Last episode, I gave you 5 shocking reasons that you should seriously consider NOT putting real estate investments inside of a self-directed IRA. But there are two sides to the coin, and today I give you 5 great reasons that your IRA is a perfect home for great real estate deals. I’m Bryan Ellis. This is episode 196.
Hello, SDI Nation! Self Directed Investor Radio is here for one purpose: To help YOU make great investments. So let’s do that right now.
Ok, so I know, I know, I know. If you heard yesterday’s show – which is available to you right now at SDIRadio.com/195 – I’m betting you think I’ve flipped my wig, as I spent the entire episode giving you really strong reasons NOT to use your IRA to buy real estate. This is, after all, the Self Directed Investor Radio, where self-directed IRAs are a key focal point.
But look… the truth is that I’m primarily interested in helping you to make GREAT investments, and a big part of that is the legal structure under which you acquire your assets. And sometimes an IRA is the perfect solution. Other times, it’s really not. Unlike your IRA custodian, I don’t have a bias towards any particular structure. The only result that matters is that you make a great investment.
So today, I give you the counter argument – 5 strong reasons that your IRA is a GREAT place for your real estate investments, starting with #1: Tax savings.
Yes, that’s right… there are a lot of taxes to be saved by properly using an IRA. Specifically, if you’re using a Roth IRA, you could save a ton, because those profits will be 100% totally tax free… and that’s the best possible scenario. But even if you use a traditional IRA – which has the nasty side effect of subjecting your profits to very high ordinary income tax rates rather than comparably low capital gains tax rates – it could still be tax-wise to go that route if you expect your income to be relatively low during retirement. Honestly, it’s a murky question. Best to get advice from your financial advisor.
So that leads us to reason #2 to use your IRA to invest in real estate: That’s where the money is! This one is practical, sure. But here’s the deal: If you’ve got a great real estate deal that requires $200,000 in capital, and the only place you happen to have the capital available is in your IRA – even a traditional one – then by all means… go for it! You’ve got to invest that money somewhere, and you can’t pull your profits out of the IRA without penalty before retirement anyway. So don’t generalize my tips from last episode so much that you miss a good opportunity.
Reason #3 to invest your IRA funds into real estate: It’s called Turnkey Rental Property. Why do I say that? For those of you who may not be familiar, Turnkey Rental Property is a cool situation in which an investor purchases a property that’s already renovated, occupied by a paying tenant, and under the watchful eye of a competent manager. So it’s a complete package, and on the very day you buy the property, you start collecting cash flow, and the property manager handles basically everything for you. Why is this relevant to your retirement funds? It’s because one of the biggest risks of investing in real estate through your IRA is that you’ll somehow, someway deliver “services” to your IRA. What is a “service”? Well, it’s not really defined, but one thing we know: If you do it, you’ve committed a prohibited transaction, and that means your IRA is going to take a MASSIVE hit in taxes, penalties and interest. And by investing in Turnkey Rental Property, you’re doing a very strong job of insulating yourself from delivering any “services” and thereby protecting your retirement portfolio.
Reason #4 to invest in real estate through your IRA: Real estate can be molded to fit your specific needs. For example: If you have 30 years before retirement, you might consider investing in real estate with overwhelming potential for appreciation. If you pick your market wisely, that appreciation could make you very wealthy. On the other hand, maybe you view rental property primarily as a way to generate substantial current income, and you only want to invest where you’ll have a high ROI from cash flow, with less regard to appreciation potential. Well, with real estate you can do both. I know that one of the markets where we’re very active – northern California – really offers almost nothing in terms of cash flow, but the market there is blazing hot with really strong appreciation. On the other hand, we’re also very active in Birmingham, Alabama, where real estate is slow-moving and rather predictable… but the cash flows are simply outstanding. Whatever your need or preference, selecting real estate wisely can really help with achieving your goals.
And Reason #5 to use your IRA to buy real estate: IRAs, by law, offer some really, really great protection from lawsuits and other ugly parts of life. So, let’s say, God forbid, that you are the victim of a frivolous lawsuit or you have to declare bankruptcy, as long as you’ve followed the IRA rules correctly, then the contents of your IRA will have a very strong degree of legal protection, so your retirement portfolio will remain safe and available to you when you need it.
So there are 5 good reasons to use your IRA to buy real estate. Those aren’t all of the good reasons, either. To be perfectly blunt, I think one of the best reasons to do so is because the IRA basically forces you to reinvest the cash flow you earn from real estate, since you can’t access that cash flow before retirement without penalty.
As such, the strategy I call the Wealth Snowball works incredibly, incredibly well for retirement accounts. By using this strategy with properties we offer, it’s plausible to invest around $150,000 one time, and 20 years later what you end up with – just by reinvesting your net earnings into more property – is that you own 13 houses producing a net income of nearly $100,000 per YEAR! Imagine having your IRA produce that kind of cash every year, totally passively, net of all expenses! That’s exactly what the Wealth Snowball Strategy can do, and using that strategy inside of a retirement account is a perfect place to do it.
So there you have it, my friends… 5 strong reasons – plus a bonus reason or two – that an IRA is the PERFECT place to put your real estate investments.
Now every time I mention the snowball strategy, I’m deluged with questions about it, because it’s pretty freaking sexy to invest about $150,000 one time, and have a six-digit income 20 years later. Some people do that early enough in life that they can use that income during their own retirements. Others do it specifically to leave a strong financial base for future generations. Whatever the reason you’re interested, if you’re seriously interested in that, drop me an email to email@example.com and we’ll reach out to you right away!
My friends, thank you for listening in today as we focus on the one thing that matters most here at SDI Radio: helping YOU make great investments. Until next time, remember: Invest wisely today, and live well forever!