$45k in Roth, I can no longer make contributions...how to invest?

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$45k in Roth, I can no longer make contributions...how to invest?

Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes

So I've been sitting on $45k of cash in my Roth for some time now, and I can no longer make contributions due to IRS limitations.  I'm wary of sticking it into the stock market like I did since I graduated college in 2009 (cashed out on everything earlier this year).  But I also hate sitting on cash.  $45k isn't anywhere near enough money to pay cash on anything local (I'm in LA), but it's a large enough sum for me that I'd like to put it to good use and not let it get eaten up by inflation.

If I were a bit older and closer to retirement, I'm fairly confident that I would invest in notes, but since I'm still relatively young (27), I'd like to use time to my advantage and get in on future equity appreciation since time is definitely on my side here.  But if that doesn't seem prudent in the current market, I'll gladly invest in notes for the next 5 years, hope it all works out, and perhaps by the end of that cycle my account will have grown to $55,000 or even $60,000, and real estate is cheap again.  But of course that's all speculation.

I'm also toying with the idea of investing in an LLC that is currently offering a 2% interest in 10 cash-flowing Indianapolis properties in exchange for $10,000 with a 3-5 year exit plan. I'm still unconvinced, however, since I'd be roughly paying $1,000 for a 2% interest in each property, and I'm not sure that these 1,000-ft rehabbed houses in supposedly "gentrifying" parts of Indy will sustain a $50,000 current valuation and then some, at a clip of 3% per annum, as I'm told by the principles ;)

Thoughts or advice, anyone?

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Brian Fouts
Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
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Congrats on having some funds to work with, that is one of the main issues that many investors run into right out of the gate.

I would just be cautious of asking advice on what to do with the funds on BP, or anywhere online.  The advice is going to be based upon the goals/outcome of those giving the opinion.  you need to be sure to align your goals with someone who has already done what you are looking to do and follow their previous action.  But of course, that is just my opinion... :)

You could easily lend on real estate projects (be a private lender) depending on your Roth custodian and limitations therein.  Could get 12% or more, short term.

We have two investment funds, one pays 10% fixed, another pays 12% fixed, so finding a private investment fund could be an option as they are more passive.  In five years, that would be over $70k.  

You could buy a turnkey real estate property, rental property, etc.  Get good cap rate and possible appreciation. 

Regarding the low entry cash flowing properties, we have over 40 of them and really don't see a lot of appreciation in them due to the market they are in.  The cash flow may be okay, but value is fairly steady.  Just our experience, different markets behave differently.  

Buying notes, to me, is the same as buying real estate to flip, hold, etc.  Depending on how you buy notes, you still want to buy low, sell high.  We bought a lot of notes in the past, but not currently due to the market.  But that is all depending on your strategy, there is always a strategy in any market.    

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    Congrats on being 'rich and evil' enough to not be able to contribute to a ROTH @Logan Allec lol  Gotta work on getting more depreciation and tax benefits from some buy and holds maybe!

    To continue making contributions to an IRA, I believe you can still do back door Roths. Invest into a traditional IRA, then convert to a ROTH. Most do it right away, I believe. Or invest in real estate, of course. Cheers!

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
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    This is of course just my opinion and I am sure you will get some better ones. There are calculators on here for exact numbers to shoot for, but the rough idea is this.

    Put 20K down on two separate houses that retail for around 100K each and get a mortgage (30 year) around 3.5%ish

    Mortgage payment = 450

    Taxes (will vary but for a number) = 300

    Property management  = 130

    Capex = 150

    Total 980 a month

    Rent it out for 1300

    Profit $320 each X 2 = $640 a month between the two houses

    Of course if you could get loans for 10K you could do 4 houses etc. You are using the banks 3.5% loan to get you a better return because you qualify for it.

    Good Luck

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  • Brian Fouts
    Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
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    Congrats on having some funds to work with, that is one of the main issues that many investors run into right out of the gate.

    I would just be cautious of asking advice on what to do with the funds on BP, or anywhere online.  The advice is going to be based upon the goals/outcome of those giving the opinion.  you need to be sure to align your goals with someone who has already done what you are looking to do and follow their previous action.  But of course, that is just my opinion... :)

    You could easily lend on real estate projects (be a private lender) depending on your Roth custodian and limitations therein.  Could get 12% or more, short term.

    We have two investment funds, one pays 10% fixed, another pays 12% fixed, so finding a private investment fund could be an option as they are more passive.  In five years, that would be over $70k.  

