Old Real Estate Dogs know some Awesome Tax FREE Income Tricks
Don and I just returned from a 5 day IRA Fun Cruise with 150 of the country’s top real estate and note investors who are almost all experts in utilizing their Self Directed IRA. We came back exhausted because our Cruise Directors Walter Wofford and Quincy Long packed in more training into those few days that I have stacked on my shelves in my office along with a ton of fun.
This trip was packed with people doing all sorts of real estate deals, but we learned early on that we needed to find the Old Dogs – the ones with lots of grey as they had this real estate and note business figured out. Not to say the young pups, didn’t have a lot to contribute. Most of these people had the same techniques as the older folks, but they had added technology to the mix to make the work involved easier and faster.
So to whet your appetite, let me tell you one story we learned over drinks, not in the presentation portion of the cruise. This is something that every American needs to know and understand – you need to know it and understand it and then teach it to everyone you know.
The power of the Roth IRA and having Tax Free Income for Life after the age of 59 – 59 ½. Can’t remember exactly how old you need to be to start tapping your Roth IRA, but what difference does ½ a year make – not a lot in the grand scheme of things I am sure.
So here is Awesome Trick #1 . . . . $10,000 Tax Free Income Monthly.
One person on the cruise of a certain unknown age told us that he had started a Self-Directed Roth IRA and put in his initial contribution, invested that initial contribution over and over and over, never adding another contribution to it and today, he can pull out $10,000 a month from the Roth IRA without paying any taxes. And past the initial contribution, he had not put in any more contributions.
So let’s look at this.
I don’t know exactly what his initial contribution to his Roth IRA was, but be it $100 or $3,000, really does not matter. What you need to know is that he earned this money, paid taxes on it and contributed it to his Roth IRA.
Next he started using some of the techniques we talked of on the cruise and grew that initial investment over the year. How many years? Again is really in-material as one transaction in the Roth IRA could earn $10,000 for one deal and others that earned $100,000 for a deal. The point being, that he kept investing that first investment over and over to grow his Roth Nest Egg and continues to invest it today and gets the same returns today on a transaction that could be $100 return or $100,000 return.
So from some of the example transactions we saw on the cruise let’s see how YOU could go open a Self-Directed Roth IRA with say $1000 today and be earning $10,000 tax free monthly too.
You have several options of starting a Roth IRA, you could start it with $100, $1000 or more or if you have a Traditional IRA or 401k somewhere, you might want to convert all or part of it to a Roth IRA and pay taxes this year on the amount you convert. The starting of the Roth IRA is the easy part; it’s the getting the $10,000 tax free a month that you really want to know about.
So let’s say you open your Roth IRA today, you can’t start taking out money until you are over the age of 59 and the Roth IRA has been active for 5 years. (Or you could inherit a Roth IRA from a friend or family member and immediately start investing the funds in the Inherited Roth and pulling out tax free, but that is an article for a different day) Once you meet the age requirement and the 5 years, you are golden.
So what are some examples of how your Roth IRA could make money?
Well this person offered up one idea to us. Non-Recourse Financing.
Knowing that we know real estate and know how to structure profitable deals he had this idea for us. First we go out and doing what we do today, find a nice little house deal that we could have our Roth IRA purchase with $100 earnest money deposit from our Roth IRA and obtain a Non-Recourse Loan from his IRA for the purchase price and the rehab. Then we fix up, sell, and split the profit.
So to put some real numbers to this deal, say we found a nice south Kansas City that worth about $60,000 all fixed up. We can buy it for $20,000 (we just bought one like this) and it needs $15,000 in repairs. Our Roth IRA writes the contract to purchase the house and puts down the $100 earnest money deposit. Mr. Old Dog’s Roth IRA that would lend the $20,000 purchase price and the $15,000 repair price for 50% of the deal. Our Roth IRA would contribute the deal and our oversight of the rehab and resale for the other 50%. We sell it to a cash buyer and profit $25,000 with ½ going to Mr. Old Dog’s Roth IRA and ½ going to Our Roth IRA. Mr. Old Dog can then pull his ½ out of his Roth IRA – his $12,500 to live on this month TAX FREE and go on a vacation with his Wife and our brand New Roth IRA just went from our initial $100 Investment to now having $12,500 in balance.
We had another idea from one of the Young Pups: Buying upside down houses subject to the existing financing.
This person marketed to Pre-Notice of Default Lists to find people who were very motivated to sell because they could not make their mortgage payment and they owed too much to be able to sell their nice house the traditional Realtor Route. He was looking for houses where the monthly Principle, Interest, Taxes and Insurance Payments were less than what the typical rental payment for the home would be. He also wanted houses that needed very little work.
So for his example, he found a house that had a value of $150,000 where the home owner paid $1100 a month PITI on a $110,000 home loan. The home rented for $1600 a month and they were $4500 behind on payments and facing foreclosure. His Roth IRA put a contract on the home to purchase it subject to the existing financing and took over the house, the existing mortgage and rented it out for cash flow.
His Roth IRA invested $4500 to bring the payments current and rented the house out for $1600 a month. The IRA paid the $1100 mortgage payment and pocketed $500 a month in cash flow. In less than a year the Roth IRA would have earned back the initial $4500 and then have zero money in the deal and still be earning $500 a month in cash flow PLUS the property was in a nice area where values were appreciating AND the mortgage was going down a bit each month.
With this example starting with about $5,000 a Roth IRA could do one deal like this a year and in 5 years be earning $2500 a month tax free and have all of its initial $5,000 back. If the Roth IRA owner had reached the right age, they would now be able to keep doing one deal like this a year and adding another $500 to the monthly cash flow tally each year plus pull the monthly cash flow out – TAX FREE to live on.
Let me talk about one more deal that was presented: Option on property in the path of development.
I don’t know the exact particulars on this deal as I did not write them down and a deal like this does not happen every day, but it is a very spectacular deal concept that you need to see.
In this transaction, the investor stumbled across a house on an acreage that his Roth IRA actually purchased for about $40,000. Just as easily one might have had their Roth IRA contract with an Option to Purchase at a future time. This house was in the path of development so the Investor held for several years and rented out the $40,000 house for cash flow. As the city grew to where the house was located, commercial interests became interested and purchased the land for a lot more.
I heard several similar examples here – one investor purchased in the path of progress and held for a few years to sell for $150,000. And another investor who was in the know about commercial developer looking for a particular type of property, stumbled across a similar acreage that he was able to have his Roth IRA purchase in the $40,000 range and then resell for over a Million to the commercial developer a short time later.
Does a deal like this come around for everyone? No, but . . . . . if one did, wouldn’t you want your Roth IRA all set up and ready to go so it could earn the $100,000 or the $1,000,000 and never have to pay taxes on it?
I hope you liked some of these ideas. I will be sharing more Self Directed IRA ideas and Real Estate and Note Case Studies. So be sure to check back!
Article provided by Kim Tucker with www.KCInvest.com.