Lately, the news has been full of natural disasters and recovery efforts. Everyone in the country wants to help with the recovery from Hurricanes Harvey and Irma. In fact, one self-titled “IRA Expert” even implied in a very public promotional campaign that real estate investors using their self-directed retirement accounts to fund their deals could make loans to friends and family during this period of recovery and directed people to his website in order to learn how.
Note: This article is not about that strategy, which is 100-percent prohibited by the IRS! You, your family, and your business should never profit directly or indirectly from your self-directed IRA investments. Err in this, and the IRS will pretty much tax and fine your account into oblivion.
Fortunately for self-directed real estate investors and the communities affected by disasters, however, there are a number of perfectly acceptable, highly profitable and beneficial ways to invest in a community moving toward a recovery from a natural disaster or what Kaaren Hall, founder and CEO of uDirect IRA Services, a self-directed IRA administrator based in California, refers to as “man-made disasters, like the housing crash.” Hall explained in a recent interview with Think Realty that she can think of a number of times in recent history when self-directed investors have made enormous, substantial differences in the pace and degree of recovery in disaster-stricken areas.
“Think about it: Self-Directed IRAs lend money so that investors, people like rehabbers and contractors, can get out there and do projects that need to be done,” she explained. “Think about the recent hurricanes and horrible damage. Someone has to fix it. Do you know how many self-directed IRA investors can and will invest their retirement dollars in private loans to the people repairing the damage? There is a pool of $27 trillion in retirement accounts in America, and a lot of that can be used for this purpose.”
Hall went on to say that these types of investments should not be considered “scavenging,” as some people may feel that they are doing, because these types of storms often result in large population movements where people opt to sell their homes and move in a new home elsewhere rather than remain, rebuild, and risk reliving the disaster in the future. “Investors, both those using their retirement funds and those investing with other capital, play a big role in expediting local economies at a grassroots level,” she said.
It Starts with Loss, but Doesn’t Have to End There
In 2016, Hurricane Matthew was the first Category 5 hurricane to form in the Atlantic Ocean in nearly a decade. Matthew blew through parts of Haiti, Cuba, the Dominican Republic, the Lucayan Archipelago, and finally the U.S. and part of Canada, causing a total of 603 deaths throughout its path and $10 billion in damages in the United States alone. In Florida and Georgia, hundreds of thousands were left without power and inaccessible due to a number of roads that were rendered impassable. However, North and South Carolina bore the brunt of the storm, with an estimated 120,000 trees falling prey to high winds and falling onto residences and businesses on Hilton Head Island, North Carolina, alone. An estimated 100,000 physical structures in North Carolina were also flooded according to the North Carolina State Emergency Management agency.
While FEMA and other federal, state, and local agencies provided millions of dollars in assistance to North Carolina, in May 2017 the state’s governor, Roy Cooper, announced that the federal government had provided less than one percent of what his state had estimated was needed – and requested – to help municipalities and individuals recover and rebuild. This means nearly a year after the event, there were still a number of projects awaiting initiation, much less completion, due to a lack of funding.
“A lot of those people are not still waiting around for help making repairs,” noted Hall. “They have sold to investors and left the area.” Many times, investor purchase offers in the wake of disaster may actually be welcomed as homeowners realize that the timeline for receiving assistance other than insurance payouts may be longer than they are willing to tolerate or that making repairs is simply not something in which they are interested in doing when they could move into an existing, standing structure in what now feels like a much safer location, often taking their insurance payout with them.
“Think about Hurricane Katrina and all the flooding in the communities of Louisiana,” said Hall, citing another natural disaster that still sends chills up many homeowners’ spines. “So many of our self-directed investors were just pouring their retirement dollars into those communities. Those IRAs were making secured loans to investors who went in and acquired those properties that were in desperate need of total rehabs, extensive rebuilding and repairs, and receiving a return in exchange. Investors prospered, neighborhoods were restored, and the area is still a wonderful place to live. It was a terrible thing, but thanks in large part to self-directed investment dollars it did not stay that way after that devastation.”
Man-Made Disasters, Like Housing Bubbles and Busts
Hall noted that self-directed investors do not limit themselves to economic stimulation and recovery support only in areas struck by hurricanes, earthquakes, fires, or floods. For example, in the wake of the housing crash and financial meltdown in the mid-2000s, Detroit, Michigan, suffered a mass exodus of population and widespread financial devastation that not only left the city itself in declared bankruptcy, but rendered many inhabitants bankrupt as well. Tales of blighted, abandoned, and decaying properties filled media coverage of the area and many economists wondered aloud if the city would ever recover.
“So many self-directed IRAs invested in Detroit,” said Hall. “Sure, you have to be very careful in a market like that, especially if you’re buying properties sight-unseen. You have to be working with someone you really trust. But those investments made huge differences in dozens of Detroit communities. They meant that houses were rehabbed instead of left to fall apart. They were beautiful and attractive and are safe residences again so people could move in either as renters or owners. So many investors made a huge difference, and serious profits in Detroit – and still are doing so.”
Investing with Head and Heart
Of course, investing in any disaster-stricken area requires a bit of sensitivity, and, as always, self-directed investors must be very careful to adhere to federal regulations governing how they invest and how they manage those investments. This is one reason so many self-directed investors prefer making private loans to other real estate investors rather than undertaking their own projects.
One of the most crucial rules of self-directed investing requires investors to remember they cannot directly participate in their IRA-funded investment. For example, you cannot manage a property that your IRA owns as a rental or repair a property that your IRA is funding to flip. Via funding other investors’ deals through their self-directed IRAs real estate investors can not only feel good about stimulating economies that desperately need a little extra help, but they can also be confident (after reviewing every individual transaction with the appropriate legal and financial professionals, of course) that they are making a predictable self-directed investment that will likely end up building their retirement funds as well.
Join up with multiple specialized self-directed IRA vendors, including Edwin Kelly, at the Think Realty National Conference & Expo October 14-15, 2017. Visit our Atlanta event page here.