Learn From Your Mistakes

One of the key differences between successful long-term investors and those who aren’t is that successful investors learn from their mistakes and make a commitment to never making the same mistake again. Even when a mistake results in a large and painful loss, it’s necessary to take a step back and review the actions that led to your loss. Learning what went wrong in your thinking or your planning must be reviewed so you can educate yourself on what to do better next time.

Also, never compound the errors you made by taking bigger risks in an effort to recover your money. This is addictive gambler’s behavior, not rational and emotionless investing, which is the best way to make decisions. Determine where you went astray and ensure you avoid the same mistake in the future.

Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will have the challenge of overcoming fear and greed. Fear can cause you to run for the exits when markets decline or your portfolio starts taking losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big score. By recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline. Taking unnecessary risks can quickly destroy your portfolio.

In today’s markets, a successful long-term investment strategy can often benefit from flexibility and proper diversification. Diversification is one of the pillars of modern investment theory and can be a powerful tool for reducing certain types of risk in your portfolio. Be sure your overall portfolio contains a variety of quality investment types, including stocks, bonds, international securities, and a few alternative investments, but only if your risk profile and investment goals support them.

No matter how careful or prudent you are, you cannot predict or control future market movements. Investing by guessing and predicting is also likely to leave your ship beached. Much of the market’s volatility has been driven by economic events that are outside any investor’s control. Global economic events, natural disasters, and government activities can all cause large-scale market movements. While an investor can’t diversify away from all forms of risk, a flexible strategy can help you find investment opportunities in many different market conditions.

Since it’s impossible to predict these events, it’s important to implement an investment strategy that diversifies by industry, by risk level, by country, by investment type, and by other factors. While diversification can’t always protect your assets in times of widespread market declines, by spreading investment risk among a wide variety of securities, any one part of your portfolio may not have as much ability to bring down the value of your entire portfolio.

Working with a Certified Financial Planner® (CFP) can help avoid emotional decision-making and many other pitfalls commonly encountered by amateur investors. It’s the CFP’s job to remain focused on the long-term strategy and act as a voice of reason when emotions run high. In today’s world of high-tech investing, major financial decisions are only a click away and investors pay a high price for short-term thinking. A Certified Financial Planner® is often invaluable for answering questions, providing reassurance, and keeping financial strategies on track despite volatile conditions. A CFP is a trained professional with experience…hire the best fee-based one you can find to guide you with your investments. Why would you trust your financial future to chance?

At Synergy Financial Management, your financial goals are our priority. We start by listening to your plans for the future, and then set your dreams into short, midterm, and long-term goals.

We then create a financial plan to achieve your goals, and monitor and manage your customized financial plan for steady but cautious growth, loss protection, limited taxes, and estate preservation … assuring your financial future.

Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement.



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452



Portfolio Performance and Measurement Reporting

Do you receive regular portfolio performance reports (not account statements) that clearly measure your performance against the appropriate benchmarks and disclose exactly what you pay for the performance of your investments?

In order to make good financial decisions, it’s important to remove emotion from the picture. The only way this can be done is to:

  1. Set clear and realistic goals
  2. Create meaningful measurement
  3. Have defined consequences for failure

Most investors do not set clear and realistic goals…so there is no meaningful measurement, and no defined failures or consequences.  This contributes to decisions being emotional in nature, which is often a potentially devastating flaw.



Set Clear and Realistic Goals; Have an Investment Policy Statement

An Investment Policy Statement (IPS) should contain at least the following information:

  • The time horizon for your investment strategy
  • The income needs from your investment amount
  • A decision-making policy for how investments will be made
  • An asset allocation (diversification) model your investment will follow
  • A provision for how frequently and how your investments will be monitored and reviewed
  • A realistic rate of return goal which is relative to an appropriate benchmark

Without an IPS, there is no clear communication about what is expected and how those expectations will be met. Investing without an IPS is like driving across a foreign country with no map, no directions, and no preferred destination. It could be an adventure…but may not have the desired results!

For Meaningful Measurement, Use Portfolio Performance Reports

Monthly statements are not adequate for most reporting. High-end private asset management firms to the very wealthy use customized performance reports, typically issued at least quarterly. They should contain detailed performance summaries so you know exactly your precise rates of return:

They should also contain detailed and simple descriptions of your asset allocation, to ensure your balance is accurate, as required by your IPS:

The reports should also show each holding in each account that composes your total investment portfolio. This way, whether you have 1 or 100 accounts, you’re always looking at the big picture and can easily determine if you are achieving your goals.

