The Roth purchases a rental for $27,000 (including renovation and closing costs), and you borrow 100% from an investor (paying 6.75% interest over 8 years). We\u2019re leaving our initial $5,500 in the account for reserve.<\/p>\n
The rental produces $675 per month in rental income, and expenses are 40% or $270, so the net rental income is $4,860 per year.<\/p>\n
Your IRA can\u2019t keep all of that because you have loan payments of $4,377 and you have to pay a special tax called the \u201cUBIT\u201d in the amount of $306. So at the end of year one, your IRA only really gets to keep $177.<\/p>\n
At the end of 8 years, you are 48 years old and the Roth IRA owns one free and clear property plus it has $5,225 in the account. There are no more loan payments or UBIT taxes, and the property now produces $4,860 in net cash flow per year (assuming you never raised the rent).<\/p>\n
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Related:<\/strong> 3 Solid Strategies for Investing With a Self-Directed IRA<\/a><\/em><\/p>\n Let\u2019s assume the IRA cash flows that way for the next 12 years (until you turn 60). That means after 12 years, you have $63,545 in the account.<\/p>\n Now that you\u2019re 60, you can pull money out of the Roth IRA totally tax-free.<\/p>\n Let\u2019s assume you live for another 30 years. That means you\u2019re pulling another $145,800 of income out of that single property, for a total of $204,345 — all from a single $5,500 contribution to a Roth IRA and one rental property.<\/p>\n And that doesn\u2019t even include appreciation and rent increases. Or the fact that you never contributed any more to your IRA!<\/p>\n Now imagine if you did that a few more times!<\/p>\n IRAs are also a great way to raise money for your real estate projects from others. There is a TON of money in people\u2019s IRAs, and it\u2019s hardly making any kind of return.<\/p>\n Most people don\u2019t know that you can legally invest your IRA in someone else\u2019s flip<\/a> or multifamily<\/a> project. And instead of making a 4% return people can make much higher rates of return — all by investing with their IRAs.<\/p>\n This is called \u201cself-directed\u201d IRA investing. And it\u2019s a huge untapped source of capital for your real estate deals.<\/p>\n Have you ever heard of a CESA plan? I hadn\u2019t until recently.<\/p>\n CESA is short for “Coverdale Educational Savings Accounts” that let you make tax deductible contributions each year and use that money to pay for education-related expenses.<\/p>\n And when I mean education-related, I mean anything related to K-12 and college education, including the computer and office supplies — for the entire<\/strong> family.<\/p>\n Then there are the Health Savings Accounts (HSAs) that are similar and let you pay for health-related expenses tax-free. And you can even invest with them like you can with an IRA.<\/p>\n Totally cool. It\u2019s amazing the difference a little bit of knowledge makes.<\/p>\n While IRAs are an extremely powerful to build incredible wealth over time, you have to play by the rules.<\/p>\n There\u2019s something called \u201cprohibited transactions\u201d (or \u201cPTs\u201d for short) that disallow\u00a0you from using your IRA in certain ways. Whenever you invest your IRA, it has to be an \u201carms-length\u201d transaction, i.e. one in which you don\u2019t directly or indirectly benefit (only the IRA can benefit).<\/p>\n The challenge is that the IRS regulations define PTs quite broadly. For example, is it likely that you can’t lend money to the contractor who is renovating your house? Most likely not.\u00a0That\u2019s because you lending him (or not lending him) money could indirectly<\/strong> benefit you in terms of his enthusiasm to finish the renovation project.<\/p>\n The problem is that if you have a single prohibited transaction in your IRA, even if it\u2019s a tiny loan you made to a relative (also a PT), you can destroy your entire IRA account that you\u2019ve diligently built up over a lifetime.<\/p>\nUsing IRAs to Raise Money<\/h2>\n
Other Cool IRA Plans That Let You Build Even More Wealth<\/h2>\n
But Here\u2019s the Catch<\/h2>\n
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