    You could buy a turnkey real estate property, rental property, etc.  Get good cap rate and possible appreciation. 

    Regarding the low entry cash flowing properties, we have over 40 of them and really don't see a lot of appreciation in them due to the market they are in.  The cash flow may be okay, but value is fairly steady.  Just our experience, different markets behave differently.  

    Buying notes, to me, is the same as buying real estate to flip, hold, etc.  Depending on how you buy notes, you still want to buy low, sell high.  We bought a lot of notes in the past, but not currently due to the market.  But that is all depending on your strategy, there is always a strategy in any market.    

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Don't invewt in a property as an owner...do it as a lender from your SDIRA.  It's cleaner, and the property become the collateral.  No toilets, not SDIRA evry month.

    You are the underwriter, so you make the terms work for you...within the law.

    Thi is now the way we prefer to do it.

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
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    @Brian Fouts is absolutely correct. I did not properly preface my comments.

    If I had 45K sitting a burning a hole in my pocket I would do something like the following base on my future goals:

    Thank you!

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  • Brian Fouts
    Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
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    Oh, and since you said you have funds to invest, you are going to get people trying to sell you their program or product, so just be prepared.  

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  • Logan AllecBusiness Member
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    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
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    Thanks, all.

    @Steve Vaughan, good point!  Maybe I should pick up another property outside of my Roth before year-end so hopefully the depreciation gets me below the threshold amounts!

    @Mike Cumbie, is it even possible to obtain a 20% down mortgage in a Roth?  I was under the impression that most properties purchased in a Roth have to be paid for cash, or else put down a very high down payment with some additional complexities.

    @Brian Fouts, great points, I don't want to chase after someone else's goals because they convinced me that their goal is the only right one.  Could I lend with only $45k?

    @Joe Villeneuve, same question that I had for Brian...is $45k really enough to become a lender? When I hear "lender", I think some rich old moneybags, not a 27-year-old dude with $45k in a Roth IRA.

    @Account Closed, any elaboration?

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
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    When you borrow with your IRA, you will need to work with a lender who will structure their loan as a Non-Recourse Loan. There are a few we've identified - most will require 30% or more down, and most will only do 3 - 5 year ARMs. Some have restrictions on the types of properties they'll lend on. They'll also require you have a cash reserve in the account in the event you lose rental income. The mortgage payments are made by your IRA.

    When you use leverage to purchase an IRA property, the income generated by that investment property will be subject to a tax called UBIT - Unrelated Income Business Tax. You'll need a CPA to calculate the impact this will have on your ROI, but roughly the income attributable to the leveraged portion will be subject to this tax. For example, iIf you finance 40% of a purchase, roughly 40% of the net income will be subject to UBIT tax.

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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
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    Logan Allec 45k is not quite enough to lend in southern cal. Unless you want to be in junior position which in opinion is way to risky. But once you get around 100k keep it in mind
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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by :

    Thanks, all.


    @Joe Villeneuve, same question that I had for Brian...is $45k really enough to become a lender? When I hear "lender", I think some rich old moneybags, not a 27-year-old dude with $45k in a Roth IRA.

    Yes...in markets in the midwest....like I'm doing here in Michigan.

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  • Logan AllecBusiness Member
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    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
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    @Doreen Chaisson, thanks for the clarification.  It sounds like for the limited amount of bullets I have in my Roth, it makes more sense for me to not seek a mortgage and just pay cash for a property or invest in notes if I want to stay out of the stock market for a while.

    @Account Closed, would there be opportunities for me in LA if I combined all $45k of Roth funds with some of my non-retirement account funds to do a deal?  Or if I wanted to use my Roth, would ALL of the lending have to come from my Roth?  I know IRAs are tricky and have many rules and hoops to jump through, like Doreen mentioned above.

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  • Brian Fouts
    Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
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    @Logan Allec, yes, $45k is enough to loan on any real estate project, you just have to find the right investor.  We currently have a $350k rehab project and a private lender is lending $30k on it.  As a private lender, you don't have to lend the entire amount of the project, you could be a gap lender (not as secured, though), etc.  Our fund just accepted an investor with only $10k, but they are getting 10% fixed with no fees.

    Don't let the amount you have be a limiting factor, it is not.  You want to lend on one of our projects, feel free!  Kidding aside, there are a lot of investors that will utilize your funds, you just need to be sure to vet them properly and make sure you are secure.  As an example, we often offer first time investors on our projects additional collateral.  Since we own many other real estate properties, they will be secure via the property they are investing in, but they also get another property as collateral, so they are double secured.  