Many firms are hesitant to provide this type of service as it is both expensive to administer as well as too revealing of the true results each investor is obtaining.  Without this type of reporting, however, it is impossible to determine accountability. At Synergetic Finance, we issue these reports and provide customized service that clearly advises our clients on the true performance of their portfolios.

Consequences for Failure – Hire Slow and Fire Fast

There has never been an argument for why a company should fire slowly. If they did, many would go out of business due to lazy or dishonest employees, or simply from an economic slowdown. Investors should react no differently if their portfolios are not doing what they were intended to do.

As an example, if your Investment Policy Statement says your time horizon is 3 to 5 years and your rate of return expectation is to exceed the S&P 500; you should give your chosen investment plan three years to confirm whether or not it is reaching its stated goal.  If it is not, you need to make a change. Giving an investment strategy three years to perform is ample time to determine whether or not it is meeting most of your goals. The key is to follow through on your plan, be methodical, and not let emotion interfere with your better judgment.

We hope this article about investment principals was informative. Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452


How Good Are Your Investments…Really?

Most investments are not very good.  One of the more common investments today is mutual funds. As a whole, mutual funds are a great idea and can work very well…but the very rich generally don’t use them. There is good reason for this. Deferred annuities are also popular. They come in many varieties and most sound too good to be true. In this case, the most successful money managers do not use them.

John Bogle, Founder of Vanguard Funds, Explains the Costs of Mutual Funds

John Bogle was asked by an interviewer from the TV program Frontline, “What percentage of my net growth is going toward fees in a 401(k) plan?”

Bogle replied, “Well, let me give you a little longer-term example. An individual who’s 20 years old today is starting to accumulate for retirement. That person has about 45 years to go before retirement — 20 to 65 — and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that’s 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow…to around $140,000.”

He continued: “Now the financial system — the mutual fund system in this case — will take about 2.5 percentage points out of that return, so you’ll have a net return of 5.5 percent, and your $1,000 will grow to approximately $30,000 to you, the investor.”

“Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return. And you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That’s a financial system that’s failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, which investors face today. So the system has to be fixed,” said Bogle.

In other words, the longer you invest, the more the investment house makes. That’s why the financial institutions recommend you invest for the long term.

Choose the Right Advisor.

If you have an investment portfolio of $250,000 to $500,000, there are a lot of suitors for your business. If your portfolio is $500,000 to $2 million – the potential managers will line up. If your portfolio is $2 million or greater; most will practically beg. You are always in the driver’s seat even if you don’t have an 8 or 9 figure portfolio.

Here’s a short list of the professionals who will likely be offering their services to you:

Bank Money Managers – Inside the banking industry are thousands of money managers.  This would lead one to believe there should be hundreds of very suitable options, but it may actually be the contrary. Within the industry, banks have a historied reputation of paying employees less than industry standards.  In a highly competitive and lucrative field, it is hard to attract and retain high quality employees with low paying salaries…which begs the question:  If bank managers were really good, why would they be working for the bank?

Brokers and Financial Planners – There’s one obvious reason many wealthy investors look elsewhere for investment management. The reason is that most are very talented salespeople and they spend the majority of their time selling, i.e., looking for new clients.  Most would agree that the people responsible for managing your money should not consume the majority of their time selling, but thinking instead about how to better manage your money. In order for most brokers and financial planners to earn a good living, they must be well-trained at managing relationships and selling – so there is little time for portfolio management training, even for those who’ve been in the industry for many, many years.

Private Wealth Management – This is the preferred method for many wealthy investors.  When working with a private wealth management firm, the financial planning and asset management are done at the same location and done exclusively on a fee-only basis. There are multiple professionals that each have defined responsibilities, so receiving good service from someone who only focuses on good service is not an issue; yet having access to the money manager is also available. By having the varying components of the wealth management team in the same location, it is very easy for these professionals to interact and provide seamless service with a high level of customization.

We hope this blog has provided some new information that will help you become a more careful and focused investor. We also hope we have made our point about seeking substantial investment advice from a Certified Financial Planner®.

