement.

Video: Master Lease Agreements in an IRA

Through a master lease agreement, the investor negotiated with the landlord to rent this property for $1,000 a month with a $1,000 security deposit – all paid for out of her Roth IRA.

Under the master lease agreement, the investor agreed to:

Pay for all the furnishings to furnish the house
Pay for any expense under $100
Take all phone calls from the tenant
Oversee the property

The landlord is going to operate as usual, minus the headaches and phone calls.

Instead of a piece of property, the asset owned by the investor’s self-directed Roth IRA is a master lease agreement. The master lease agreement reads: “Equity Trust Company custodian FBO (for the benefit of) [client’s name or account number] IRA.” Both the IRA account holder and the landlord sign the agreement.

Expenses and tax-free profits for the investor

The investor pays a $1,000 security deposit from her Roth IRA made payable to the landlord, plus $1,000 a month in rent. The landlord will receive the same rental income that they were getting before this master lease arrangement: $12,000 a year. That brings the IRA investment total to $13,000.

The investor also paid $5,000 to fully furnish the property. From there, she spent $4,800 for miscellaneous expenses in year one.

Remember: under the master lease agreement, the IRA holder is responsible for any expense under $100; for expenses over $100, she’ll contact the landlord and come to an agreement or work with contractors to resolve any issues.

Year One Total Expenses


Security deposit	$1,000
Rent: $1,000 per month	$12,000
Furniture	$5,000
Misc. expenses	$4,800
Total	$22,800

When an IRA owns an asset (in this case, the lease agreement), the IRA has to pay for any repairs. The IRA account holder making the investment can’t personally pay for those expenses – they are paid from the IRA.

The investor pays the landlord the $1,000 in rent, and then she rents it for $2,600-2,800, netting $1,600-1,800 per month. She’s renting the property for a minimum of 30 days, and tenants generally stay for three to six months. She is able to attract back-to-back tenants.

You might wonder, “who’s going to rent a property for three to six months?” With today’s housing market, people are having trouble finding housing when they move from out of state. They’re looking for short-term housing for a minimum of one month, sometimes upwards of a year.

Some renters took a short-term job position in a particular market, so they’re not planning on staying there forever and don’t want to move all their belongings. They want a fully furnished unit that they can just move in, bring some of their stuff, and then leave when they want to leave. The renters generally take good care of the property, too.

The landlord is happy because they’re getting their monthly check. They’re oftentimes aging or exhausted landlords. And the investor with the IRA is happy because she’s able to provide a great service to the property owner.

The investor is also providing a great service to the tenant because it’s a fully furnished unit. The landlord’s happy because the investor has improved the value of the property and is taking good care of it.

In this example, the investment is in a Roth IRA, so the profit is tax-free. In year one, the client in this example made a gross rent of $31,200.

Year One Profit


Investment	$22,800
Gross rent	$31,200
Tax-free profit	$8,400

Future potential of this master lease agreement

Keep in mind, year one is a bit more capital-intensive because of the furnishings that cost $5,000. Looking at the second-year financials, the investor returned $15,200 into the Roth IRA tax-free. In the first year, the entire investment was paid back. They made $8,400 in profit on top of that. In year two, the profit projection is $15,200.

Again, the IRA just takes control of the real estate – it doesn’t own the property. What if they bought a second, third, or fourth investment? Now they have multiple assets generating multiple streams of tax-free profits. This is how investors start growing a smaller IRA in a meaningful way.

Last but not least, the master lease agreement includes a right of first refusal, which gives the investor the ability to buy that property at a future date. Some folks, instead of negotiating on a master lease agreement, might use a lease option or some other creative financing strategy that they work out with the landlord.

It’s important that you speak to your real estate attorney so they can properly draft the master lease agreement or whatever other types of agreements or contracts you choose.

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

Am I restricted to only purchasing residential property with my IRA?

You are not limited to residential real estate. Your IRA can hold various investment properties such as commercial buildings, vacant land, condominiums, mobile homes and apartment buildings, in addition to residential property.

Case studies provided are for illustrative and educational purposes only. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Quotes and information included in the case studies and testimonials were provided by the investors and included with permission. Equity Trust Company does not independently verify all information provided by third parties.

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