For one couple, self-directed IRAs have helped pave the way to a strong financial future – for themselves and their children. In 2011, Richard and Lorraine’s story and investment activity in the foreclosure market earned the couple the Equity Trust Self-Directed Investor of the Year award.

After their eldest son, Joe, grew up and moved out of the house, Richard and Lorraine adopted four children from various social service organizations near their hometown. Their newly adopted children came from difficult backgrounds and the couple was committed to providing them with a better future.

Richard and Lorraine wanted to provide financial security the children could lean on, even after the couple was no longer around to help.

Back in 2011, Richard and Lorraine held four homes in their self-directed IRAs. Today, they own eight real estate properties between their various Roth and Traditional self-directed IRAs.

“We wanted a better financial future for our children more than for ourselves,” Lorraine says. “And that’s what we did, we used our self-directed IRAs to purchase investment properties we felt could help provide both a solid return and financial security for our children in the future. Once the first few worked well, we kept buying houses with our self-directed IRAs.”

Discovering a New Way to Invest

The couple has always been diligent savers. For years Lorraine split the majority of her income into her Traditional IRA, Roth IRA and savings accounts.

While looking for another avenue to invest their savings, the couple discovered the concept of self-directed IRAs. Self-directed IRAs – accounts that allow the investor to invest in alternative investments such as real estate, tax liens, notes, private placements and more – were a relatively unknown concept.

After asking around, Lorraine recalls, “none of the major banks knew about self-directed accounts, so we weren’t sure it was real.”

It was real, Richard and Lorraine discovered after more research. They soon opened their self-directed IRAs and were on their way.

A Call to Mom Prompted the First Step

Their decision to enter the foreclosure market in 2009 was due in large part to their son, Joe, who had recently moved to Florida. Lorraine remembers receiving a call from Joe saying, “Mom – you won’t believe it, houses are being sold at a quarter of the value down here.”

Richard and Lorraine began their search and connected with a real estate agent in the area. They found a home that was last sold for $215,400 before the market downturn. Due to the market conditions at the time, it was available for $80,500. “You can’t build a house that size for that kind of money,” Richard recalls.

They purchased the home with a partnership of 50 percent cash (from personal income) and 50 percent from Lorraine’s self-directed IRA. The couple then invested another $2,000 of improvements into the home (50 percent paid from cash and 50 percent from the IRA) and worked with their real estate agent to find a tenant.

As their investment demonstrates, it may be possible for self-directed IRA purchases to be a tenants-in-common or percent-ownership structure. This structure gives investors the potential to co-invest or partner their self-directed IRAs with non-IRA money, other retirement accounts or a variety of funding sources.

(An investment structure such as this must be implemented from the very beginning of the purchase and it is important to ensure all expenses are paid and income is returned in direct proportion to the percentage of ownership arrangement of the co-investment structure. As always, please consult with your tax attorney, CPA or other financial professional before making any investment decisions.)

In the Business of Helping People

Richard and Lorraine soon found a couple with several young children, forming an immediate connection. The family previously lost their home to foreclosure and, later, the home they were renting was foreclosed upon as well.

Richard and Lorraine were able to step in and provide much-needed stability for the family, offering a five-year lease on the recently acquired property mentioned earlier. They received approximately $1,000 per month in rent, $500 returned to the IRA tax-deferred and the other half (the portion paid with non-IRA money) returned as personal income subject to taxation.

“It was sad watching people walk away from their homes when we were picking them up for 20-cents on the dollar,” Lorraine recalls of the foreclosures. “Fortunately we were able to provide stability for their children, because that’s what they needed too, while investing for our retirement and our children’s financial future as well.”

After taxes and expenses, they receive approximately $9,000 each year in profit, half of which returns tax-deferred back to the IRA. In addition to the rental income, Richard says they received a year-over-year return in value on the home as it appreciated when the market rebounded.

The type of tenants the couple has is important to them. “We are just regular people,” Lorraine recalls, “We aren’t brokers or real estate agents, but we jumped in and did it for the right reasons. It’s just people helping people.”

Investing Closer to Home and Developing the Right Team

The family has since moved to Florida, which allows them to be closer to both their eldest son and their investments.

It also allows Richard and Lorraine to be able to meet face-to-face with those working on their investments and build a network of trusted resources in their community. They now have a core group of six people they work with regularly but have employed up to 10 people for some projects.

In August 2014 the couple purchased a 3,000-square-foot rental property near their home 100 percent in Lorraine’s Roth IRA. The value of the property has doubled since the purchase; in addition they receive $1,600 monthly rental income, tax-free, back to the account.

“It’s wonderful to know this money is just sitting there growing and will be available to use tax-free after we turn 59½,” Lorraine says.

Investing for the Future – One Home at a Time

Self-directed IRAs have enabled Richard and Lorraine to grow their retirement, help families in need, and provide the security they desired for their children.

Lorraine estimates they’ve rented to nearly 30 families in their eight self-directed IRA rental properties over the years, some of whom were able to get out of the rental market after connecting with Richard and Lorraine’s real estate agent. “It seems the rich are getting richer and the poor are getting poorer,” Lorraine remarks, “what can regular people do but help each other?”

Richard and Lorraine routinely stay in touch and eat dinner with some of their tenants, who grew to become friends.

Perhaps most importantly, the couple’s four younger children each now have two houses earmarked for their financial future. Lorraine said the children are ecstatic when they visit the investment properties and are proud to know that each home will help with their financial security someday.

Happy to be in Florida and closer to Joe, the family enjoys the time they share together and the younger children are thriving. “All four children are now black belts in Taekwondo,” Lorraine says proudly, “and our 11-year-old daughter already wants to be a real estate broker if you can believe that!”

 

 

The above case study is for educational purposes only. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.