Didn’t know you could invest in real estate through your Individual Retirement Account?
Last week, we took a quick look at the growing practice of acquiring real estate for a self-directed retirement accounts.
This week, let’s take a peek at a real example of how a 40-something couple got it done.
Terry and Molly Rausch, high school sweethearts who grew up on a mountain lake and got married during a huge gathering on its western shore, used real estate IRAs to acquire a large waterfront parcel they knew would appreciate tremendously in the next 20 years.
Charley Stevens had lived in a small cabin on the lake’s south shore for as long as anyone could remember. The lake road bisected his property, separating the steep uphill portion above the road from the short waterfront parcel that held his cabin. One day, out of the blue, the property was listed for sale.
The property, with 188 feet of waterfront and a skeleton dock, stayed on the market for years. The listing price came spiraling down from $170,000 to $149,000 to $129,500 and finally to $99,500. More and more people came to look, but the last price reduction, made in the dead of winter, caught nobody’s attention. Desperate for some cash to renovate a home, the estate contacted an auction house that specialized in recreational property.
The property was placed in the company’s spring catalog for $79,500, – just inside the company’s policy of only accepting properties with a listing price equal to or less than 80 percent of the last listing price.
The Rauschs, both 42, were more than well-acquainted with the property and had scrambled up its slope as kids. The problem was money – they didn’t even have enough for a down payment. And if they borrowed the down from another family member, how could they afford the monthly payments on the note, given the financial demands of their young family?
What they both had were IRAs. Molly had a mutual fund that was not performing in stellar fashion, while Terry had some high-tech stocks that were high flyers at the time. The couple started their IRA contributions at the same time.
The approximate value of Terry’s was $37,000, while Molly’s was about $35,500. They had heard about a real estate IRA from a college classmate, then called a branch of a national lender to inquire about the possibilities. The bank’s trust department did not handle such affairs, but referred them to a smaller, in-state lender. Terry Rausch knew all about the bank. It had a branch, one of 38 statewide, in his hometown and had been in business for more than 50 years.
The auction company then sent a title report, and the Rauschs were intrigued to discover how Charley Stevens’ property was divided. The spread had six, separately deeded lots – three on the waterfront side below the lake road and three larger lots on the uphill portion. The trust officer at the bank, who also knew of the lake but not the actual property, felt confident there was sufficient value in the land to justify at least a $70,000 purchase price.
In order to fulfill a “due diligence” requirement, she requested a market analysis from the real estate agent who had originally listed the property for sale. That analysis was returned with a $129,000 value.
The trust officer suggested the couple purchase the property by contributing $70,000 from their IRA accounts. Terry Rausch would pitch in $37,000 and take three lots, while Molly Rausch would contribute $33,000 and take the other three. That way, the property was purchased for all cash, and would raise no red flags with the IRS.
The couple sold their assets and transferred to the community bank. The trust officer provided the couple with compliance documents required by the U.S. Treasury and FDIC for self-directed IRAs. However, the service was not cheap; the bank charged a 1 percent annual fee on the market value, with a $500 minimum fee on any balance.
Because the market analysis had shown the market value to be $129,000, the Rausches had to pay $1,290 per year for the service, or $645 per account. In addition, there were the usual property taxes and association fees.
The offer – $70,000 all cash in 30 days – was quickly accepted by the seller. The couple soon owned 188 feet of waterfront on a lake they knew would appreciate. In a few months, they conducted a successful lot-line adjustment that gave them two, 94-foot-wide buildable waterfront lots (the county minimum was 90 feet) that could share the same septic system drain field.
When the time and price are right, the Rauschs will sell the property and reinvest the funds elsewhere. That way, their IRA will be liquid for their retirement years.
Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill) was written with John Tuccillo, former chief economist for the National Association of Realtors and is available in local bookstores.