At Synergetic Financial, your financial goals are our priority. We start by listening to your plans for the future, and then set your dreams into short, midterm, and long-term goals.

We then create a financial plan to achieve your goals, and monitor and manage your customized financial plan for steady but cautious growth, loss protection, limited taxes, and estate preservation … assuring your financial future.

Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!


Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452


What Is Your Portfolio’s REAL Return?

To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes and inflation on your returns. Many posted investment returns explicitly exclude the effects of fees, which come right off the top of each year’s gains. It’s important to dig deeper and find out how much that performance is costing you each year so you can decide which investments will serve you best.
Taxes can also take a serious bite out of your investment gains each year so it’s important to structure your investments to account for taxes on capital gains, dividends, and income. Taxes should not be the primary driver of an investment strategy, but incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, structuring your investments so that taxable investments can grow in a tax-deferred account may be an option. Synergy Financial Advisors can help you with this.
Inflation, which is the erosion of your purchasing power over time from increases in the cost of goods, is another insidious force that can eat away at investment growth each year.
An investment strategy that fails to account for the effects of fees, taxes and inflation on overall return will severely handicap your ability to increase your wealth over time because if you do not build these factors into your investment plan, you will lose your most valuable commodity…time.
After some research, you may find that an investment with a lower return may actually have a higher total return once you account for taxes, fees, and inflation.
A candy bar that cost 25 cents in 1975 costs over a dollar today, due to the effects of rising prices. That same candy bar would cost approximately $1.30 in 2020 if there is annual inflation of 4% per year. Consumer prices have risen each year in the United States. Since the U.S. Department of Labor began tracking consumer prices, the average annual inflation has been 3.22% each year, which means that what cost one dollar in 1913 costs $23.51 today.
To put these numbers in the context of investments, an assumed inflation rate of 4% will reduce the value of a $100,000 portfolio invested today to approximately $67,500 in just ten years; this means your investments would have to grow to $148,000 during that time period … a 48% gain … simply to keep pace with inflation…and this number doesn’t include the effects of taxes and fees on investment performance.
Another good axiom to remember is that it is usually wise to avoid following the herd. By the time your friends, family, neighbors and the newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit you because the hype has already inflated the price. Whenever investment dollars rush in, prices soar and savvy investors usually move on. By the time the mass of average investors have caught on to a new fad, prices are often too high and investments are overvalued, making them a poor choice for investors seeking value.
The herd mentality is a well-documented pitfall among investors and it can have striking consequences for investment performance. Investment clubs, which were popular during the 1990s, were studied with regard to the dangers of group-think. These clubs, composed of amateur investors, often favored certain sectors and investment types to the exclusion of all other types. Researchers found that portfolio returns of investment clubs lagged the S&P 500 index by 3.7% per year, meaning that members did worse as part of the group than the market overall during the same period.
When you seek financial advice, select and work with a Certified Financial Planner®. A Certified Financial Planner® has the training and experience to professionally guide your investment decisions. We recommend you hire a CFP® who is independent and not associated with any investment company so you receive only unbiased recommendations. Your CFP® should also be fee-based, not commission-based, so you know your financial advisor’s priority is solely your best interests.
We hope this article provided insights about the value of reviewing your investment portfolio’s actual performance to make sure you receive the best return for your financial security and future. Please contact us so we can review the possibilities for enhancing your investments’ return.
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452


Know the Right Amount of Risk

Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals.

