How to Grow Your IRA From $5,500 to $204,345 With a Single Rental Property

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Most people, even savvy real estate investors, underestimate the amount of money an IRA can save over time. Initially, small accounts can grow into very large accounts, especially in combination with leverage.

To illustrate this point, here’s a not-so-crazy scenario that I got from tax attorney/CPA John Hyre (that way, if the numbers are wrong, I have someone else to blame). 🙂

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How to Grow Your IRA From $5,500 to $204,345 With a Single Rental Property

You’re 40 years old and contribute $5,500 to your Roth IRA. I’m going to show you how you can pull $204,345 out of that single rental property over your lifetime.

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’re leaving our initial $5,500 in the account for reserve.

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.

Your IRA can’t keep all of that because you have loan payments of $4,377 and you have to pay a special tax called the “UBIT” in the amount of $306. So at the end of year one, your IRA only really gets to keep $177.

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).


Related: 3 Solid Strategies for Investing With a Self-Directed IRA

Let’s 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.

Now that you’re 60, you can pull money out of the Roth IRA totally tax-free.

Let’s assume you live for another 30 years. That means you’re 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.

And that doesn’t even include appreciation and rent increases. Or the fact that you never contributed any more to your IRA!

Now imagine if you did that a few more times!

Using IRAs to Raise Money

IRAs are also a great way to raise money for your real estate projects from others. There is a TON of money in people’s IRAs, and it’s hardly making any kind of return.

Most people don’t know that you can legally invest your IRA in someone else’s flip or multifamily project. And instead of making a 4% return people can make much higher rates of return — all by investing with their IRAs.

This is called “self-directed” IRA investing. And it’s a huge untapped source of capital for your real estate deals.

Other Cool IRA Plans That Let You Build Even More Wealth

Have you ever heard of a CESA plan? I hadn’t until recently.

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.

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 family.

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.

Totally cool. It’s amazing the difference a little bit of knowledge makes.

But Here’s the Catch

While IRAs are an extremely powerful to build incredible wealth over time, you have to play by the rules.

There’s something called “prohibited transactions” (or “PTs” for short) that disallow you from using your IRA in certain ways. Whenever you invest your IRA, it has to be an “arms-length” transaction, i.e. one in which you don’t directly or indirectly benefit (only the IRA can benefit).

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. That’s because you lending him (or not lending him) money could indirectly benefit you in terms of his enthusiasm to finish the renovation project.

The problem is that if you have a single prohibited transaction in your IRA, even if it’s a tiny loan you made to a relative (also a PT), you can destroy your entire IRA account that you’ve diligently built up over a lifetime.


Related: The 7 Things to Know When Using A Self-Directed IRA For Investing In Real Estate

It’s critical that you have a thorough understanding of the prohibited transaction rules.

After learning about how strict and narrow the PT rules are, it’s a good idea that before you invest your IRA in anything, you consult a good tax attorney first.

So, two lessons from today:

  1. Educate yourself about the ins and outs of the different IRA plans. Learn all you can about prohibited transactions; and
  2. Implement every IRA plan you can and incorporate it into your real estate investing (either your own or by raising money from other people’s IRAs).

How have you used your or other people’s IRAs in your real estate investing?

Let me know with a comment!

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook “The Secret to Raising Money to Buy Your First Apartment Building”.


    • Michael Blank

      ?There are banks that do non-recourse, but the down payment requirement is usually 40% to 50%. Private money is negotiable, as long as the lender is not a “disqualified party”. That’s the approach that the gentleman I mentioned in the article I used.

  1. Scott Leach

    I am having trouble understanding the numbers. In the second paragraph it says that the ROTH purchases a rental for $27,000 and you also borrow 100% from a lender. Is the money borrowed from the lender to repay the IRA? The wording makes it sound like $27,000 is taken from the IRA, then money is borrowed from a lender, and then the normal $5,500 annual IRA contribution is put back in the account for a ROTH IRA balance of $5,500?

