Friend & Co-Worker Partnerships
Some clients of Blue Chip Realty don't have enough in their retirement accounts to afford a down-payment on any investment property by themselves. Others want to invest in something larger than a single-family home, such as a duplex or triplex. In both cases, a partnership is the answer. The IRS allows family members, co-workers and even friends to form an LLC and purchase investment property with their retirement funds. The percent ownership doesn't have to be equal, but does need to be documented.
Here are two examples highlighting how this could work:
In this first example, three co-workers decided to roll-over portions of their 401K's into a self-directed IRA owned by an LLC they formed called "Sonoma Smart." The light-blue row represents the entire LLC, while the three white rows underneath delineate the share owned by each of the three partners. Their "stocks vs. rental" gain is an extra $634K, as shown in Column N. (Note a few columns have been left out for brevity)
Note that this group decided to split their deposits and earnings on a 50-30-20 basis. Actually any splits are acceptable, as long as they are documented. Given the choice of waiting to have enough cash in your retirement account to afford an investment by yourself, or acting now and buy a place with a friend or co-worker, the numbers suggest to act as soon as possible since a leveraged asset (i.e. a rental) appreciates faster.
Friends Buy $1.8M Tri-Plex
The second example shows two friends pulling a combined million dollars out of their respective 401K's at the ratio shown in Column A and B. Their value difference of stocks vs. rentals (Column N) is $1.5M.
Splits don't have to be "even numbers." For instance, Kathleen and Sue could have decided to split 59.5% and 40.5%. As long as they add up to 100%. If you don’t have a friend or co-worker to partner with, BCR may be able to introduce you to someone that can!
Bottom Line: 401K/IRA Rental = Diversification + Safety + Bigger Nest Egg + 5x Greater Retirement Income