Hello! Who are you, and where are you from? What’s your venture?
I’m Robert, a retired Engineer from Spokane, WA, and, recently my wife and I were able to successfully purchase a rental property through our IRA. Since retiring, we’ve been planning to focus on real estate investing. We’re managing two rental properties at the moment, one within our IRA and the other through the traditional means. Both rentals properties are in very nice areas, and we go the extra mile to make sure our tenants are highly qualified.
What’s your backstory? How did you find your deal?
Well, my wife and I worked a lot during our youth and made a decent amount of money. We worked in the San Francisco Bay Area, and the commutes were long and expensive. We traveled a lot but also had to budget in order to pay for everything and raise our four kids. It was a lot, but we had good salaries, so we were still able to put away a good amount into savings. Most of it was put into our IRA for the tax advantages, but our risk tolerance has lowered as we’ve gotten closer to retiring. Unfortunately, the options for what you can invest in through an IRA are very limited. Because of the soaring inflation, we decided to sell off our stocks and reinvest in something we consider safer, it was between market index funds like SPY (which was still stocks) or real estate. And since we had so much spare time, we choose real estate in the end.
So we went to shop for a home. We’ve been in and out of the real estate for a long time, so finding the properties to make offers on wasn’t difficult. We really wanted to focus on having a qualified tenant who could pay rent on time, and, we chose a house in a nice area of our town. Living in an LCOL (Lower Cost Of Living) area compared to the San Francisco Bay Area meant it was much easier to choose a home within our budget. Since we first moved to the Spokane area, we’ve looked into buying a lot of these nicer properties and we have had our eyes on this one for a long time. Luckily, it went on the market just at the right time when we were looking for a way to place our money into safer investment.
We got that one on our second bid since ours was an all-cash offer. The offer was made under our LLC and it was a pretty common way to buy house and keep anonymity (although we didn’t need to). We paid the inspections from our new LLC checking account and since there was no mortgage, we closed early (about 20 days). We were worried at first because when we were doing research, we kept reading negative experiences about using IRA to buy rental properties. But the whole process was super easy and everything went pretty smooth in the end.
How did you finance it? Did you get a loan from the bank? Interest and terms?
We actually didn’t finance the property. It was an all cash offer that pulled directly from our IRA. There was already plenty of money in the IRAs to pay for the property in full.
The only loans that we could get for this particular investment would be non-recourse loans anyway and we wanted absolutely no part in.
In order to do this, the first thing we did was find a local company that specializes in IRA rental purchases. We decided to open a “Checkbook LLC” IRA so we could easily manage the contractors and expenses purchases with full transactional bank control. The LLC costs $1200 for a one-time set up, $300 per year management fee for them to prepare tax forms and the state charges per year. It took about month from completing the paperwork (which also took three or four hours) and transferring the funds from Vanguard (a normal IRA transfer) to being fully ready to go.
We then requested a check from the self-directed IRA to be issued under our LLC, which costs $30 and we received it in about a week.
Now once we have everything all setup and the funds available, we went to a local credit union to set up a business checking account for the LLC (which didn’t cost us anything, just took a couple of days for the check to clear).
Was there any repairs? How long did it take?
There weren’t any significant repairs to get this property up and running. It was already nearly ready for tenants, so it was just a few odds and ends.
And since the property is in a tax-deferred IRA, all the funds have to be from direct IRA contributions or from the existing IRA balance. So there’s no real way to upgrade the unit or add additional value without pulling from IRA and drawing down the portfolio balance.
We are allowed to manage the property. However, we are just not allowed to put in any physical labor. The laws explicitly tell us that we are not allowed to do unpaid work on the property. When we do have to do repairs, we would have to contract out all maintenance work. This means simple things like painting or installing cabinetry need to have labor bills included, as just submitting receipts for materials would make it look like I did the work for free, which is definitely not allowed. And I need to have an “arm’s length” with the contractors, so that means no family members as well.