While economic trends can exert a powerful effect on market movements, the stock market and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that economic outlook is unimportant. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks high-quality individual investments.
Investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly.
Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value of your investments.
The challenge is determining how much risk is right for you and your portfolio. Knowing your risk tolerance and the appropriate amount of risk for your investment goals is one of the most important concepts we discuss with our clients.
No one wants to see their portfolio lose money, but it’s important to understand that an investor must take on more risk in order to achieve higher long-term returns. It’s vital to be honest about your ability to withstand short-term swings in value and accept reasonable investment losses in the pursuit of returns.
Another essential question you must answer is how much risk you need to take in order to meet your investment goals. Modern portfolio theory hypothesizes that there is an asset allocation strategy that will generate the highest return for every risk level. The right risk allocation for a portfolio will depend on a number of factors, including your expectations for return, investment objectives, time horizon, and appetite for risk.
Many popular asset allocation tools focus on age – or time until retirement – as the primary driver of an allocation strategy. While this can be useful, age is only one factor in determining a proper asset allocation strategy; other factors include liquidity needs, net worth, and investing priorities.
On the face of it, the logic of decreasing allocation to equities and increasing fixed income holdings as one gets older seems reasonable. As investors approach retirement, their ability to wait out portfolio swings or earn their way out of losses diminishes. However, many age-based allocations fail to adequately account for longer life spans and the effects of inflation, putting investors at risk of running out of money later in life.
Ideally, you should be allocating your investments based on your investor policy statement (IPS). Your investment plan should be based on the return you annually need to achieve so you can meet your financial goals by a set date in the future.
This is called the required rate of return, or RRR. Assuming you calculated the cost of your retirement years (the number of years you’ll be in retirement, the events and activities you want to enjoy, the taxes you’ll pay, the cost of inflation…), you can now reverse-engineer the calculations to tell how much you should be investing, at a specific annual percentage rate, from now until retirement…while being cautious not to exceed undue risk.
Not everyone knows how to do this. In fact, typically only good financial planners, such as a Certified Financial Planner® (CFP®), can do this.
Ultimately, holding the wrong amount of risk means you may not realize the investment gains you expect or you may experience wider swings in your portfolio’s value than you can stomach. If you are unsure about the current level of risk in your portfolio or have questions about risk management, it may be worth speaking with us. Our experienced financial advisors can help you understand the best options available to you.
Your financial goals are our priority. We start by listening to your plans for the future, and then set your dreams into short, midterm, and long-term goals. We then create a financial plan to achieve your goals, and monitor and manage your customized financial plan for steady but cautious growth, loss protection, limited taxes, and estate preservation … assuring your financial future.
We hope this article about investment principals was informative. Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452



Wish Your 401(k) Was Bigger?

The secret is consistent saving. By starting your savings early and regularly adding to your investment, your results will be spectacular.

The Data Is In

Based on data from Fidelity Investment, the 547,000 401(k) account holders who maintained their 401(k) with the same employer since 2001 presently have an average account balance of just over $331,000, up from an average of $43,900 fifteen years ago.

Now, compare their success with the investment results of the entire group of Fidelity Investment’s 14.5 million 401(k) account holders whose average account is only $90,600. Clearly, this $240,400 difference makes the case for early and steady retirement investment.

“The lesson is to get in when you start your career and save over time,” says Jeanne Thompson, one of Fidelity Investment’s senior VPs who tracks 401(k) trends. “The market and your contributions together will drive the growth.”


Even More Data

The Investment Company Institute and the Employee Benefit Research Institute reported similar findings in their study, What Does Consistent Participation in 401(k) Plans Generate? (EBRI Issue Brief #426, September 2016.) Their results concluded that consistent contributions are the essential key to building a large 401(k). Their study researched 3.5 million 401(k) account holders who held 401(k) accounts for a seven-year period, from the end of 2007 through the end of 2014. The group that consistently contributed to their account achieved much higher results than the comparison group of 25 million 401(k) account holders.

At the end of the seven-year range, 26.9% of the consistent group had over $200,000 in their 401(k) compared with only 10.7% in the broader database. Similarly, 19.3% of the consistent group had between $100,000 and $200,000 in their 401(k) account compared with only 9.5% in the broader database. As well, the consistent group had an average account balance of $170,290… which was more than double the average account balance of $76,293 for the entire database of 401(k) account holders. Further emphasizing the point, consistent participants had a median account balance of $87,418 which was more than four times the $18,127 of the overall database. The message is clear: consistent savings and investment over a period of time results in a much larger account balance.

The ICI/EBRI study also determined there are three primary factors which affect account balances:

  1. Contributions
  2. Withdrawal and loan activity
  3. Investment return


5 Prescriptions

To increase the possibility of your 401(k) account growing larger over time, consider the following suggestions:

