The rich invest in real estate, but not how you would think
Most know that if you live in your primary residence two out of five years and sell your home, the profits, up to $250,000 are tax free. This is how most use real estate as an investment since real estate, on average, appreciates at roughly 3.5% annually. While better than a CD or savings account, the rich have another strategy they don’t want you to know about.
Before we go on, none of us here are financial advisors, lawyers or tax advisors, nor do we play one on TV, so before making an investment in real estate seek advice from professionals in their respective fields. While we aren’t experts in those areas, we are experts in real estate, especially the Rock Hill and Fort Mill markets and if you want to take advantage of what you’re about to learn, please reach out to us.
In 1997 the Roth IRA was established by the Taxpayer relief act. Ultimately, a Roth IRA allows you to put earned income into an investment and not pay taxes on the capital gains. The thought being you already paid taxes on the income, unlike a 401k or traditional IRA where you pay into them pretax. One thing most people don’t know about a Roth IRA is you can self-direct it. Another aspect that isn’t widely known is that a self-directed Roth IRA can hold assets such as real estate. There are specifics to this type of investment such as having to purchase property out of the funds in the account, expenses having to be paid out of the account and all profits having to roll back into the Roth IRA, but you really need to sit down with a tax advisor for more details.
Here’s how the scenario plays out: you set up a self-directed IRA and put $60,000 cash in it. You find a duplex for $40,000 and purchase it. All of your closing costs, expenses, inspections and the like must be paid for with funds from the self-directed IRA. At the end of the day, after making some upgrades and repairs, you have $50,000 invested in your new rental property. Once you start renting it out for $500 per side, since it’s a duplex, you have to deposit all earnings from the property back into your self-directed IRA. In just over four years, your initial $50,000 is back in your account. You take this $50,000 and do it all over again. Keep in mind you left a $10,000 dollar cushion from your initial investment for repairs and emergencies. When you’re ready to retire, sell every property you’ve acquired, absolutely tax free. This my friends is how the rich get richer.