All-cash Roth purchase closed, though the funding window nearly ate it

Closed on a 2 bed 1 bath, 1,040 square feet, in a county seat town in the midwest. $118,500 all cash from a Roth SDIRA. Rents at $1,150, taxes $1,340 a year, insurance $890, PM at 10 percent. Left $14,200 of cash in the account after closing, which is roughly twelve months of full operating expenses plus the $340 custodian fee.

What went right: no loan, so no UDFI, no 990-T, no annual filing cost. Rental income and eventual gain compound inside the Roth. That's the entire thesis and it's a boring one.

What nearly broke it was timing, twice.

First, earnest money. $2,000, and it had to come from the IRA, not from me. The custodian needed a signed direction of investment plus the fully executed contract with the buyer listed as the custodian FBO my Roth. My agent had already drafted it in my personal name because that's what she always does. We re-papered it in a day, but if the seller had been difficult about a re-signed contract on day two I'd have lost the deal.

Second, the closing wire. Custodian quoted 3 business days from receipt of the funding request. It took 6. Title company was fine about it because the seller was moving to a care facility and had no competing offer, and I'd padded the contract to a 35 day close for exactly this reason. If I'd agreed to 21 days I'd have been in default.

One thing I'd keep: I asked the custodian, in writing, for their processing times per document type before I made an offer, and I built the contract dates off their numbers plus 100 percent. That padding is the only reason this thread is a win.

One thing I underestimated: everything routes through the custodian. The insurance binder is in their name. The utility deposit is in their name. The PM agreement is signed by them. Every single one of those took a form and a fee.

Answer

1samantha_ruizAU4APRO6

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.

4 replies

1nicole_adeyemiPassivePRO5

The re-papering catch is the one I see kill deals. 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 your plan when a tenant hands the PM a check made out to you personally? Because that happens, and the PM has to know to reject it and reissue.

2diane_kowalskiPassivePRO9

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

1priya_n21PO1C

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