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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
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    @Logan Allec as he has a lot of experience in southern cal and can offer more advice.  

    Good luck!

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  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
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    Is your IRA self directed?

    Lending to investors is a great idea. While not enough to be the 1st position lender, especially not in California, if the rehabber obtains financing for the deal, your money would be a great asset to a reputable flipper to cover his/her rehab costs as a 2nd allowing him/her to do more deals. 

    You could lend to a landlord on a longer term basis. It would be a lower rate, but over time, it might prove to return a higher yield. I've borrowed lots of IRA money over the years and still have quite a bit in play now on my SoCal rentals.

    If you're active in the market, you could also use your IRA money as option consideration.

    As for an equity joint venture, I have a simple rule: Money earns interest, knowledge earns profits. I don't give away hard earned/uncovered profits on deals just because someone shows up with a check, and I highly advise others reading this to adopt the same philosophy.

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  • Marcus Johnson
    Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
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    So was your plan to be a short term investor in the stock market or long term investor?   The reason I ask is that if you think that because in 2008 we had the great recession where the market dropped 58% and trillions of dollars from investors were pulled out of the market due to fear.  Now the market has come back over 200%  from 2009 till 2014 and those investors lost out big time.   Here we are again in 2015 and the stock market is down 5% and people are nervous again.  

    The point is that if your a long term investor and track the S&P 500 (SPX) since 1994

     http://www.marketwatch.com/investing/index/spx/cha...

    Or you can move the chart to whatever your liking, but it has average 11% since inception.   Compound interest is our friend, so at 27 years old and 45k in a Roth, the average person has 30 years to save for retirement and if you made the average returns of 11% you'd have 1 million dollars tax free at retirement.    Also according to the rule of 72, your money doubles every 7 years on average.  

    If I were you, I'd leave the Roth money alone and save money to invest in Real Estate.  

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
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    A qualified financial advisor can help your sort out which plan of action is best for your personal situation.

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  • Adam Anderson
    Developer · Palm Harbor, FL · Member since 2015 · 307 posts · 96 votes
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    You might be able to make a non deductible Traditional IRA contribution and convert it to Roth. We do this with our clients all the time. It works very well if you have a 401k or other qualified plan at work and therefore can not deduct the Traditional IRA contribution anyway, and do not have any money in a Traditional IRA already.

    If your Roth IRA funds originated from only your contributions over the years or a Roth Conversion more than 5 years ago you can access 100% of your contrition's tax free for any reason at any age (see IRS Pub 590). The growth or earning can only be withdrawn after age 59 1/2 without penalty.

    Adam

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  • Logan AllecBusiness Member
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    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
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    Thanks @Account Closed thanks, I'll keep that in mind.

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  • Marcus Johnson
    Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
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    @Logan Allec

    I wouldn't worry about 6 of the worlds strongest companies carrying the S&P 500.  Your talking about Google, Apple, Amazon, etc..   That's a good problem to have.   That means the United States top companies are stronger then ever.   If your worried about nearly 80 years of 11% returns from the S&P 500, look into VTASX which is comprised of around 3000 of the top companies in the US which has averaged 9% since inception.  

    I am also a real estate investor, so don't get me wrong that I don't like real estate, it's just the passive income investing in the stock market is to hard to pass up.  When you have a rentals, which I do, we'd all like them to be passive, but whether you manage them or a company does, there are still problems that come up that require unknown amount of cash to be spent.    What I like about rentals is owning something I can touch and work on with my hands.   It gives me something to think about daily, whereas my index funds simply require no more work then contributing to them monthly or yearly.  

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  • Logan AllecBusiness Member
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    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
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    Don't get me wrong, @Marcus Johnson, I agree with you that the stock market is an amazing tool for long-term wealth building, and most of my net worth has been and currently is in the stock market, but at the moment I'd like to diversify into another asset class, at least for knowledge's sake.

    If I get 9% per year for the next 3 years by investing in notes, and the stock market averages a bit more, oh well, 9% is still a great rate of return.  And although it's not scientific at all, and I certainly can't predict the future, I have my doubts that the stock market will return much better than 9% per year for the next 3 years given the amazing run-up the past six years and the fact that interest rates having nowhere to go but up.  But of course I could be wrong, and if I'm wrong, I'll still be happy with my 9%.

