Use Your Retirement Account Wisely

One of the keys to a successful retirement according to the Harvard Business Journal is not the amounts of assets you have but the amount of regular monthly income.  Real estate is a great tool to create regular on-going income.   That sound great you say, I’d love to buy some investment property but I don’t have $80,000, $60,000 or even $50,000 to put down on investment property.  I don’t have idle cash.  Well there are at least two ways to invest without idle cash.

Put That Equity to Work

The first is to take out a home equity line of credit and use it as the down payment.  Now, I don’t recommend this for everyone.  I try to stay free of debt as much as possible though leverage can be a good thing.  Just not too much leverage.  If you’ve been in your house for 10, 15 or 20 years you do have a lot of equity built up and it’s only looking good on paper.  By taking some of that equity out and buying investment property you’ve put it to good use. The rent will pay for the loans and you’ll be building equity in the investment property and re-building the equity in your home.  Home equity loans tend to be low cost and right now low interest. So why not put that equity to work?

Buy a House with Your IRA – Who Knew!

The second is to invest in real estate with your retirement funds.  What?  You can do that!  Yes you can.  I currently own two properties that I purchased with retirement funds.  There are two great things about it.

First, the funds are fairly easy to access.  A disclaimer here, I am not a tax advisor or accountant.  I highly recommend you talk to one if you decide to go down this route.  The first thing you do is setup a self-directed IRA account.  There are only a limited number of companies that manage these across the country.  The one I use is in Las Vegas and there is one here in Nashville.  Once the account is set up you can transfer any funds from any other retirement accounts into that IRA.

Hands off Management – That’s Easy

Then once you identify an investment property, the IRA purchases it and holds it.  Pretty simple.  There are rules such as you can’t buy it from or sell it to a family member and a family member can’t live in it. And it should be a hands off transaction so once it’s purchased it’s best to have a property management firm manage it for you.  But then you didn’t really want to deal with renters anyhow, did you?

Deferred Taxable Income – It’s a Good thing

Second, the sweet thing about this deal is that all the income and expenses of the property go through the IRA.  So no out of pocket expenses for you for maintenance and management.  And no taxable income from the rent.  The rent goes into the IRA and accumulates until you have enough to purchase another property or you’re ready to retire.  And if you sell the property the gain goes into the IRA as well.  Then when you retire you withdraw the proceeds just like any other retirement account.

The Nuts and Bolts of It

Example:  John wants to buy a rental condo through his IRA for $200,000.  He transfers $225,000 from another retirement account to his self-directed IRA.  John initiates the purchase contract under the IRA.  John sends a buy direction to the IRA manager.  The IRA manager sends $5,000 earnest money to the title company.  John reads and approves all closing documents.  The remaining purchase funds are wired to the closing company and the deed is recorded in the name of the IRA.  The IRA now owns the property.

John locates a property management company to oversee the property.  The company finds a tenant and all rents and expenses are handled by the property manager with the IRA manager.  The property has $1,200 cash flow tax deferred.  John monitors the transactions via his online account.

Two years later John decides to sell the condo and a sales contract is prepared for $235,000.  The IRA coordinates the closing with the title company.  John reads and approves all the closing documents.  Proceeds after closing are wired back to the IRA.

Realized Return to Your IRA

Initial Investment $200,000

Cash flow over 24 months $1,200 x 24     28,800

Gain from sale ($235k-$200K)     35,000

Transaction expenses (purchase and sale)       5,000

Balance of account after sale $258,800

Deferred gain of $58,800 (29%) over 24 months!

There are other variations on this theme, like having your IRA hold the mortgage on a property or buying a property with a partner.  Those however are more detailed and are for your tax attorney or IRA manager to explain.

Now Is a Great Time

If you have ever considered investing in real estate now is a great time – interest rates are low, rents are high and Nashville is expected to grow for quite a number of years yet.  Let’s get started now!  Call me.


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