And we would have to keep our money separate from the self-directed IRA’s money. But that’s no big deal, we just need to keep track of which credit card we’re using when paying.
We’re told the IRS takes it quite seriously and does very thorough audits. It’s pretty annoying and one of the IRA rental properties’ biggest drawbacks.
How did you find your buyer/tenant? Do you have a team?
Long story short, we just do the usual, through Craigslist and some Facebook groups. We advertise the property when it’s about to be vacant and when there’s a short gap in the tenancy. However, since there is no mortgage, a little bit of vacancy is no significant issue for us. A small blip here and there between tenants won’t make a meaningful impact on our long-term financial goals. Instead we rather have high quality tenants than focusing on keeping our units filled. Our current tenant in the normal rental unit has always paid on time, even throughout the rent moratorium, which tells us we’re doing something right here.
As for my team, we don’t really count the contractors. It’s just my wife and me. We handle it all ourselves and enjoy being landlords, as challenging as it can sometimes be.
What is the revenue? What are the expenses?
The two properties we currently have were purchased at around $250,000 each. However, this was paid in full, so we don’t have a mortgage to pay on either one. The properties are kicking out about 5% net gains between rent and appreciation. But only the normal rental is tax-free due to depreciation exemptions. So, it’s about $25,000 annual profit, with only half of that being taxed at the end of the day.
Since we own different types of rental properties, I did take some time to consider the differences in the tax advantages and whether it was really worth it. I have a lot of money in IRAs and my choices were pretty limited regarding what I can do with that money in the first place. I also don’t have any more money outside my IRA to buy another rental property even if I wanted to.
With the “normal” rental, we can write off depreciation which shields some of the rental income (not all, about half). However, for every dollar of depreciation we claim, the cost basis for the property is decreased, and we’ll end up paying taxes on the depreciation “savings” if we were to go sell the house. With the IRA rental, all gains are tax-free until we withdraw them from our IRA. So, in both cases, we end up with gains that can compound now tax-free and just have the tax paid later. We’re eventually going to pay the taxes but deferring right now is essential in taking full advantage of compound interest.
There’s also one final benefit to owning a rental property in an IRA, which is letting me keep my ACA and health benefits. Rental income is taxed as ordinary income. So having too much of it could raise my income level and affect my ACA eligibility, and, I definitely don’t want to lose that.
How are you doing today and what does the future look like?
Well, we absolutely love being retired, but it’s also gets boring easily. Our kids are all grown up. We already traveled everything. It’s hard not having anything to do. Being a landlord helps give us a sense of purpose, even when it can be cumbersome with the tenants at times.
Our financials would probably look fine even if we just held our entire IRA in stocks and bonds, and drew it out the normal way, but that would be boring. We do have some risk but it’s a lot less than when we did in stocks and still gives us enough exposure to make us feel like the money is not just sitting there. The rental properties are not only a great opportunity to continue to improve our family’s financial future, but it lets us stay busy while learning the ins and outs of real estate. There’s still so much to learn. This is much more exciting and has some interesting real upsides to it.
Any advice for other who want to get started?
In the end, I feel like it’s the best lower-risk approach than our other options. Currently, we don’t have a mortgage, the cash flow is positive and we don’t really need the money anyway at the moment. So we can ignore the price fluctuation of home values and would never have to sell at a loss. It makes sense for us, but for the young ones who are still in the “accumulation phase” of their investing journey, it might make more sense for them to go the traditional route and buy real estate with leverage.
And also the usual advice: get started early and never stop learning.
The best thing you can do when you’re young is to save and invest. When I was younger, I invested in much riskier things like tech stocks and options so I wouldn’t exactly recommend that though. However, you want to give yourself time for that magic compound interest to work, so you need to start young. If you’re not young, you will need to save more money and perhaps don’t take as many risks. I’d still recommend investing at any age or situation; just be mindful that the closer you get to retirement, the more you need to consider maintaining your wealth instead of building it. It can be easy to get caught up in making more money just to ‘bet the farm on black’ and lose your life savings.