    • William Morrison

      My Non-Recourse loans are closer to 60/40 with an additional reserve. The 60/40 is based on the rent, estimated quality of the neighborhood, curb appeal and a minimum value of the rental property much larger than this one.
      But I’m not trying to borrow from my sister, grandmother or friends.

    • William Morrison

      Matthew your comment had me thinking and grinning. Then these thoughts came to mind:

      You can tell a lot about a future partner by what risk they would suggest you take on their behalf.

      Think about both sides of this arrangement, the lender and the owner of the IRA.

      You see a loan with high risk and low reward that the IRA owner is proposing. It’s a non recourse loan only guaranteed by the assets of the IRA. It has a high rent to asset ratio for a reason.

      If the lender is using their IRA for the loan resources, you would add here the cost of setup an account capable of lending money. Not cheap to setup, one time cost. Then the annual fees and expenses for a high risk loan with relatively low risk reward return.

      So if this individual would encourage you to participate in this endeavor, would you partner on anything else with them? Or does it tell you more about them than they realized?

  2. Adam Bray

    The initial headline and the content of this post is really misleading. Suggesting that an IRA of $5,500 can be used to generate some magically large return by using it as collateral (in some way) on a loan for an investment in a flip property is really not good advice for many people.

    The self directed IRA options that are out there are pretty good if you can lend the money to arms-length entities or use them to purchase properties directly. Beyond that, there’s not a lot of ‘creative’ ways to use the capital.

  3. John Vetterling

    I’m interested in seeing what some of the CPAs have to say.
    1. I don’t think your UBIT taxes go away when you pay off the loan.
    2. I doubt seriously if the tax deferred status of your IRA outweighs the tax advantaged nature of rental income. I suspect you would have higher net after tax returns from simply buying the property outside your IRA. Your deductions from interest, depreciation, and repairs offset the income, making it essentially tax free income.

    • William Morrison

      John, for your UBIT question ask your CPA about the 12 month rule.
      One really good recourse on this site is @Dmitrity Fomichenko with Sense Financial. He and his firm are excellent at the whole process to include annual follow up.
      The second question to ask is who on their staff has dealt with the IRS.

      A couple good sources for self education so you can ask your CPA and Attorney good questions when you get your responses are:

      Leverage Your IRA
      by Matthew M. Allen
      Best price is on the NASB site.
      Live Tax Free Forever (through Your Solo 401k)
      by Michael J. McDermott
      It is like a lot of real estate and financial books that really have an important message but limited scope. So some fluff to justify a book, but worth it.

      A third but much drier and a tough read is:
      The Self Directed IRA Handbook
      by Mat Sorensen Attorney at Law

      I suggest these because I have several replies (written) from Attorneys suggesting I try a firm more qualified in the IRA/Solo 401k area after discussions. Each was confident they were the firm for me until we got into specifics and my questions were backed by references. I like Attorneys and CPAs but not because they have the title.
      As a multi-state investor I’ve had similar situations with CPAs in a new state, but more of a blank stare after the assurance that they were absolutely correct until specifics are discussed.

  4. jesse hargrove

    I don’t know where you can purchase a home for 27,000.00. I live in the north east and that isn’t happening. I have used my IRA to purchase single family homes. the process is not difficult. I am sure of one thing. I am in control of my IRA . I was in the stock market for many years. I would much rather own a home that I can touch
    and has a good cash flow than any mutual fund out there. I think the days of double digit returns are gone. I was thrilled when I found out I could use my IRA funds to purchase rental property. It has been working out for me and the cash goes back into my IRA. You need a good team, property manager. you need to purchase quality homes in good areas. that are growing. and for a fair price. This is my retirement plan. I wish I could
    use my 401 K funds to purchase more.

  5. Few pointers – Coverdale Educational Savings Accounts contributions are not tax deductible..The distributions if less than education expense are tax free. also beneficiary should be less than 18 years..Hence, these points are not clearly specified. Also, if I invest my rental income in another rental the snowball will build home equity and returns are much better. IDeally earnings from 60 to 90 years is a myth and does nto happen in most cases owing to aging factor

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