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Many Equity Trust clients use self-directed investing as a means to realize their retirement dreams. For Scott and Christine of New York, who are currently benefitting from the strategy, self-directed investing is a prominent element of their retirement dream – a dream that will likely become reality soon.
Scott and Christine are real estate investors who hold several properties within their self-directed IRAs. Within the next few years, the couple plans to sell the investment properties they own and travel across the country in an RV full-time, visiting family and helping other real estate investors.
“The way we will support ourselves is loaning back to investors like ourselves,” Scott says.
The partners in investing and life acknowledge that their self-directed investing is a major reason they’re able to undertake this journey.
Scott and Christine are long-time real estate investors, but it wasn’t until recently that they learned of a new-to-them investing strategy.
In 2012, an Equity Trust education speaker visited their local Real Estate Investors Association (REIA) chapter meeting and revealed that it’s possible to use an IRA or other account to fund their investments.
“We feel we have more control over the returns we make instead of relying on the uncertainty in the stock market.”
Christine, Investor, New York
Custodians such as Equity Trust who custody self-directed accounts make it possible for investors to invest in an array of assets while receiving tax advantages. (The IRS identifies a handful of investments that are not permitted – see IRS Publication 590 for details.)
Upon learning this, Scott and Christine wasted no time converting their IRAs to Roth IRAs with Equity Trust so they could use their retirement funds to invest in an asset that they were already familiar with: real estate.
“We feel we have more control over the returns we make instead of relying on the uncertainty in the stock market,” Christine says.
Scott and Christine look for opportunities to buy and rehab properties within their Equity Trust Roth IRAs. In 2018, they received an email about a house that was left as part of an estate. The beneficiaries of the house agreed to sell it to Christine for $31,000. She had an edge, providing an attractive all-cash offer, because she was using her Roth IRA to fund the entire purchase.
Christine hired someone to remove everything from the house, which filled two dumpsters for a total cost of $800. All expenses had to be paid from her Roth IRA. Christine was able to easily pay the vendors using the Bill Pay feature on Equity Trust’s online account management system myEQUITY.
Christine then advertised the property as a potential rehab opportunity.
“Instead of wholesaling the property I let prospective buyers determine their price,” Christine says, adding, “I received 12 offers, and in less than 20 days I put it under contract to sell to an up-and-coming flipper for $72,165.”
The sale close date ended up a month later than originally planned because of delays with paperwork. This could have negatively impacted the transaction, but the Equity Trust client service representative was able to work with Christine and ensure everything went smoothly from the standpoint of her Roth IRA.
Some of Scott and Christine’s properties are income-producing properties for their retirement accounts. Other times, as in this case, the investment is structured as a note. The note is for $65,000 with monthly interest-only payments for one year at 12 percent. All payments flow back into Christine’s Roth IRA, tax-free.
[Related: Considering a Roth Conversion?]
Purchase price: $31,000
Total Investment: $31,800
Down payment: $7,165
Monthly payments: $650 (interest only 12 mo.)
One-year ROI: $7,800 interest
Profit on sale: $40,365
ANNUAL RETURN: 151 Percent ROI
With this investment, as with many of Scott or Christine’s investments, they’re not the only ones benefitting.
“We explained to the neighbors what we were doing with the property, that a flipper is fixing it up and it’s really helping the neighborhood,” Christine says. “They’re happy, and I’ve been able to enjoy profits in my Roth IRA, so it’s been a plus for everyone.”
Video: Client Bud Converts Thrift Savings Plan to Roth IRA for Tax-Free Growth
Scott and Christine have a pipeline of opportunities through the network they’ve established in their area.
“Initially, we worked with a local bank here in Rochester,” Scott says. “We’ve built a relationship with the REO (real estate owned) department there. We’ve purchased a few other properties from them using our IRAs, as well as outside of our IRAs.”
Scott adds that they’re attractive business partners for banks because they’ve proven they’ll follow through when they make an offer.
“The sales close relatively quickly because we have the cash and resources,” he says.
They’ve been able to grow their network with other banks in the area for the same reason.
Scott and Christine’s team includes an attorney that helps work with them through each real estate investment.
“In New York State, it’s almost crucial you go through an attorney for any real estate purchase,” Christine says.
The couple met the attorney at a REIA meeting. They recommend REIA chapters for anyone looking for more knowledge, opportunities or to expand their network in the local real estate market.
“The REIA is a good resource because we meet with other investors and share ideas,” Scott says, adding, “When we travel, we’re able to go to other REIA meetings throughout the country. Our local chapter is a member of the National REIA, so there is no charge to attend other National REIA chapter meetings.”
As Scott and Christine’s plan to travel the country takes shape, they’ll sell a handful of properties owned in their retirement accounts. That will produce the cash flow to support them. They also plan to continue to earn tax-free profits by loaning their IRA money to other investors.
“It’s been great for us,” Christine says of self-directed investing. She adds that they’ve never had any retirement accounts through their employers, but self-directed real estate investing has given them the power to retire on their terms. “We have control this way.”
Am I restricted to only purchasing residential property with my IRA?
How do I sell a property owned by my IRA?
Can I use funds from my IRA to renovate property to sell it at a higher price?
Case studies provided are for illustrative 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.
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