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  • Brian Fouts
    Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
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    Just be careful talking about averages.  If the stock market averages 11% (which I don't buy at all, but that's just me having done a lot of research for myself and our clients), it doesn't necessarily mean that you are making 11%.  In fact, I just about guarantee that you are not averaging 11%.  That would be amazing.  But keep in mind that everyone views the returns, averages, and numbers differently.  Some take inflation into consideration, some don't.  Just because the S&P gets a certain return, your return is actually based upon what stocks you are invested in or how you are invested in the stock market.  Investing through a mutual fund, which most 401k plan are in, reduces your return over time dramatically.  Fees, compounded over time, have a big impact.  If you are investing direct in the stock market, you can do better of course.  Active versus passive and all that.  

    But, just my opinion. And I pulled my last bit out of the stock market 8 weeks ago (was in 401k and rolled it over to IRA). I've also had fixed return (10%) investments in other IRAs for over 5 years and they have massively out-performed the 401k WITH contributions.

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  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
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    Originally posted by @Logan Allec:

    Thanks @Account Closed, no, it is currently not self-directed, but I think that is my next step in my investing goals.  Is it risky to lend as a 2nd?  I don't exactly know what a reputable local flipper looks like or how to find one.  I've read on here about some people getting burned, so that puts me off a little.

    It can be risky. Just depends on the investor you're working with. I'd take a look at the property and comps. I'd also ask to see the last few closing statements. Look at the acquisition HUD and see what the private lenders on the deals have funded, what the investor paid for the property, then look at the closing statements and see that the private lender was paid off, what the sales price was and what the net to seller amount was. I'd also check the listings to see what price the investor listed the property for compared to what it actually sold for. That will give you a good idea if the investor is overly optimistic or judiciously conservative. I'd also look at the holding times to see how long the average deal was held. Lastly, I'd check to see what kind of cash reserves he/she has. I want my payments to be made on-time and if there are any surprises, I want the investor to be able to cover those with his/her own cash.

    Then, compare that research to the current deal to see if it is another duck in the row, or something outside of this investor's previous experience. If I were working with an investor who has flipped 100 entry level houses below $300K, I wouldn't be standing in line to lend him/her money on his/her first $700K deal. I'd sit back and watch the show and after a few of those closed, I might consider opening up my check book at that point. 

    I've lent lots of money to other investors using this same model. They'd obtain hard money or private financing and I'd cover the rehab. I just never lent my money to someone who is doing their first deal or only does a few a year. I want an "in the trenches" investor out there doing it full time. If it is a part-timer, there isn't that pressing need to get the property sold in order to get paid.

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
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    I have a similar problem; it is a "high quality" problem to have, but a problem none the less. My solution: wait until I see better opportunities in the market and/or build it up enough to buy a SFR rental in a good hood for cash. In the meantime, an alternate way to backdoor more money into your Roth is to Roth 401k and convert to Roth IRA, or traditional 401k and pay tax to convert to Roth IRA. Only problem is, you will likely need to quit your job before you can roll the funds. Or best yet, if you can claim self employment (easy to show "intent" to make profit to meet IRS requirements), solo Roth 401k. I'm not a lawyer, so keep me honest and double check everything.

    If the money is really burning a hole in your pocket and you absolutely must invest now in RE, then look at REITs, private placements (assuming you qualify as an accredited investor), Notes, Hard Money Lending as options ... the 1st 2 will be passive but require high trust in others, the last 2 require some specialized skill and knowledge to pull off successfully. Feel free to reach out if you want to discuss further.

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  • Logan AllecBusiness Member
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    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
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    Great advice, @Aaron Mazzrillo, thank you.

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
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    @Logan Allec,

    I'm with Joe Villanueve - roll it into a self-directed Roth IRA and use that to either acquire property or invest in other investors' deals.

    The folks in my investing group typically pay 12% to 20% or more for 6-month loans. Of course, we always look for no points and no payments, but everything is negotiable.

    I tend toward lending myself. When investing your retirement accounts into a property, you cannot do any "sweat equity" - EVERYthing needs to be hired out. You cannot benefit directly, you can only increase the value of your retirement account - your accountant or tax attorney can explain the details - I'm not qualified to do so. As I understand it, however, with a Roth IRA you may be able to withdraw the amount of the return, just not the principle itself, without taxes or penalties. Again, consult your financial professional(s).

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