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Case Study: Bonnie & Tom Buy Real Estate

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Bonnie & Tom have always known they wanted to invest in real estate. They heard their financial advisor talk about portfolio diversification for years, but weren’t sure how to invest outside of the stock market. A friend of the family referred Bonnie & Tom to Nabers Group to see if there would be a way we could help. Their friend, Jackie, is a client of Nabers Group. Our team set up Jackie’s Checkbook IRA LLC back in 2009 and she had seen great success growing her portfolio through passive real estate investments.

We sat down with Bonnie & Tom to learn more about their situation, their goals and to see how we might be able to help them take control of their financial future.

Client Background

Bonnie is 61 and Tom is 63. She worked as a math teacher in the public school system for 24 years. Her husband Tom was an accountant at a Fortune 1000 firm. After a long a fruitful career, Bonnie retired in late 2016 and has a 403(b) plan she’s been investing in for quite some time.

Tom has a 401k with his current firm, and a 401k plan from a former employer. Both Bonnie & Tom have traditional IRAs they’ve been contributing to as well. After discussion with Jackie, Bonnie & Tom began to wonder if they could setup a self-directed IRA with an LLC in order to invest in real estate.

Launching a Small Business

Because of their math backgrounds, the couple often took small consulting jobs helping their friends and local businesses do their tax planning. Bonnie would also do math tutoring over the summer to get a bit of extra income. They decided to form an LLC with the two of them as members. This way, they could legitimize their small business and get to write off some expenses.

The new LLC didn’t have many clients, but was making enough income to pay some bills at home, even after Bonnie had retired. As a result, they were even able to take a couple small trips with the earnings from their side business.

During our consultation, we discovered that while the Checkbook IRA is a powerful vehicle, the Solo 401k would ultimately serve Bonnie & Tom more in their goals. The pair qualify for a Solo 401k because they own a small business. Their business does not have any full-time W2 employees. They qualify for the Solo 401k even though Tom is still working full-time as an accountant for his firm. The IRS allows individuals to contribute to multiple 401k plans at different employers at the same time.

Getting Started

Tom & Bonnie set up their plan with Nabers Group. They completed the setup online which took about 10 minutes. Our team obtained a new tax ID number for their 401k plan, had their documents prepared and delivered about 2 hours later. They downloaded their documents from the Nabers Group Solo 401k portal, and were ready to fund the plan!

Rolling Over Funds

Bonnie & Tom used our unique software to type in their retirement plan details  and receive customized rollover packets. Bonnie rolled over her entire 403(b) plan and her IRA. Tom is still employed at his current firm, therefore he can’t rollover the current employer 401k. However, he rolled over his past employer 401k plan and his IRA into their Solo 401k.

All said, they rolled in about $180,000 to their new Solo 401k plan.

Further, Bonnie & Tom opened a bank account in the name of their Solo 401k trust. They deposited the rollover checks into the 401k trust bank account and had complete checkbook control.

Finding the Deal

Bonnie & Tom were active on a few real estate-focused forums. They even attended a local seminar to learn about finding deals. Their plan was to find a property worth about $200,000 and use a mortgage. With some education and guidance from the Nabers Group team, Bonnie & Tom knew they could obtain a non-recourse loan on the property. Typically, non-recourse lenders will ask about 40-50% down, as they carry all the risk. There is no personal guarantee with a non-recourse loan. Only recourse in the case of a default is to take the property in question. No other assets from the Solo 401k, or personal funds are affected as a part of the investment.

Bonnie & Tom decided to go with a turnkey property company who had great reviews. Moreover, the company specializes in working with self-directed retirement accounts and already had non-recourse lending built right into the deal. The pair looked at photos of a few properties and reviewed the numbers. This due diligence process helped them identify a deal right for their portfolio and risk tolerance.

Completing the Investment

Because the non-recourse lending was already built into their deal, Bonnie & Tom saved a step in finding a hard money lender, bank or private lender to write the loan paperwork. Bonnie & Tom chose the property they wanted and signed the paperwork. The property costs $200,000 and Bonnie & Tom are putting down 40% as part of their non-recourse loan. They invest $80,000 and the remaining $120,000 will be a mortgage in the name of the 401k trust.

The property is titled in the name of their 401k Trust. Just like the bank account, the closing paperwork uses the tax ID number for the Solo 401k trust as well.

Tom sent the wire from his 401k trust bank account to the closing table. After the closing paperwork was signed, the deal was done!

Rent Checks on Repeat

A property manager handles the day to day goings on of the investment. The property manager finds and screens tenants and collects rent. Bonnie & Tom also arranged for the property manager to pay the mortgage payment to the non-recourse lender. The rent checks arrive in their Solo 401k trust bank account every month. Any expenses or repairs on the property are paid for with 401k trust funds. This way, the retirement funds remain separate from Bonnie & Tom’s personal funds.

All expenses and repairs on the property are done by a third party, usually hired by the property manager. Furthermore, this avoids any prohibited transaction from the account holder doing “work” on the property owned by the trust.

Above all, the investment property provides growth for Bonnie & Tom’s Solo 401k and retirement plan. They continue to get cash flow income from the property and the investment appreciates. Remember Bonnie & Tom funded their Solo 401k from initial rollovers totaling $180,000. They spent $80,000 to buy their first property and still have another $100,000 to invest in another property or investments.

They will continue to contribute new money to the Solo 401k from earnings in their side-business LLC.

Once the cash flow stream is big enough, Bonnie & Tom hope to acquire another property!


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