An all-cash Roth SDIRA purchase, and where the funding timeline nearly breaks the deal

Take an all-cash Roth SDIRA purchase of a 2 bed 1 bath, 1,040 square foot house in a county seat town in the midwest, $118,500. Rents at $1,150, taxes $1,340 a year, insurance $890, property management at 10 percent. Leaving roughly $14,200 of cash in the account after closing, about twelve months of full operating expenses plus a $340 custodian fee, is the kind of reserve that keeps the account from needing an emergency capital call. What makes an all-cash Roth purchase work: no loan means no UDFI, no 990-T, no annual filing cost. Rental income and eventual gain compound inside the Roth entirely tax free. That's the whole thesis, and it's a deliberately boring one. Where these deals actually break is timing, and it breaks in two specific places. First, earnest money has to come from the IRA itself, not from the account holder personally, and the custodian needs a signed direction of investment plus a fully executed contract naming the custodian FBO the account as buyer. Agents used to writing contracts in a buyer's personal name routinely draft it wrong the first time, and re-papering it under time pressure is a real risk to the deal. Second, custodian wire timing is often quoted faster than it actually runs, three business days quoted versus six in practice is a common gap. Building in a contract close date well beyond the custodian's stated processing time, doubled, is the difference between a smooth close and a default on a tight 21 day contract. The detail worth remembering: everything routes through the custodian's name, the insurance binder, the utility deposit, the property management agreement, and each one requires its own form and fee.

tashaford30 SG2CPRO 16

Answer

samantha_ruizPassivePRO

The part that sounds easy in your post is the $14,200 reserve, and I want to push on it because you're describing it as twelve months of operating expenses. It isn't. Taxes, insurance, and the custodian fee run about $2,570. Twelve months of PM at 10 percent on full occupancy is $1,380. So you've got roughly $10,000 of actual buffer above known recurring costs.

That's a decent buffer. It's one HVAC system and one bad tenant turn, and then you're at zero with no ability to write a personal check to fix it. Your only refills are rent at about $700 a month net, a $7,000-ish annual contribution if you're eligible, or a rollover from somewhere else.

So the question is what the age of the roof and the mechanicals is. If the furnace is nineteen years old, you don't have a twelve month reserve, you have a bet.

The other variable I'd move is vacancy. At $1,150 rent and $215 a month of fixed carry, a four month vacancy with a $3,000 make-ready puts you down about $3,900 against a $10,000 buffer, and you can't fund the make-ready faster than the account can pay. In a taxable deal you'd just wire more money in. Here you can't, and that's the whole difference in how these need to be reserved.

What you did right was pad the closing timeline off the custodian's own written numbers. I'd steal that.

samantha_ruizPassivePRO

4 replies

nicole_adeyemi SS3APRO 13

The re-papering catch is the one that kills deals like this. Agents write the buyer as the person because that's the muscle memory, and by the time anyone notices there's a signed contract that the custodian won't fund against. What's the plan when a tenant hands the PM a check made out to the buyer personally? Because that happens, and the PM has to know to reject it and reissue.

nicole_adeyemi SS3APRO 13

diane_kowalskiServicePRO

Six days against a quoted three. Did they explain the gap, or is that just their normal?

diane_kowalskiServicePRO

priya_n21 PB2BPRO 21

$700 a month net into a Roth on $118,500 deployed, compounding tax free for twenty years, is exactly the version of this worth aiming for. Nice.

priya_n21 PB2BPRO 21

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