Imagine a savvy investor, Bob, who decided to leverage a Self-Directed IRA to dive into the world of real estate. By utilizing this specialized retirement account, Bob was able to explore opportunities beyond traditional stock and bond investments. This case study will delve into Bob’s journey, showcasing how he effectively harnessed the power of a Self-Directed IRA to acquire, manage, and profit from real estate investments—all while enjoying the significant tax advantages that come with this approach. Through Bob’s experience, we’ll uncover the practical benefits and strategic considerations of using a Self-Directed IRA for real estate investing.
Background
- Name: Robert (Bob) Garmin
- Age: 44
- Occupation: Marketing Manager
- Current Retirement Savings: $220,000 in a traditional IRA at Fidelity
Objective:
Bob wants to diversify his retirement portfolio by investing in rental real estate through a Self-Directed IRA. He wants to leverage the tax advantages of the IRA while aiming for long-term growth and income generation. Bob plans to rent the property while working full-time and sell during a seller’s market during retirement.
Step 1: Setting Up the Self-Directed IRA
1. Research and Selection:
– Bob researched various Self-Directed IRA custodians and decided to work with IRA Financial, which allows for any type of alternative asset investments, including real estate.
– Since he was interested in rental real estate, he decided on the Checkbook Control structure which will allow him to control his investment better.
– He completed the necessary paperwork to set up the account, which took about ten days from start to finish, and to complete the transfer of $140,000 from his Fidelity IRA into an IRA Financial Self-Directed IRA LLC.
2. Fund Transfer:
– The funds were transferred from his traditional IRA to the Self-Directed IRA LLC without incurring taxes or penalties, as it was a direct transfer. Funds were transferred directly from Fidelity to IRA Financial.
– If needed, Bob can initiate another transfer of funds as direct rollovers/transfers are unlimited.
Note: Since funds are moving from one IRA to another, the process is known as a transfer. If the funds were coming from another account, such as a 401(k), then it will be called a rollover.
Step 2: Identifying Investment Opportunities
1. Market Research:
– Bob conducted research on potential real estate markets and identified an area with strong rental demand and appreciation potential.
2. Property Selection:
– Bob found a single-family home in a growing neighborhood priced at $115,000. He estimated the property could generate monthly rental income of $1,200 and had potential for appreciation.
3. Property Analysis:
– With the help of a real estate professional, Bob analyzed the property’s cash flow, including anticipated expenses such as property management fees, maintenance, insurance, and taxes.
– He projected an annual return on investment (ROI) of approximately 7% after accounting for all costs and potential vacancy rates.
Step 3: Acquisition and Management
1. Purchase Process:
– IRA Financial helped facilitate the purchase. The IRA LLC paid for the property directly, and the title was held in the name of the LLC.
– The IRA funds fully covered the purchase price of $115,000. Because of this, Bob did not need to worry about any UBTI taxes.
2. Property Management:
– Bob hired a property management company to handle tenant placement, rent collection, and maintenance. He was informed of the prohibited transaction rules before selecting the company.
– All income generated from the rental property was deposited directly into the IRA, and expenses were paid from the IRA LLC bank account.
Step 4: Financial Performance
1. Income Generation:
– Monthly rental income of $1,200 was received, totaling $14,400 annually.
– After accounting for property management fees, maintenance, taxes, and insurance, the net rental income was approximately $10,000 per year.
2. Appreciation:
– Over a period of seven years, the property appreciated in value to $150,000 – approximately a 23% increase in value.
3. Tax Advantages:
– Rental income and capital gains from the future sale of the property are tax-deferred until distribution allowing Bob to benefit from tax-free growth within the retirement plan.
– In the future, Bob may consider an in-kind Roth conversion of the property. This will allow for tax-free distributions from the Self-Directed IRA.
Step 5: Future Considerations
1. Diversification:
– With the success of her initial investment, Bob is considering using additional funds in her Self-Directed IRA to invest in another property. He is also researching other alternatives, such as private placements and cryptos.
2. Plan for Retirement:
– Bob plans to hold the property until retirement or until he decides to sell, at which point the proceeds will either be reinvested or distributed, subject to IRS rules. Once he reaches age 73, Bob must start beginning required minimum distributions or RMDs each year.
3. Ongoing Management:
– He continues to monitor the performance of the investment and stay informed about market trends to make strategic decisions regarding future investments.
Conclusion
By using a Self-Directed IRA, Bob successfully diversified his retirement portfolio through a real estate investment. The plan provided her with the flexibility to select and manage her investment while taking advantage of tax benefits. His initial investment yielded strong returns through both rental income and property appreciation, showcasing the potential benefits of real estate investments held in a Self-Directed IRA.
This case study illustrates the process and benefits of investing in real estate through a Self-Directed IRA LLC with Checkbook Control, emphasizing the importance of research, planning, and ongoing management. Bob was able to setup his Self-Directed IRA in under ten days and was able to gain investment diversification by using a tax-advantageous retirement account to make the investment. Bob is now one of the million+ savvy American investors that have gained investment and retirement freedom via the power of the Self-Directed IRA solution.
