Creative Thinking Helps Investor Control Real Estate Rehab Costs

By Keith Blazek0 Comments

The following case study is from the book “Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing.” It illustrates one type of investments possible with a self-directed IRA: raw land.
 
It took creative thinking for Scott, an Equity Trust client from Ohio, to ensure the expenses of his rehab project did not cripple his profit potential.

When Scott went in search of a property to invest in and renovate using his self-directed IRA, he found a home in a sought-after part of town that had a reputation as a public nuisance. He bid on the property and his self-directed IRA purchased the home for $68,404. Scott worked with a local contractor who hired employees recently released from prison and trying to make a living and get their lives back on track.

The strategy Scott used on this deal included an agreement with his subcontractor that specified a fixed amount for the rehab and renovation of the home. His subcontractor agreed to complete the entire rehab process for $24,000 – allowing Scott to more easily factor his expected return on his investment (ROI). It also reduced the risk that he got caught up in the project and overextended his funds on extra improvements that were not necessary to make a profit. The fixed expense allowed his subcontractor to budget exactly what needed to be done to improve the property.

The subcontractor agreement was actually finalized before Scott’s IRA closed on the property. He was able to start the project with a clear and concise financial projection.

Scott’s subcontractor ended up going over budget by an additional $1,000 but did not miss the expense goal of $24,000 by much. In just four and a half months Scott was able to sell his rehabbed property for a 45-percent ROI. That’s an annual yield of more than 100 percent on his investment – something rarely found outside of self-directed IRA investing. All told, Scott’s investment breaks down like this:
  • Initial Purchase: $68,404.55
  • Subcontractor Expense Budget: $24,000
  • Subcontractor Additional Expense: $1,000
  • 4½ Months of Utilities: $947.63
  • Total Expenses: $25,947.63
  • Total Costs (expenses + purchase price): $94,352.18
  • Sale Price: $125,265.39
  • Total Profit: $30,913.21
  • Return on Investment: 45.19% in 4 ½ months
  • Annualized Return on Investment: approximately 135%
By capping his expenditures, Scott was able to more accurately predict and anticipate his investment return. Since real estate is a tangible asset, something you can walk through and inspect, it is much easier to predict and plan for the investment, especially when compared to the rise and fall of the stock market. While the value of real estate is affected by market conditions and a host of other factors, you have much more control over the value of your investment property. When you upgrade a dilapidated kitchen with new kitchen cabinets, appliances and floors, you can see the increase in value with your own eyes. You have control over how the investment performs by controlling the management, improvement, and sale of the asset.

To read more than 30 more case studies about clients using self-directed IRAs, as well as an overview of retirement savings options, check out Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing