Purchasing a Home Using Your Retirement Account?

I heard you can own real estate in your retirement account!  Is that true?

Yep!  In fact, here is a personal story about myself (Gary) and my wife (Vicki). We recently purchased a rental home in my wife’s retirement account, and we think you should consider doing the same!

Like many of you, our retirement accounts were hit hard during the tanking of the stock market, especially the Nasdaq market.  Although that market has started to recover in the past year, we wanted to diversify, and recognizing the recent drops in the real estate market have created an opportunity to ride that market back up again, we decided to purchase a rental home using some of the funds in her retirement account.

To accomplish this, we first transferred her retirement account into a “self-directed” account, which includes real estate as an “allowed” investment.  We (her account) then purchased a single family starter home, 3BR/2BA, a cosmetic fixer upper, in Hayward. We paid $240,000 cash (financing is available, however), and we spent $20,000 fixing it up to make it rentable.  After two weeks, we rented it for $1600 per month. Subtracting insurance and property tax expense, we deposit the balance of $1300 per month ( a 6.5% return) straight into her retirement account, UNTAXED, making our return even higher.  And, we expect the home to appreciate over time, adding to the return and (hopefully) covering the buying and selling costs.   We think this is an excellent, safe “long term” investment, a wise use of retirement funds.

And it gets even better.  We’re now going to take advantage of “leverage” by putting a 50% loan to value against that home and using the funds to buy a second property. The positive cash flow will be reduced to $585 per month due to the payment on the 50% loan, but using the same investment numbers for the second home, we’ll have a positive cash flow on each of TWO properties now, bringing the total back up to $1170 per month into Vicki’s account.  AND, now we’ll own TWO properties which we expect to appreciate over time.

A few comments:

  • The loan on the home must be a “non-recourse” loan, as the loan is being made to the retirement account, not an individual.
  • The purchased property must have a POSITIVE cash flow.
  • If you hire a property manager, that cost will of course lower your return.  We chose to manage the home ourselves.
  • Please call us if you’d like to meet and discuss the specifics about how we can help you accomplish a similar purchase in your retirement account!  Although it can be done by yourselves, we hired anexpert on retirement accounts to open and help us transfer Vicki’s funds into a “self directed” account.
  • It does not have to be a single family home that you purchase; multi-unit properties tend to have even better cash flow numbers, but perhaps not the same potential for appreciation that single family homes provide.

By the way, because of the drops in prices for entry level houses (and some multi-unit buildings), this works
for buying rentals OUTSIDE of your retirement account as well, but you can’t take advantage of the
depositing the positive cash flow “untaxed”.