12 Strategies to Build Your Roth IRA With Smaller Real Estate Investments – Part I

By James L. Maxfield, Jr.

After a recent seminar presented to the Kentucky Real Estate Investors Association in Louisville by CamaPlan Principal Carl Fischer, real estate broker and investor James Maxfield initiated a discussion session to outline and highlight some creative strategies on how to use self-directed IRA retirement funds to grow accounts quickly. The following strategies have been used by many investors. Some are more common than others, but they all work especially well for investors with new or smaller IRA accounts of generally less than $10,000 of cash to invest.

However, before we continue with some good strategies how to build your IRA account, you should dispel the idea that IRA investing must be for long-term holding. In fact, the only way to build your account quickly is to turn transactions and profits over quickly. So you will probably not be doing all tax-free or tax-deferred transactions if you reach “dealer” status. Consult with your tax adviser and IRA custodian about this important tax issue. However, do not be that concerned about it either. Just do your deals and make money; if you have to pay some tax, so what? You will still build your IRA and your net worth.

Strategy 1: Partnering with Yourself

At first, many IRA “newbie” investors don’t realize that they can purchase an investment with funds partly from their IRA and partly from personal funds or other equities. The general guideline for this is that your personal investment and your IRA investment should be about equal and that the investment could have been purchased solely either with your IRA or by you personally. So if you want to make an IRA investment and you don’t have enough cash in your IRA, split the investment into two parts and use about half personal cash and half IRA funds to make the transaction. This is not difficult and may just require one or two extra forms for your IRA custodian.

Purchasing a discounted note and splitting the note into two smaller notes—one for your IRA and one personally—can also be done. Partnering with oneself in this manner should not draw any IRS scrutiny as long as your personal investment percentage is about half or more of the asset value. Partnering with another IRA investor or any other cash investor is also possible if you are short of funds in your own IRA to complete a transaction. You can partner with one or more investors on a project. The other investors can use personal funds or IRA funds; it does not matter (I suggest you consult your tax or legal advisor about how many partners or limited partners you partner with in a transaction—you should be okay up to 9 or 10 without running into additional “syndication” legal rules and reporting requirements). In this manner you can syndicate the property ownership. This is also an excellent way to purchase a property for a cash discount and have no debt.

Strategy 2: Securing and Selling Options on Houses

Finding and flipping options on houses when your IRA funds are small is still very possible. Just look for good opportunities for houses owned by motivated sellers. Negotiate an option on the house for your IRA and sell your option to an investor who has more cash resources. You can either build up a list of potential cash investors over time or you can find them by becoming a member of a local real estate investor’s association, or other like-minded IRA investors can be found at various IRA client networking functions sponsored by your IRA custodian company or by becoming a free subscriber of IRA Assets News to find opportunities for small-group joint investing or private IRA funds to complete your project or transaction.

Strategy 3: Marketing Options of Land and Building Lots

Finding and flipping options of vacant lots, raw land and farmland can also be accomplished with small amounts of IRA cash. Flipping options on residential building lots, raw land, and small farms can be just as easy and profitable if you take time to learn about each type of property and develop a network of builders, buyers, and developers. Vacant land specialist, John, looks for land or lots that seem under-valued for some reason (most sellers over-value their land). When John finds a good opportunity, he will try to secure an option on the property for a small amount of money for as long a period of time as he can negotiate. The option payment should also count toward the purchase price if the option is completed. Now he controls the property and can resell it to a cash investor or developer or even a retail buyer.

Strategy 4: Become a House Wholesaler

Wholesaling houses has become an occupation and preferred strategy by a few investors in some markets with a high-percentage of rental housing. This investor strategy is similar to flipping options on houses. However, in this case, the investor actually completes a purchase contract that may be subject to closing the transaction in 30 to 90 days. Then the “wholesaler” calls his list of cash investor contacts and rehab contractors to resell the house to them. The wholesaler does not repair houses—he is just a middleman. I am told from discussions with rental house wholesalers that when they contract for a house in poor condition, their profit is expected to be about $2,500 to $7,500 per house—depending on the value of the house. These homes are usually vacant properties in very poor condition (often foreclosures or abandoned homes) that may require $5,000 to $50,000 of renovation work to be saleable (please note – buyer beware! Be sure the market values will support the amount of work required to make a house ready for rent or for sale. Some houses must be scraped off and are not even worth their lot values. Also beware of unpaid back taxes and code violations that you must assume on these “good” deals).

So for the small IRA investor interested in developing a wholesale business, for some modest costs and up-front deposits or option payments from your IRA you can generate a quick, small profit. In some areas with many rental properties in poor conditions, wholesale investors can sometimes complete one to five or more transactions per month. Even if they only make $1000 per house for this activity, do the math. A $1000 cash deposit on a contract that returns the deposit plus a profit of $1000 is a 100% annual return. You doubled your money. But if you flipped the house to your cash investor in two weeks, your time value return-on-investment is actually 2,400%. At current CD rates, it would take you about 50 years to earn that same $1000 profit as you would make on one quick property wholesale deal.

Strategy 5: Bird-Dogging for Other Cash Investors

Bird-dogging for 10% to 50% of a transaction is something that an inexperienced IRA investor can do to get stared. This also can be thought of as working with a mentor. It is similar to flipping and wholesaling. The main difference is you are only doing the “grunt work” of researching and finding an opportunity and bringing in another investor to set up the transaction with him experience and money. Depending on your relationship with your investor-partner, he may agree to pay you a profit-sharing fee of 10% and up to 50% of the future profits of the completed property rehab or resale. The “bird-dog” investor generally uses none of his own money, only his time. But to get your profits into your IRA, you will need to put something from your IRA into the deal—even if it is just $100 cash or perhaps paying for the point of sale inspection or something (consult with your IRA custodian advisor about this).

Strategy 6: Become a Vacant Lot Dealer

It is not difficult to set yourself up as a “dealer” of vacant building lots that you can option or purchase at a large discount. Buying cheap building lots and using them as down payments on small residential rental homes or rehab projects is another strategy that can be used effectively by the small IRA investor. These lots can be found in plenty of seasoned and mature large developments scattered across the country. I am referring to developments of 500 to 25,000 lots, not local subdivisions put in by local builders and smaller developers. Retirement developments in good climates with amenities that are good locations for second-home buyers or retirees, such as Florida, Tennessee, the Carolinas, and even Missouri and a few other states are good places to start.

After you purchase a lot for cash with a good discount, you have several choices. The first strategy is to sell the lot at a retail price with a down payment and carry the financing in your IRA. Try to get most or your entire cash purchase price back as the down payment and take all of your profit and interest income as tax-free payments to your IRA. Another strategy is to use your lot at its retail value as a down payment on a small rental house. The balance can be either cash from another source or seller non-recourse financing.

Strategies 7-12 are presented in 12 Strategies to Build Your Roth IRA With Smaller Real Estate Investments – Part II

Disclaimer: Information, ideas, or opinions in this article are not intended as legal or tax advice. Please consult your legal or tax adviser as well as your IRA custodian for specific questions about your intended transactions.

James Maxfield is an real estate exchange broker with over 35 years of experience and the author of an upcoming book that will detail and provide examples of more than 100 creative real estate formulas and exchange transaction strategies. He is also a regional marketing consultant and representative for CamaPlan Self-Directed IRA. He can be contacted about this article at or If you would like more information about how self-directed IRA plans can be used for developing your personal retirement plan, please contact James Maxfield at 440-229-7454.

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