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Investing your retirement account in Real Estate


If you are one of the few individuals who save consistently for retirement, congratulations!


If you have been able to accumulate a sizable amount in your retirement account whether, it is a 401k, Individual Retirement Account (IRA), Simplified Employee Pension Plan (SEP-IRA), or any other kind of retirement savings plan, kudos to you!


Now a couple of questions, how well is this retirement account performing for you? Meaning, what kind of dividends is it producing every month? And, are you doing anything to safeguard the value of your hard-earned dollars against inflation?


If the yield you are getting is not that great, let’s say anything under 4%, and you are not sure that your funds are hedging well against inflation then you may want to consider doing something about it and make your money start working for you.


Perhaps a self-directed IRA account might be of interest to you.


Yes, you may take control of your retirement account and invest in a way that will accomplish the two points we just discussed, and it is approved by the IRS.


One of the ways you may invest your retirement account is in real estate in two different ways that I am aware of. One is by investing it in a rental property, and the other one is by investing it in the form of a note, in other words lending it, to someone else.


Before we continue, let’s review some basic general IRS principles about retirement accounts. The IRS allows you to save and set funds aside from your income for your retirement and does not tax you on those funds until you start using them after you are 59 and a half years old. Once you start withdrawing funds from this account you will be taxed on this deferred income, in theory, at a much lower tax bracket. If you withdraw funds prematurely, in most instances 10% is automatically deducted from that amount for federal income tax purposes by the institution where you have those funds.


Speaking of the institutions where these funds are held, many times they have representatives calling you to urge to invest those funds in some sort of account that supposedly will yield higher returns if you have them on just a money market account per se. I used to get calls from my banking institution about this so frequently to the point of being upsetting. When I told them that we would be investing those funds in real estate they told me such a thing wouldn’t be possible. I assured them that it would be and indeed it is possible.


Since one of the IRS rules regarding your retirement funds is that you don’t receive or handle any funds directly to avoid being taxed you must have them transferred (rolled over) from the institution where you now have them, if they are not familiar with self-directed IRAs, to another financial institution knowledgeable and familiar with self-directed IRAs. This institution will be your trustee that will pay for the asset once you identify it and that will also receive the rents produced by said asset.

Let’s explore the first suggestion, buying an income property, and let me emphasize, it must be an investment property, not a home for personal use otherwise those funds would become taxable immediately.


It would be best to pay for this asset in full, but if you do not have enough funds to do it you may use those funds as the down payment and finance the rest. The financing must be done on the name of the retirement account, not on your name.

After acquiring the asset, it obviously needs to be rented to produce income. As per IRS rules, it may not be rented to a relative of yours and you may not participate in the management of this property thus you must retain a management company to manage it and disburse the rents to the trustee.


Let’s say, for illustration purposes, that you are able to buy a single family residence for $170,000 and you need $15,000 to rehab it in order to rent it. Let’s assume you have enough funds in your retirement account to pay for all this in cash. Then you rent the home for $1350.00 per month and the management company charges you 8% of rent in management fees.  You would have $1242.00 in gross income every month which the management company would send every month to the trustee to go back into your retirement account. Keep in mind that the property taxes, home insurance, and any repairs must be paid, either by the trustee or the management company. Make sure to negotiate all utilities for the property, including water, to be paid by tenant. Under this scenario, you would be receiving approximately $800.00 of net income every month into your retirement account (it’s more like $900.00 but I’m being conservative for any maintenance). After one year, your retirement account would have received $9,600.00 in rents from your asset. That represents roughly 5.18% of your initial investment which will increase with future rent increases. In addition to this, depending on where you buy your asset, your asset will appreciate over the years.


As mentioned before, you may also lend those funds to someone else after you roll them over to a trustee in which case you would retain a loan servicing company instead of a management company to handle the note payments and disbursements to the trustee company.


There you have it. You accomplished both goals!

Your hard-earned dollars are now producing income for you each and every month and, if you purchased the asset intelligently, it will hedge against inflation extremely well.


One of the things that intrigue me most about retirement accounts is, if upon retirement we are only making withdrawals from the principal, and this principal is not being replenished, how long will it last? How much do we need to have saved in order to last us through our golden years? I’m not a financial planner so I don’t have the answer.

I do know however that by investing your retirement account in real estate through a self-directed IRA account, not only do you accomplish the objectives already discussed, but you will also have a constant cash flow from your investment upon retirement without even touching the principal.


By the way, the example I used is real (please see blog about this topic for photos and a print out of the rents received by an investor).


If you would like to know how you can also invest your retirement account into real estate, give me a call.


*This is not intended to be legal or tax advice. Consult your CPA or attorney for advice on this subject.


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