Rich on Money

Financial Freedom in the Military through Real Estate

You did WHAT with your IRA?!?

How and Why I bought rental properties in my IRA

Yes, I may have done something stupid.

I certainly did something unique.

I sold all the investments in my IRA and bought rental properties! (My Wife’s too!)

The rental properties are held in the Roth IRA as investments, and the rental income accumulates as cash inside the IRA.

And I’ll show you how it made me FILTHY RICH!!!

I did it, and you can too!!!!!

filthy-rich

OK, that was an exaggeration. We haven’t even gotten our first rent check yet.

Only time will tell how successful this strategy is. Here’s what has actually happened so far.

I had to move my IRA to a different company with self-directed IRAs that allow you to own real estate as an investment.

Self-directed IRAs allow you to own non-traditional investments in your IRA. Other than real estate, you can own many other things such as precious metals, horses, and intellectual property (these all sound like bad ideas, stick with real estate).

After doing some online research, I ended up going with a company called IRA Services Trust Company. They are known for low fees compared to the rest, but lack in the ability to get someone on the phone easily. Most customer service is performed via email.

This made us nervous at first, but after effortlessly purchasing three rental properties (two for me, one for my wife) in a short amount of time using only email, we feel much better. My closing attorney said it was the easiest closing she’s ever done!

It’s all a little tricky at first. When you make an offer to buy a property in your IRA, you aren’t actually buying it, your Roth IRA is. This company was adamant that all documents, including the offer for the property, has to list the buyer’s (me) name in a particular way with these exact words:

IRA SERVICES TRUST COMPANY CFBO: Richard Allen Carey IRA Account #XXXXXX Tax ID: 26-2627205

          CFBO stands for custodian for the benefit of

This long weird-sounding name on a contract confuses anyone that hasn’t seen this before. It takes some explaining.

This made it tricky to buy a HUD property. The HUD office balked at having those exact words on the documents. They said it wasn’t allowed. It took many phones calls to sort it out, but we eventually found a way.

Also, there are strict rules about not mixing your personal money with the money in the Roth IRA. For instance, if you have something large to fix, such as getting a new roof, this money cannot come from your personal funds. It has to already exist inside your IRA.

You have to make sure there is always enough cash in the account to handle surprise big expenses.

Unfortunately, the two houses I bought in my IRA ended up being my two most expensive remodels to date. It used almost every penny I had set aside to get them ready to be rented.

Also, all rent received must be sent into the IRA directly, never to you personally.

            Sounds like a pain in the ass!!! Why did you do it?

Well first, I just love real estate.

Second, last tax year was the first time we ended up owing what I would call a LOT of money in taxes. It shocked us!

          Should we be upset?

Not really. Having a high tax bill is a good sign. (Tell that to my wife!) It means you made a lot of money!

The reason we owe a lot in taxes is we generated a lot of cash flow from our real estate. I bought several rental properties in cash over the past two years, and the cash flow started adding up!

It’s surprising how much you can make when there is NO MORTGAGE PAYMENTS!

happy_customer-183x186

Anyway, my wife was pissed about the tax bill and said she wishes there was a way to get around it.

I told her you can’t get around paying taxes on real estate unless you own it in an IRA.

Now we will have a rental income that is not being taxed at all!

SWEET!!!

Disadvantages

Compound interest

The magic of compound interest works with typical investments, notably stocks or mutual funds. Money gets automatically reinvested and the “magic” of compounding happens. With a Roth IRA, you have to save up enough money from rent and yearly contributions to buy another house (either with a loan or cash). You also have to leave buffer cash for repairs and expenses.  No automatic reinvesting.

Effort

It requires (a little) more work than letting your money sit effortlessly in a Vanguard S&P 500 Index fund. With traditional investments it’s just…

set-it-and-forget-it

Fees

One reason I chose this particular company were the fees were low by comparison to others. One of the more annoying fees is the $15 charge to send a check to someone to pay an expense. This can be paying taxes, insurance, contractors, etc.

Remember, you can’t send the check yourself, so you are forced to pay this fee more often than I would like.

Here are some more examples of the other fees I’m paying in these accounts:

Quarterly account fee            $25

Wire fee                                      $15

Real estate purchase fee       $125

Quarterly asset fee                  $20

They nickel and dime you here and there, but it doesn’t break the bank.

