Case Study: Partnering Funds
The following case study illustrates how to partner funds with another investor for increased buying power.
Jen and her brother, Ryan, want to invest in real estate to build income for retirement. They decide on partnering IRA funds to invest in a more lucrative, single piece of property instead of investing in separate properties. Their plan is to buy a house to rent for a few years and then sell it for additional profit.
Each of them has $100,000 in their brokerage IRAs. But their brokerage accounts don’t allow alternative assets. To invest in real estate with their retirement funds, they open self-directed IRAs with Advanta IRA. They make an IRA-to-IRA transfer of funds from their brokerage accounts into their Advanta IRAs. Now they are ready to invest.
Making the Investment
Once their self-directed IRAs are opened and funded, Jen and Ryan locate a single-family residence for $150,000. The house would be a perfect rental after a few upgrades and repairs. They determine the renovations will cost about $20,000. Since they are partnering IRA funds to invest at a 50/50 ratio, they have ample funds to make the investment.
Advanta IRA’s investment process:
- To start the purchase process, Jen and Ryan submit the real estate contract and a Purchase Authorization form to their Advanta IRA account manager.
- The Advanta IRA account manager works with the closing agent or real estate attorney to ensure proper titling in the IRAs’ names on all documents. The deed will be titled as tenants in common between IRAs. Both IRA names appear on the deed as follows:
- Advanta IRA FBO Jen IRA #—— as to a 50% undivided interest and
- Advanta IRA FBO Ryan IRA #——- as to a 50% undivided interest
- Advanta IRA signs documents on behalf of both IRAs.
- Advanta IRA wires $75,000 of the purchase price from Jen’s IRA and $75,000 from Ryan’s IRA to the closing agent or attorney handling the closing.
- Advanta IRA stores all closing documents for the investment.
Paying for Renovations and Other Expenses
Once the purchase is complete, the renovations can begin. Any expense related to the renovations of the investment property must be paid with IRA funds. Since their IRAs have 50/50 ownership, half the repairs are paid from Jen’s IRA funds and half are paid from Ryan’s IRA funds. They direct Advanta IRA to pay expenses accordingly. Advanta IRA pulls equal amounts from each IRA to pay property taxes, insurance, maintenance costs, and any other expense related to investment.
Earning Tax-Advantaged Income
Jen and Ryan rent the property and receive $1,500 a month in rent. The tenants send their rent payments directly to Advanta IRA, where the rent will be evenly deposited between Jen and Ryan’s IRA accounts. The IRAs are tax-sheltered accounts and do not pay income tax on earnings from real estate. So, the monthly payments grow in the account month after month, providing additional capital to reinvest in the future.
Jen and Ryan decide to sell the property after five years for $200,000. Here, they capture an excellent opportunity to earn additional tax-sheltered income on their investment. All income is deposited into their IRAs equally, with no capital gains due on the sale.
Total Income Earned on the Investment
- Net rental income over five years is $90,000
- Profit from the sale is $30,000 ($50,000 profit from the sale minus the $20,000 in initial renovations)
- Total income from this investment is $120,000
- Their IRAs will split the proceeds from the sale 50/50.
Within a 5-year timeframe, Jen’s and Ryan’s IRAs each realized a tax-free profit $60,000 that they can invest in a future project. Neither Jen nor Ryan would have been able to afford this investment alone. Partnering IRA funds to invest in real estate increased their buying power and helped them earn a healthy return without the stress of worrying about the stock market.