If you opened your year-end retirement account statement, you were probably surprised about the substantial loss in account value.  Many people are reporting account losses around 40% compared to the beginning of the year.

Did you know that real estate has only lost about 30%-40% of value?  And not all areas of the country have suffered a loss-some are reporting gains in value (many areas of Texas and New Mexico, many communities in Colorado, areas of North Carolina/South Carolina, etc.)

What are you going to do now that your portfolio is down?  Are you going to buy more stocks (dollar cost averaging?)  You can liquidate your portfolio and stick the money in a “high-yield CD/savings account” earning a paltry 3% (negative after you index for taxes and inflation.)  If you could invest in real estate with your IRA, Roth or 401K and receive “income” tax-free (or tax deferred) and earn returns that would amaze your accountant, would you be interested?

The tax code allows you to use your Roth, IRA or 401K to invest in real estate as long as you (and your IRA/401K) meet a few basic requirements.  Remember that Roth rules allows the “investment” to grow TAX FREE while regular IRA/401K accounts grow TAX DEFERRED.  Use these rules to grow your retirement account.

Imagine if you “directed” your  Roth IRA (today worth $55,000) to buy a property for $200,000 and obtain a loan for 75% of the purchase price ($150,000).  Your Roth would be responsible for making the mortgage payments (about $900/mo at 6%, 30 year) and taxes/insurance payments (about $150/mo).  Any rent above this would flow back into your Roth TAX FREE!  If you rented the property for $1,500/mo that would be about $450/month ($5,400/year) that would flow back into your IRA each month for as long as you held the property (and it was rented).  Assuming you held the property for 10 years (that’s $54,000 tax free into your Roth IRA), and then you sell the property in the 11th year at $220,000 (about 1% appreciation per year-THIS IS RIDICULOUSLY LOW for real estate!!!) for a profit of $15,000.  And yes, the $15,000 would flow back into your Roth IRA TAX FREE!

The return on your initial investment ($50,000 down + closing costs…about $55,000 total) could return the initial $55,000 plus the monthly rents for 10 years (about $54,000) plus the sales profit of $15,000 for a net TAX FREE PROFIT OF $69,000. (Initial investment=$55,000, profit=$69,000, total after 10 years=$124,000).

If your “regular” Roth were to grow from $50,000 to $124,000 ($55K + $54K + $15K) it would have to have an average annual growth rate of over 9% each year!

Other benefits to holding real estate in an IRA/Roth are:  yearly rental increases, loan reduction, property value appreciation and leverage (using other people’s money) allows you to borrow/buy more properties.  Plus you control and direct the investment…unlike the big brokerage houses!

Imagine if you took advantage of the Roth IRA rules and invested $25,000 to buy a “fix-and-flip” property.  Then sold the property for an improved price of $75,000.  The profit of $50,000 (plus the original investment of $25,000) would flow back into your Roth TAX FREE!  The result is a tripling of value over the course of several months and your investment bypasses the short term capital gains (and long term too).  This catapults your returns to over 500%!

The rules for buying investment real estate with an IRA, Roth IRA or 401K are easy to understand, but the IRS is strict about enforcement.  Care and due dilligence are required to stay out of trouble.  If you are interested in learning more about investing  in real estate with retirement funds, call or email me.  Robert: ph: 970-372-0691.