  1. The start of a new calendar year is a great time to do a 401(k) check-up, a task you should do annually. Look at your Investment Policy Statement (IPS) to make sure your goals are still the same as when you first began your investments, and schedule a meeting with your company’s 401(k) advisor to review your holdings so you can make sure your investments are in the right proportions according to your plan.
  2. If your employer offers matching funds, save enough to at least acquire the full company match. If possible, try to increase the amount of contributions you make every year because these extra dollars could make a huge difference to your retirement lifestyle. Small changes made over time can add up to big benefits later.
  3. Taking loans and withdrawals from your 401(k) account may only hurt you in the long run. Do your best to avoid borrowing from your future. Time is your biggest ally right now; as you saw from the data, money can increase dramatically when left undisturbed.
  4. Exercise extra caution when making investment decisions and consult with an investment specialist. Your 401(k) is important to the health and wealth of your retirement years, so it deserves extra attention. You don’t have to become an expert, but you should educate yourself well enough to know why you are investing in the funds you’ve selected and how these choices work together to increase and preserve your wealth.
  5. If you change jobs and move to a new company, enroll in your company’s 401(k) plan as soon as possible so your tax-deferred savings are not interrupted. You should also discuss and consider the value of rolling over the 401(k) balance with your former employer into your new account so there’s less record-keeping, and so it’s easier to take disbursements when you’re 70½.

Contributions for 2017

For those employees who participate in a 401(k), the 2017 annual contribution limit is $18,000, the same as in 2016. There is also a catch-up contribution limit for those employees who are 50 or older, and the amount remains the same in 2017 at $6,000. If you are self-employed, the amount you can save in a solo 401(k) rose from $53,000 in 2016 to $54,000 in 2017. You may even be allowed to make after-tax contributions to your 401(k). Whichever choice is right for you, be sure to consult with your financial advisor to ensure you make the best decision for your unique circumstances.



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452



Buy-Sell Agreement: Calamity or Certainty?

Is there a way to protect your business from the effects of the death, disability, or divorce of a co-owner?

When you went into business with a co-owner or co-owners, you entered into a legal arrangement that combined your resources and skill sets…and also, to some degree, your fortunes and misfortunes. We can’t always plan for the surprises that lie on our life’s path, but there is a brilliant legal tool which can help your business avoid disruption when calamity strikes your life, or the life of one of your co-owners.

A buy-sell agreement performs three essential functions with efficiency when disaster strikes:

  1. Identifies how the departing co-owner’s interest in the business will be reassigned;
  1. Converts the ownership interest into a liquid asset for easy transference;
  1. Resolves legal inquiry about the true dollar value of your business.

Let’s consider each:

  1. Reassignment of a co-owner’s interest: When a co-owner leaves the business for whatever reason, a decision must be made about the redistribution of the co-owner’s share. The interest may be divided equitably or by percentage among the remaining co-owners, or it may be transferred to the co-owner’s heirs, or it could be offered for purchase to a third-party. Unless you like thrills and chills, knowing what will happen to the co-owner’s interest will go a long way toward relieving anxieties!
  1. Establishing the liquidity of the business interest: When the buy-sell agreement is funded, possibly with life or disability insurance, funds can quickly become available to satisfy payout requirements and taxes. There are several ways to fund a buy-sell.
  1. Determines the precise value of the co-owner’s business interest: The tax man and sometimes the courts will need to know the exact dollar value of the co-owner’s interest. A business valuation will be required to identify the business entity’s value, based on one of several formal court-approved valuation processes.

Frankly, the last thing you want is to wonder who will receive the departing co-owner’s interest in the business, how the value of that interest will be funded, and have uncertainty about the precise dollar value of that portion.

When a co-owner is deceased, or must leave the business because of disability, divorce, bankruptcy, or retirement, having a premeditated agreement that clearly describes the expectations of the remaining co-owners will help keep your business running efficiently during a time of difficulty and stress. Forethought and good planning will help your business weather the changes that are likely to come sooner or later.

Because life is filled with uncertainty, schedule a visit with a Certified Financial Planner® (CFP®) who will help you safeguard the financial security of your business.

It all starts with a conversation. Please call me and let’s schedule a complimentary meeting.



