Self-directed IRAs Can Boost Your Wealth While Positively Impacting Your Community

Rex, a real estate investor from Illinois, purchased a foreclosed single-family home in 2013 for $47,000, including some rehab costs. After renting it for a year, he was able to sell it for $69,000. This looks like a profitable, somewhat typical real estate investment transaction. But in this case, Rex completed the deal inside a self-directed IRA, his profits returned tax-deferred to his retirement account, and he helped a family remain in their home of 40 years.

Unlike Rex, many investors do not realize there is a multitrillion-dollar source of capital out there brimming with potential: the IRA and retirement plan market. Retirement plans account for 34 percent of all household financial assets in the United States, according to the Investment Company Institute (ICI), but their true potential has remained relatively untapped.

The ICI estimates approximately $23.5 trillion is held in retirement plan assets, $7.3 trillion of which is held specifically in IRAs. Despite the enormity of the nation’s retirement market, only 2 percent of IRA investors understand they can utilize their retirement plans for more than stocks, bonds and mutual funds.

These investors have turned to self-directed IRAs to invest in assets they know best—real estate being a common and popular asset type—to build future wealth in their tax-advantaged accounts.

The Benefits of Real Estate

A 2014 Morgan Stanley study of wealthy individuals showed that 77 percent of millionaires owned real estate in their portfolios. But you certainly don’t have to have a million dollars in the bank to reap the benefits of real estate investing.

When you recognize the true potential of your IRA capital—for example, the ability to invest in real estate, the potential to earn interest on private lending agreements or to purchase tax liens —more opportunities begin to emerge.

Perhaps even more important, your investments can significantly improve and revitalize a community. By looking around you for investment opportunities, you can use your capital to have an impact that would otherwise not be realized through public or commercial development, all while growing your wealth.

Investing for Real Community Impact

Let’s share a few examples of successful self-directed IRA real estate investments, realized by Equity Trust clients, so you can begin to think about the various ways your retirement dollars can do well for you and for others.

Since the housing crisis of 2008, many homeowners have been stranded with underwater, or upside-down, mortgages—owing more than the home is worth. Neighborhoods have been destroyed. There’s a deep human cost to the crisis: families losing their homes. Rex, the Equity Trust client mentioned earlier, used his self-directed IRA to help an Illinois family stay in the home they had lived in for 40 years, while also benefiting his retirement.

After reviewing some information on the property, Rex decided to drive by to take a look. It was obvious the home was still occupied—and next to the entry was a plaque bearing the family name. “It was sad looking at that proud plaque knowing this family home was in trouble,” he said. There was no answer when Rex knocked on the door, so he left his card. A few days later, he received a call from the homeowner, who explained that the home had gone into foreclosure after her husband passed away.

Rex told the homeowner he intended to bid on the home, but that she could stay another month rent-free until the home’s purchase closed with the investment from his IRA. Then, when he won the bid, he worked out a deal with the homeowner’s daughter, Katie. Katie met with a home lender to create a credit improvement plan, and Rex signed her up with a rent-to-own agreement whereby she would pay $650 per month, tax-deferred, to his IRA to stay in the home. With his IRA, Rex also funded a $3,600 loan to help Katie pay off medical bills and a past collection. Eventually, Katie purchased the home from Rex’s IRA for $20,000 less than market value. Rex made a profitable investment, earning a 65 percent ROI on the home and a 15 percent ROI on the small loan, and Katie and her mother were able to keep their family home.

“Katie mentioned she thought many times this would never happen, considering all the borrower home loan hurdles and recent changes in her life, but today, the family owns their home again,” Rex stated on the day the sale finalized.

“The home is 100 percent repaired and good to go for another generation and more,” he said. “After perhaps 300-plus home transactions in my career, this was the most fulfilling. What a fun day!”

Standing Up for New Orleans Post-Hurricane

A couple from New Orleans saw an opportunity to help a friend who hoped to rehab a flooded and gutted home in their community, which was ravaged by Hurricane Katrina. They pooled their IRAs and co-invested $106,000 toward purchasing and renovating the home, as well as paying the property’s carrying costs. Four months later, the rehabbed house sold for $235,000, with the couple securing 33 percent of the sale price per the agreement with their friend. The proceeds were tax-free because the couple invested through self-directed Roth IRA accounts, earning a 35 percent return. In addition, the deal directly inspired two similar renovation projects in the area, helping to rebuild a community that was devastated a decade ago.

Lending a Helping Hand to American Vets

In another case, Roger, a client from Maryland, worked with his friend Bob, a pastor and Vietnam veteran, to fulfill a dream—creating a ministry for vets returning from Iraq and Afghanistan. Many veterans suffer from post-traumatic stress disorder and struggle in their return to civilian life. Bob’s goal was to provide spiritual guidance and skills training as a way to help them find meaningful and gainful employment. After bank financing for the property fell through, Bob feared his dream would not come true.

Roger stepped up and provided a $100,000 loan from his retirement account. The 6 percent interest he received was returned back into his retirement account tax-deferred. But he concedes that the real payback was making the “Building Veterans” ministry a reality. “If I wasn’t able to step in and use my self-directed IRA funds as the initial financier for the house, the whole thing would have fallen through,” recalled Roger.

Helping Small Business Owners with Financing

Another self-directed IRA account holder with an interest in buying and selling homes took a bit of a detour. The investor, Matt, came across a classified ad from a local used-car dealer seeking financing to repave his business’ parking lot. He negotiated a private lending agreement with the owner with funds from his self-directed IRA. After the success of this initial loan, Matt now uses his self-directed IRA to provide floor-plan financing to this dealership and other nonfranchise dealerships in the area. This loan provides 10 percent interest payments tax-deferred to his IRA and is secured by the car titles. Every time the dealer sells a car, he pays a title exchange fee of $250 (back to Matt’s IRA) and provides a new title to secure the loan.

In the end, Matt gave his retirement a boost while helping a local business stay afloat and demonstrated the diversity of potential opportunities available with an IRA.

Opportunities Begin with Education

Of course, as with any investment, it’s important that investors do their homework to understand the intricacies and risks of what they are investing in. Working with a team of financial professionals can help ensure real estate investments fit into a cohesive retirement plan. And for the community-minded real estate investor, self-directed IRAs could offer an opportunity to grow your retirement nest egg and your community at the same time.

  • Richard Desich

    Richard A. Desich is Executive Director and a Co-Founder of Equity Trust Company. With more than 300,000 clients and $30 billion in assets under custody and administration, Equity Trust enables individual investors, financial professionals and institutions to diversify investment portfolios through alternative asset classes, including real estate, tax liens, private equity and precious metals. 888-382-4727

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