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Case Study: Investing in Real Estate with IRA Funds

Estimated reading time: 3 minutes, 46 seconds

The stock market hasn’t been kind to Paula (age 45) this year. The market’s deep dives in recent months have had a major impact on her IRA holdings. Her investment advisor suggests diversifying, but his ideas center on market-based assets. Paula is not satisfied with that solution.

Paula is genuinely concerned that her retirement goals may be at risk due to the stock market volatility. Everything she hears and reads seems to indicate more correction is about to take place. She determines to take more control of her retirement funds and begins to look at ways for true diversification.

Paula’s coworker Angela tells her about how she invests in non-public assets like real estate and cryptocurrency with retirement funds as a hedge against market volatility.

Paula hasn’t heard of this before and, while very intrigued, is rightfully suspicious. Why hasn’t her advisor told her about this opportunity? Why was this option not available with her employer 401(k)?

Angela explains that since the creation of the IRA, you’ve been able to invest in a multitude of assets, including those not traded on the stock market. Since they both work in real estate, Angela believes that holding real estate in an IRA could help Paula meet her retirement goals. She describes how she uses Kingdom Trust as custodian of her real estate and digital assets and works with an advisor and broker well-versed in such alternative assets.

After visiting our website and educating herself on self-directed retirement investment, Paula’s intrigue leads to action. She opens a Roth IRA online with Kingdom Trust. Then, she requests her advisor sell some of her traditional holdings so her new IRA is in a better cash position to make a new investment.

She then transfers funds from her current Roth IRA to the new Kingdom Trust Roth IRA. During the transfer process, Paula finds a realtor to help locate an investment property. The realtor has worked with clients investing using self-directed retirement funds before, which helps to ease Paula’s mind about this investing method. The realtor also helps Paula understand prohibited transaction rules, unrelated business income tax and other potential factors.

Paula is now poised to invest in an income-generating real estate property using Self-Directed IRA funds.

The two find a duplex for sale in a nearby town. Paula determines to use a portion of her IRA’s $175,000 in uninvested cash to fund the purchase. The property is fully-rented and brings $750 per tenant in monthly rent revenue. The asking price is $150,000. But before purchasing the property, Paula sits down with her CPA to project her potential return on investment (ROI).

Paula’s CPA first helps her with the monthly net earnings calculation, which is her gross income minus expenses:

Gross income per month ($750 rent per tenant): $1,500

Property management expenses: – $150

Taxes and insurance: – $150

Miscellaneous expenses: – $175

Net earnings per month: $1,025

Then, they calculate the monthly earnings out to approximate net earnings per year of $12,300 ($1,025 x 12).

She considers making an offer of $140,000 on the property. After those calculations and with that figure in mind, they calculate the ROI (net earnings/investment amount). Dividing the net earnings of $12,300 by the proposed $140,000 investment results in a potential 8.8% ROI.

Additionally, Paula’s CPA informs her that she must also consider appreciation. In reviewing the area, they learn the annual appreciation rate is a steady 2%. So, added to the previously-calculated ROI, Paula is pleased with a projected 10.8% return.

Following conferences with her investment advisor and tax professional, Paula instructs her realtor to make the $140,000 offer. Five days later, the offer is accepted, and they close on the property within six weeks.

Paula plans to hold on to the property until at least age 60, all the while continuing to receive the tax-advantaged benefits. And if she chooses to withdraw funds from the account at that time, she can anticipate tax- and penalty-free withdrawals since she’s investing via a Roth IRA.

Paula is thrilled she’s able to truly diversify and direct her retirement by using Kingdom Trust.

She feels more protected against stock market volatility, and she’s able to invest in what she knows and understands. In fact, she’s even considering adding another alternative to her portfolio (more on that later!).

If you’re on the fence about self-direction and/or investing in alternative assets, consider opening a Kingdom Trust account today. Simply chat in, email or call us today to get started, or proceed right to the online account application. There’s no time like the present to join Paula and so many others who’ve chosen self-direction as the path to true investment diversity.

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