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452




Synergy: Holding Real Estate in Your IRA: Limited Liability Companies, Part 4 of 4

The limited liability company is another flexible option if your IRA does not provide sufficient funds for the purchase, and neither loans nor tenancy-in-common ownership provides a solution for which you are looking.
I am going to skip the long version of what an LLC is and leave that to your attorney, but, briefly defined, an LLC is a form of business entity that offers both limited liability for its owners and certain tax benefits.
When using LLCs, it is similar to investing in a real estate investment trust (REIT) in that your IRA may be invested in limited interests which is kind of like investing in shares of stock. The difference here is that LLCs are private, and there are usually only a few investors that are limited members and a developer that is the managing member.
Here is one way an LLC may be used.
You know a developer who is getting ready to start a new project in your local area. He has used $1,000,000 of his own money to purchase the land and now is trying to raise capital to develop the property. Once the project is finished and the condos are sold, he expects to realize a large profit. He is willing to give up some of his profit in exchange for the needed capital.
The name of his company is ABC Construction Company, LLC. After your attorney has reviewed the proper agreements and you have done your due diligence, you may instruct your self-directed IRA custodian to purchase the units of ABC Construction Company, LLC that have been agreed upon with the developer.
This is a simple version, and there are many more detailed points to be considered and understood when using LLCs, but I hope this provides some food for thought.
Now we are ready to talk about how to actually purchase the property. When using your IRA to purchase property, the steps in buying real estate are really no different than if you were not using your IRA. There are a few things to be aware of, and we will review them now.
The basic steps are:
  1. The Purchase and Sales Agreement (the offer)
  2. The Acceptance
  3. The Inspection
  4. The Closing
The purchase and sales agreement is where it all starts and is probably the most important. Each self-directed IRA custodian will have their own set of rules and procedures, so you need to review their real estate processing checklist well in advance of actually making an offer.
You need to make sure that the purchase is made by your IRA custodian and not you, personally. This means that you will need to set up your self-directed IRA prior to making an offer. If you are under the gun and did not have time to open your IRA, and if the person making the offer is not a disqualified person, you may make the offer in the following way: “John Doe and or assigns”. Adding the phrase “and or assigns” will allow you to assign the contract to the IRA custodian once the account opened.
In addition, if you put up earnest money with your personal funds, you will need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.
Some IRA custodians will require that they hold the original recorded title to the property in safekeeping. The title should reflect the name of your IRA custodian for your benefit, such as, XYZ Trust Company, Custodian FBO John Smith IRA.
In conclusion, I hope you now realize there are some interesting and creative ways to invest in real estate and this can be done in your IRA or other types of retirement plans. This topic is very complex and, by no means, have all the elements of this opportunity been covered in the article, but I hope it was a good start for you.
Please remember that this type of investing is best performed when using a team of professionals that can help you navigate the potential hazards. Please seek the advice from the following professionals as needed: an attorney, CPA, IRA custodian, CFP, real estate professional, mortgage broker, registered investment advisor or other competent advisor.
We hope these four articles about using your IRA funds to invest in real estate were informative. Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452

Synergy: Holding Real Estate in Your IRA: Tenancy-In-Common (TIC), Part 3 of 4

For people who identify an attractive property that costs more money than they have in their IRA or more than they can (or are comfortable) borrowing, tenancy-in-common may be a solution.

Tenancy-in-common is a form of concurrent ownership in which two or more persons each have an undivided interest in the entire property, but no right of survivorship. Because each person’s interest, or share, is undivided, each can sell his share at any time without the consent or agreement of the others. So, how does this help you? Let’s go through an example:

Let’s say you and two of your friends find a good property in which to invest, and the purchase price is $100,000. With a tenancy-in-common arrangement, you can buy the property together, with each person putting in the amount of money he or she has available. Each will own a certain percentage of the property, the income generated from its operation, and, eventually, a percentage of the profits when the property is sold.

Owners                      Contribution Amount                    % Ownership

You                                      $60,000                                               60%

Tom                                      $20,000                                              20%

Rob                                       $20,000                                              20%

Total                                  $100,000                                             100%

A tenancy-in-common arrangement also allows use of both IRA funds and non-IRA discretionary funds to buy a single investment. It is not a requirement that each of the owners use the same type of funds as the others.

Here is what I mean:

Owners                      Contribution Amount                    Contribution Type

You                                         $60,000                                  50% IRA money/50% cash

Tom                                        $20,000                                  100% IRA money

Rob                                         $20,000                                  100% cash

Total                                     $100,000                                  100%

Your IRA has a current balance of $40,000 but you do not want to use the entire $40,000, so you use $30,000 from your IRA and $30,000 from your bank account. Your total contribution amount is $60,000, and you’re a 60% owner of the property.

Real Estate C Resized

Tom’s IRA has a current balance of $20,000. He is comfortable using the entire amount, and will fund future property expense inside the IRA with his annual IRA contributions.

