A Classic Way to Improve Your IRA
Welcome to the series’ first case study! Today I’ll walk you step-by-step through a real estate fix and flip scenario so you can have a stronger grasp on the subject. I find that going through this process with clients can help them latch onto the idea much quicker, so I hope it’ll assist you in the same way!
First we need to make sure we’re not exhausting your entire retirement account’s money for the actual property purchase; that we have a substantial amount left over for any sort of incidental costs. I can’t stress this enough: do not cut this close. We probably get two calls a week in our office from panicking clients because they bought too much house for their budget, they don’t have enough money in their account, and at the end of the day the only option they really have is to make that year’s contribution to cover the balance.
Also keep in mind that the retirement account owns this asset, so all the cash flows in and out of your retirement account. When you’re paying a contractor for any work on the property, you’re going to instruct our office to actually cut that check to the appropriate parties. Finally, as the account holder you need to do the due diligence on the asset that you’re purchasing (as always).
Now it’s time for a pretty straightforward example where the retirement account is going to purchase a property for $50,000. In this case, the property is going to need about $15,000 of work. It’s not a huge rehab project, but certainly one that many people have done themselves. Holding costs should also be considered, and in this case they’re $1,500. HOAs, taxes, insurance and additional costs of that nature are included in this number.
Let’s say the buyer is going to come along and actually purchase the property for $95,000. Once again the retirement account owns the asset, so depending on the account type the gains are going to be either tax-free or tax-deferred. The important numbers for this deal are the selling price: $95,000, and the purchase price: $50,000. If you subtract $16,500 for carrying and rehab costs (as mentioned earlier), the IRA actually invested $66,500 into this deal.
Assuming that we’ve already factored in the closing costs, realtors, etc., this would actually give you a net of $28,500. This is a deal that a lot of individuals are capable of doing.
Let’s even assume it doesn’t take you six months to do this deal; instead it takes you a year. In just one year’s time you took $50,000 and turned it inthttp://www.americanira.com/lp/buying-holding-real-estate-american-ira-case-study/o $78,500! Self-directed IRA retirement accounts offer many, many profitable options.