Advantages

High, stable ROI

My rentals make more than 10%, sometimes more than 15% a year from cash flow. That’s a stable number that doesn’t fluctuate much.

Even with S&P 500, you could have large ups and downs. Also, despite popular opinion to the contrary, there is no guarantee the S&P 500 will continue to rise as it has in the past. It could plateau or, god forbid, go down.

I know, no one believes that’s possible. No one except me!

Diversification

It diversifies me. I still have my entire military TSP (like a 401k for govt employees) in the S&P 500.

Appreciation

Real estate has appreciated on average at about 3% a year in the past (keeping up with inflation). That’s on top of the 10-15% I’m already making.

I really appreciate that!

Only time will tell if this was a smart move!

Anyone else tried this? Who thinks I’m crazy???

Anyone interested in seeing my actual numbers from this investment strategy?

Comments and Emails Please!!!

Stay tuned.

Rich on Money

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15 Comments

  1. Luis

    ROM – I look forward to you posting in six months to a year and reading about the pros and cons. Until then, good luck. SF!

  2. “I really appreciate that!” Haha! Super lame joke, but I like it. I’m so glad you wrote about this. I’ve been interested in this concept for a long time. This helped nudge me to learn more details and maybe get it moving. Thanks!

    • While I’m optimistic it’ll go well, stay tuned and I’ll write about how things go. Thanks for commenting and great meeting you at FINCON!!!!!

  3. I am a total noob but I had no idea that you could do this with your Roth IRA. This is brilliant. I feel like at certain points I have mastered everything there is with personal finance and then BAM I learn something new in the financial community that blows my mind. Thank you so much for sharing!!!

    • Thanks for the great comment! If you ever master everything with personal finance, let me know!!! That’s a tough one. The more I learn, the more I realize I’m just scratching the surface!

  4. Very cool, Rich! It’s a lot of work upfront, but it’ll be great for you tax-wise in the long run.

    I was looking at Pensco at one point, but never pulled the trigger.

    I’m looking forward to hearing more as it evolves!

  5. I enjoyed reading this! Its a good article.. I am an real estate investor and I can say I agree on all all this.

    • Thank you! It means a lot coming from an investor. It feels right, but I haven’t seen or met anyone else that’s done it!!

  6. You’re not crazy, Rich. You just have the real estate fever:) I’m sort of the opposite of most people. I’ve been investing self-direct Roths and HSAs from the beginning of my career 14 years ago, and I just recently started diversifying into index funds with Vanguard.

    I do like investing in real estate with the IRA, but I prefer owning a note/mortgage, a limited partner share, or a tax lien if possible. I avoid a lot of those nitpicky hassles you mentioned and in the case of notes/mortgages I reduce some of the risk of exposure to liability from the rental.

    Also, with rentals you lose the benefit of depreciation shelter because your IRA does not pay taxes. If instead you find an entrepreneur to own and manage it, then you loan him/her the money, they can take advantage of the depreciation and pay you a really high rate of interest and even share in the appreciation since you put the whole deal together.

    This is a fun topic. Definitely keep us up to date how your rental goes. With steady returns like you’ve mentioned, it’s hard to go wrong.

    • Coach! Wow, you’ve been doing this self-directed thing a while! I’ve got a lot to learn from bloggers like you!

  7. By having real estate in any type of retirement account… Don’t you loose the tax benefits? Depreciation, amortization, interest shield are now meaningless. Would love your rational on not cashing in on these benefits and electing to invest in a retirement account.

    • Depreciation, sort of. You can depreciate a house while you own it, but the tax man cometh when you sell the house and you pay taxes on what you depreciate.

      Interest shield. I’m not sure I’d call it that. Paying interest on a loan sucks, but it sucks slightly less with a small tax break. Taking on debt to save a little money on taxes makes zero sense to me. You’re better off not having the debt imho.

      The most important tax benefit of having your rental income grow in the roth IRA is that you pay zero income taxes EVER on that money. Rents are taxed as normal income otherwise. I paid a shitload in taxes on my rental income last year, which is what gave me this crazy idea!!!

  8. steve masse

    Rich, Good idea. solid thoughts/analysis. the best part: tax free income, tax free appreciation…but remember..only to age 59 1/2 are you limited to no income takeout…after that age, you can remove income tax free from the investments in a roth ira..i imagine same for reit ira…?..yes/no?

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