Finally, Rob does not own an IRA, so he will use some of his savings account to contribute his $20,000.

The possibilities are endless.

In the fourth and final article of this series, we’ll share information on how to use your IRA funds to invest in real estate through a Limited Liability Company (LLC).





Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452


Synergy: Holding Real Estate in Your IRA, Part 2 of 4

Yes, you can use debt financing to purchase real estate in a self directed IRA. However, to do so legally, you must use the IRA-purchased property, not the IRA itself, as security for the loan. This type of permitted borrowing is called non-recourse lending. A non-recourse loan is not like the loan on your personal residence. In fact, it is very different. Here, unlike your home loan, if the loan isn’t paid back as promised, the lender may take the IRA-owned property used to secure the debt, but may not take recourse against any of your other assets. Because of its unique nature, not very many banks or lending institution offer these types of loans, but they do exist, and your self-directed IRA custodian may be able to point you in the right direction.


Like other loans, non-recourse loans do have a monthly payment and some type of amortization schedule which will need to be followed. Therefore, your IRA property will need to be able to make the loan payments from its cash flow, its annual IRA contributions (within the 2016 limits – $5,500 or $6,500 if 50 or over), or some combination of the two. Simply put, you need to have more money coming into your IRA than is going out. This also means you need to have sufficient liquidity in your IRA for other real estate related expenses like property taxes, insurance, and other repairs and maintenance. Remember, the IRA itself must pay all expenses.

Let’s look at a simple example:

Loan Information:    Present Value of Loan                               $100,000

Term (amortization period)                                                           30 year Fixed

Annual Interest Rate                                                                       7%

Monthly Payment                                                                            $665.30

Annual Payment                                                                               $7,983.62

Taxes:                        Annual Property Tax                                   $1,500

Insurance:                 Annual Insurance Premium                      $400

Repairs/Maint:         Annual Repairs                                            $150


Total Annual Cost of Property:

Payment        $      7,983.62

Taxes             $      1,500

Insurance      $         400

Repairs          $         150

Total              $    10,033.62

The amount of $10,033.62 is the amount of money going out each year, and so your property would need to have more than this amount coming in each year. So, for a person under the age of 50, you could subtract the $5,500 annual IRA contribution from the $10,033.62 annual expenses and you would need ($10,033.62 – $5,500 = $4,533.62) $4,533.62 of cash flow from the property.

In addition to annual operating expense, in accordance with Section 511 of the Internal Revenue Code, if your IRA property has debt, or if a mortgage was incurred with its acquisition, you must pay annual taxes on any income produced. This special tax is called Unrelated Business Taxable Income (UBTI). Please note that this tax does not apply to every property purchased with an IRA but only to those that have related debt. Here is an example of how it works. Please be advised that I am not a CPA and that the following calculations are for illustrative purposes only. I advise you seek tax advice from your own CPA when it applies to your individual situation.

First, your income is taxed only after deductions are made for expenses and for other items that are deductible. Then, the first $1,000 of your net income from the property is not subject to tax.

Using our previous example you will remember that we had a loan of $100,000. Let’s also say that you put down $100,000 so that the total purchase price was $200,000. Finally, let’s say you found some good renters and your net income after expenses is $1,500.

Since the first $1,000 is not subject to tax, only $500 will be used in the UBTI calculation. ($1,500 – $1,000 = $500).

The tax is based on the relationship between the average amount of debt on the property during the preceding twelve months and the property’s average tax basis. Here tax basis is the purchase price, increased by improvements or decreased by depreciation, during the same period.

In our example our ratio looks like this:

Debt                                        $100,000

Basis (purchase price)        $200,000

Ratio equals                         $100,000/$200,000 = 50%

We then apply the ratio to the income that is subject to the UBTI tax.

$500 x 50% = $250

The $250 is then taxed at the current rate for trusts. The trust tax rates, like other tax rates, are a moving number.

Here we will use a trust tax rate of 37.5%.

$250 x 37.5% = $93.75

The $93.57 is your tax liability.

You should notice that as the debt is reduced, the UBTI tax is decreased proportionately.

In our next article, we’ll present information on how you can use your IRA to establish a Tenancy-in Common (TIC) allowing the concurrent ownership of property between two or more parties. Stay tuned!


Is your business worth enough to secure your retirement?