How To Grow a Small-Balance Retirement Account with Real Estate

By John Bowens

Real estate investors are catching on to the fact that they can use retirement accounts – known as self-directed IRAs – to invest in real estate, including fix-and-flips, rental properties, raw land, and much more. Many investors start small and grow their accounts by increasing their buying power with the real estate profits that flow back into the IRA or other account.

You’re probably thinking, ‘Wait a second, how in the world would I invest in real estate with a small amount of money in an IRA when real estate prices in the U.S. have never been higher?’

Investors utilizing their self-directed IRAs are leveraging a little-known strategy called real estate joint ventures. You could potentially look at partnering your IRA funds with another investor’s IRA funds to acquire property, and then split the profits based on your negotiated percentage split.

Example 1: Finding $200,000 for a transaction

Scott from Milwaukee had $24,000 in his self-directed Roth IRA and was looking to acquire a property that required $224,000 for the purchase and renovations. He then would sell the property and make approximately $60,000 – a great opportunity. Scott’s challenge was that he needed to come up with the other $200,000 for the investment.

Scott met real estate investor Kate at his local REIA group. Coincidentally, Kate had an Equity Trust self-directed Roth IRA and health savings account (HSA). They partnered all three accounts together to acquire this property, sold the property in approximately six months, and made a $60,000 profit.

Per their real estate joint venture agreement, 70 percent of the profits went back to Scott’s Roth IRA and 30 percent of the profits went back to Kate’s Roth IRA and HSA. Scott’s the one who found the property opportunity and Kate was the one who brought in her Roth IRA and HSA for some of the funding, so Scott made $42,000 tax-free in his Roth IRA, growing his Roth IRA from $24,000 to over $66,000 tax-free. Kate made approximately an 18-percent annualized return between her two accounts on a $200,000 investment.

Example 2: Turning $13,000 into nearly $50,000

For this example, I won’t use names because the investors choose to be anonymous. I’ll call them Investor A and Investor B. Investor A only had about $13,000 in his Roth IRA and Investor B had a significant amount of capital in their self-directed accounts, which they hoped to deploy and make an attractive rate of return.

The two investors partnered to acquire a property and rehab it for a total of $75,000 and subsequently sold the property for $150,000. Per the negotiated joint venture split, Investor A contributed $13,000 in the transaction with his Roth IRA. After closing costs, they split the profit 50/50, so Investor A made about $34,000, 100-percent tax-free, growing his Roth IRA to nearly $50,000 on just one transaction.

Those are just two examples of real estate transactions where investors got creative, found an opportunity, and put

Legislative Update ... continued from Page 3 are NOT to be used. A conviction in a court of law is very different than an arrest. As such criminal records have been a gold standard for the industry to review to determine the likelihood of risk from a potential tenant. This is very different from the current push by the administration as noted in the White House Blueprint for a Renters Bill of Rights, page 11 paragraph 1(!) that opposes background checks and screening for tenant applications alleging disparate impacts, and is seeking through regulatory changes at CFPB to strictly limit access to background checks and threatening Fair Credit Reporting Act violations for screening companies. Please make sure you are using a verified and legitimate screening process.

For more information on this issue be sure to check out David Pickron’s Rent Perfect podcast episodes 90-94 with his general counsel, Denny Dobbins! These episodes can be found online at www. RealEstateInvestingToday.com.

Much ado about FHFA

Having received grief from a reader who conflated arrests with convictions, confused proposed regulations with existing rules, and contestation over the truth of the matter related to FHFA mortgage insurance rates – please understand that media headlines are often written to draw attention. However, when the truth of the story is consistent with the purported headlines, such as in the case of the recent FHFA together a real estate transaction with another real estate investor or interested real estate investor.

Putting these concepts into practice

To provide more details on this real estate joint venture concept, Equity Trust Company developed a Self-Directed IRA Master Transaction Handbook. The handbook provides sample documents, including a real estate joint venture agreement, along with diagrams on how other investors are structuring various transactions. The intent of the Master Transaction Handbook is for you to provide it to your real estate attorney as the foundation so they can then customize your specific documents based on your needs, the state you’re in, and your investor partner(s) you’re working with.

