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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.