Self-Directed Investor of the Year: Bouncing Back from Bankruptcy

By Keith Blazek2 Comments
Introducing our 2015 Self-Directed Investor of the Year winner, Lowell from California. He was chosen from more than 70 submissions based on his self-directed investment success, perseverance and commitment to the community. As the grand-prize winner, he will have his IRA annual fee waived for the rest of his life. Stay tuned for the stories of the runners-up in the coming weeks.

Lowell, a client from California, taught at the elementary, middle school and high school levels in California for 31 years and was energized by helping children and impacting their lives. After losing his life savings, he found a way to gain it all back with the help of self-directed IRAs and is now re-energized by impacting the lives of members in his community.
 
For 25 years, Lowell diligently saved for retirement with his 403(b) retirement plan and invested in annuities and mutual funds. “I was very disappointed with the mutual funds,” he recalls. “I was earning around 4 percent and was not earning the returns that go with the hype of marketing mutual funds. In fact, the mutual funds were not doing much better than the fixed annuities.”
 
Lowell decided to use real estate investments to insure his future, but unfortunate timing and some bad luck resulted in a major roadblock to his retirement dreams.
 
Attempt at Real Estate Part 1: Investing with Personal Money
 
Over a decade ago, Lowell decided he wanted to supplement his struggling 403(b) investments by diversifying with real estate. He had a few contacts in Utah and purchased three duplexes and two single-family homes as rental properties.
 
Not yet knowing real estate investments inside an IRA were possible, Lowell purchased the real estate outside of his IRA and needed mortgages to finance the properties. He covered the mortgages with the rent coming in and hoped to profit from the cash flow and appreciation of the properties.
 
This was before 2008.
 
When the market crashed in 2008-2009, Lowell was hit hard. After the bubble burst, tenants stopped paying rent, his property manager struggled to keep the properties in the black, and Lowell was soon unable to cover the mortgage payments he owed.
 
At this point, Lowell borrowed $70,000 from his 403(b) savings to help keep things afloat…it was gone in three months.
 
Not only were his personal finances tied up in the failing rental properties, but he was forced to siphon from his retirement funds after 25 years of saving just to stay afloat.
 
“I looked at myself in the mirror and said, ‘You can’t keep doing this,’” Lowell remembers.
 
Losing Everything and Starting Over – The Climb Back
 
Lowell filed for bankruptcy and lost everything (except for his retirement account, which is judgement-proof). He gave back his investment properties in Utah and lost his personal residence. “I essentially started at zero again,” he remembers, “I knew I was approaching retirement and knew the Utah rental properties were going to bury me.”
 
Lowell retired from teaching in 2010 and needed a way to rebuild what was left of his 403(b) retirement account. Disappointed in his account’s performance, he began searching the internet for different ways to invest his 403(b) money and achieve a better return. “This is when I discovered self-directed IRAs,” he says.
 
In early 2011, Lowell rolled over his 403(b) into a self-directed IRA and “never looked back.” He explains, “I decided an Equity Trust self-directed IRA was the right fit for me because, with the right types of investments, I saw opportunities to quickly grow my retirement nest egg.”
 
Attempt at Real Estate Part 2: Award-Winning Self-Directed IRA Investing Success
 
Lowell learned from his past mistakes and decided real estate was still a viable option for his retirement investing, despite his past hardships. “My mistake was using mortgages because there was too much at risk,” he says. “Since my IRA now owns each property, I know that even if a property sits vacant, I am not losing money other than the necessary costs of insurance and taxes. I don’t have mortgage payments to put me under.”
 
Recently, Lowell successfully sold two investment properties, creating results that helped him earn the Equity Trust 2015 Self-Directed Investor of the Year award. The award includes a prize of having his annual fee waived on one of his IRA accounts for the rest of his life.
 
One investment was a bank-owned single-family home and the other was a single-family home he acquired through a county tax sale auction. He’s stayed out of Utah and now focuses on properties closer to his home in California, so he can keep a closer eye on them. He’s also connected with a real estate agent in his area, who has helped Lowell identify opportunities and work with the banks to acquire the properties.
 
He acquired his first property in April 2013 from a bank-owned REO sale for $85,142 ($84,000 purchase price plus closing costs). “This is where a good real estate agent working for you can help convince the bank they need to sell the property and liquidate at a lower price,” Lowell explains.
 
Lowell rented the property for two years, providing consistent cash flow and growth deposited back to his IRA, until the property sold in December 2015. Between the rental income and the sale price, the property generated a 76.85 percent return on investment (ROI).
 
The other investment property was acquired in February 2014 from a county tax sale auction. Lowell subscribes to a service that allows him to monitor trustee and tax sales. He identified a home built in 2007 but, as with most tax sales, Lowell was unable to fully inspect the home because it was locked up and boarded.
 
“You really have to follow the clues that you can see,” says Lowell. Clues he looks for include the extent of any vandalism, the conditions of the roof and garage door, the surrounding neighborhood and the build of the home. “The condition of screens on doors and windows is, surprisingly, one of the big ones for me. I’ve often found that torn or damaged screens are red flags to the condition of the interior.”
 
Lowell purchased the property at auction for $55,261 and, after adding around $10,000 in repairs and maintenance, sold the property in October 2015 for a total ROI of 69.4 percent.
 
The Ripple Effect of His Success
 
Since retiring in 2010, Lowell estimates he’s revived 15 properties in his community, either directly through his self-directed IRA or by loaning money from his account to other investors. “I live in this community and it was obliterated in the crash of 2008-2009, probably 10 percent of the homes were lost,” he says. “When I drive around my community and see yards that are trashed or houses in poor condition, or even to see homes vacant – it pains me – because I know there are people who are looking for nice places to live.”
 
One family comes to mind for Lowell. “I recently rented to a young couple. The husband gets weekly dialysis due to kidney issues,” Lowell recalls. “They have children and were hoping for more stability.” The couple was receiving public housing assistance until it was pulled abruptly near the holidays. After hearing the news Lowell stopped by with a gift for the holidays. “I changed the terms mid-lease and lowered their rent by $125 to give them some more breathing room. I remember the father telling me in that moment ‘prayers really do come true.’”
 
Lowell also donates salvaged items from his properties to Goodwill. In one investment we discussed earlier, the cleanup crew took two trailer loads of furniture and household items to Goodwill for donation along with ten large 30-gallon trash bags of clothes. “It is wonderful that my IRA grows, but I get great satisfaction in seeing a home come to life and return as a viable part of our community,” he says.
 
Furthermore, tales of Lowell’s success have caused similar changes in those around him. The topic typically comes up when people ask what he’s doing in retirement. “When I tell them that I invest in real estate with my IRA they usually get a confounded look. I can tell they do not know what I’m talking about, but my success gets people interested,” he says.
 
In 2015, Lowell’s wife and mother-in-law opened accounts at Equity Trust and his brother-in-law is in the process of doing the same. Lowell’s wife just completed a deal on another trustee sale home with the intent of renting it. However, the prospective tenant was interested in buying the house, and with that sale, his wife’s IRA earned a 48-percent ROI in less than 150 days.
 
Lowell now focuses his self-directed IRA on bank-owned foreclosures and tax-defaulted properties, but he’s also done several hard money loans. On one of his deals, Lowell loaned $40,000 to a real estate investor for three months and earned $10,000 tax-deferred back to his IRA.
 
Lowell says the potential that self-directed IRAs can offer makes them worth looking into. “I would tell an IRA account holder that now is the time to get a self-directed IRA. I have made more return on my IRA money in the past five years than I did in the previous 25 years in mutual funds.”