The handbook is available as part of our education course, Wealth Accelerator for Small Balance IRAs. The comprehensive education package includes step-by-step processes and frequently asked questions, presented in video modules that allow you to learn at your own pace. Topics include actual investment strategies investors are using with their self-directed accounts, including joint ventures, wholesaling, and private money lending. We also introduce existing self-directed IRA investors who share real-world examples of how they are finding success with their self-directed IRAs. restructuring of fees, such that even proadministration “fact checkers” have to go to great lengths to excuse the behavior of the department, which has a history of underestimating the risk pricing of its insurance product such that previous administrations had to raise rates in order fiscally stabilize the program, it begs the question of reduction offsets. For example, if someone with a 740 credit score sees an increase in their fees by almost 60 percent and someone with a 640 credit score sees a 25 percent reduction in their fee, even if the actual percentage charged is higher for the 640 credit score – there is a perceived and real increase in cost for the 740 credit score and perceived and real decrease in cost for the 640 credit score. To say that one is not truly subsidizing the other may be accurate – but without the actuarial charts to prove otherwise, the perception and the reality are one and the same: bad credit scores got a break and good credit scores are paying more than before! caused the disinterest?

National REIA members can receive $50 off this education package: visit https://info.trustetc.com/nationalreia to claim this offer.

John Bowens, CISP, is Director, Head of Education and Investor Success at Equity Trust Company, a leading custodian of self-directed IRAs. Visit www.TrustETC. com for more information.

Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust 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.

Be sure to check out National REIA’s Action Center on NationalREIA. com to weigh in on legislation and rules before they impact you! Likewise, stay up-to-date with current industry news and updates by visiting RealEstateInvestingToday.com.

Addressing member disinterest requires careful planning and a lot of up-front conversation between the potential member-owners of an LLC before they work with their counsel to draft the LLC operating agreement.

6. DRUGS

When I use the word “drugs,” I’m referring to anything of an addictive nature, such as prescription or nonprescription drugs and alcohol. It can include any addictive behavior that is detrimental to the person or the business. There needs to be language in an LLC operating agreement as to what happens when one person becomes an addict and is no longer acting in a responsible manner, whether that person is a member-employee or whether that person has inherited a membership interest in the LLC. You don’t want to continue to fund an addictive behavior that is detrimental to the life and interests of that person. Does the LLC have the resources available to pay for an inpatient treatment program? Does the LLC have specific provisions in the operating agreement as to how power and authority are taken away from the person with an addiction? These are things that need to be thought through.

The most important advice I can give you regarding this bad “D” is to not think that this will never happen to you or any of the other members in the LLC, because it usually happens to those who thought it couldn’t happen to them.

7. DEBT

Too much debt will cripple or kill a company. An LLC operating agreement needs to contain clear language, which is agreed to in advance by all members, as to how much debt the LLC will take on and what form or manner of debt is acceptable. This is so important because two common causes of business failure are (1) taking on too much debt and not being able to pay that debt with the income from the LLC, and (2) inadequate bookkeeping and tax records which result in tax liabilities that put the LLC out of business before it really had a chance to get going.

Owing back taxes is another form of debt that the LLC needs to be aware of and must plan for. As an owner of an LLC, you must be aware of all the tax obligations you have with your employees. I have seen businesses that started out with a big splash, lots of employees, and lots of excitement and sales, but when it came time for the 941 payroll tax returns to be filed, they didn’t have the money to do so and ended up in trouble. Make sure all aspects of the LLC’s finances have been discussed with all members.

8. DECLINE

Unfortunately, businesses do decline as market conditions shift and change. Businesses that were once vibrant and dominant (Blockbuster, Sears & Roebuck, numerous hamburger chains and retailers) are now relics of the past. Why? Because there was a decline in their business that needed to be addressed.

If market conditions change to the point where your business is no longer viable, that needs to be recognized and agreed to by all members of the LLC. Metrics should be defined in advance as to what it will take for everyone to agree that the business has declined to the point that it is no longer viable.

One of the easiest ways to track decline in a business is to know your numbers on a weekly, or at least monthly, basis relative to the amount of new matters, projects, deals, or opportunities coming in and how much money is coming in versus going out. For example, if you are a house-flipping enterprise that used to get 40 leads a month of people interested in selling their houses, and you closed 3 deals a month, but now you are down to 5 leads a month and only close 1 deal every other month, then your business is in serious decline. You need to adjust accordingly.

Make sure your operating agreement spells out what to do in case of declining business. An operating agreement will usually contain a section regarding winding up the LLC in which it is agreed that the person who continues to run the company during the process of winding it up will get paid. Make sure there is enough money on hand to continue to pay that person who is left with the responsibility of shutting down the operations and bringing everything to a close (closing out bank accounts, reconciling the books, submitting the final tax returns, and distributing whatever money is left). All too often, businesses wait too long and there is no money left to do this process, so no one wants to take on the responsibility because they will not be compensated for doing it. This is a sign of failure to plan ahead for what may be inevitable.

I trust this series has been helpful to you. If it has, I’d love to hear from you.

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio four times via litigation. Read more of his viewpoints at WatsonInvested.com.