Financing Rental Properties to Get the Most Out Of Your IRA

Guest post by Gregg Cohen:

Savvy investors are becoming aware that it is possible to buy properties in your retirement accounts. However, many people have no idea that financing rental properties in your retirement accounts is also possible – and very powerful! 

For the right situation, financing rental properties in your IRA can be equivalent to wealth-building on steroids. It works for a traditional IRA or a Roth IRA and the effects over time can be huge for your retirement accounts.

Here’s how it works:

Let’s say you have $150,000 in your Roth IRA. You would like to buy a rental property that costs $120,000. You are 40 years old and don’t expect to touch that money for another 20-25 years.  You will be able to buy that 1 house without using financing and earn roughly $700 a month in positive cash flow. That property will appreciate over time. You won’t have to pay any taxes on the income generated.

Now, let’s say you used the power of leverage in your IRA. You have $150,000 in your Roth IRA. You now can buy 2 rental properties that cost $120,000 each. You only had to put 50% down on each one!

At the time of retirement in 20-25 years, you now have 2 assets that are owned free-and-clear and are generating a total of $1,400 in passive monthly income which will supplement your retirement. And, of course, you still don’t have to pay any taxes on the income generated.

Here’s the catch:

When you use leverage in your IRA, both investments will be cash flow neutral for the first 12 years.  The loans made to your IRA are designed to be heavily weighted toward an early payment.  Of course, the rates will be much higher than what you would expect from a conventional mortgage as well because there are only a small handful of lenders willing to lend to an IRA.

In our hypothetical scenario, you weren’t planning on touching the money in your IRA for decades anyway, so the consequences of an initially neutral cash flow are negligible, since the investment is still profitable in the long run. It is about delayed gratification; if you can wait 12 years with no positive cash flow, you’ll wind up with twice the positive cash flow in years 13-25 (and beyond), and you’ll have two assets that are completely owned free-and-clear (and which will appreciate over time.) You’ve just maximized your Roth IRA!

As a side note, for any investors who already have purchased a rental property in their IRA in the past but weren’t able to finance at that time, you are still in luck. You can refinance your current rental property at 50% loan-to-value in order to acquire an additional rental property. This means there is a good chance you could acquire another rental property in your IRA now without having to use any more of your IRA funds!

If you’d like to learn more about maximizing your IRA through financing rental properties, the JWB Real Estate Capital team may be able to help. JWB assists clients in building a portfolio of passive income through rental properties located in Jacksonville, Florida. JWB provides a full-service approach and has all aspects of the investment under one roof including an in-house property management team. You can reach the team directly by calling 904-677-6777 or by emailing Victoria Smart at victoria.smart@jwbcompanies.com.

Gregg Cohen is the CEO of JWB Real Estate Capital. JWB Real Estate Capital serves clients in 12 countries and 37 states by helping clients build a portfolio of cash-flowing rental properties to create consistent, passive income streams. JWB has been recognized in the Wall Street Journal, New York Times, Bloomberg & Inc Magazine and other national publications. Learn more about JWB at www.JWBRealEstateCapital.com or call or email our office at 904-677-6777 or info@jwbcompanies.com.

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