It’s Not Too Late: Client Turns to Real Estate to Boost Retirement Wealth

By Elsie Dudukovich0 Comments

Throughout his career in education, Alan of Texas utilized the available options for retirement savings, participating in the Teacher Retirement System’s Optional Retirement Program (ORP), 403(b) tax sheltered annuity plan (TSA), and a 457 Plan.  Those plans provide options in stocks, bonds, and CDs. But after the 2008 recession and the volatility of the stock market, Alan’s portfolio was reeling, and he started seeking different investment options for his retirement savings.  

Life Event Triggers Change in Retirement Investing
Alan’s interest in different retirement investing options piqued around the same time he got an unlikely start as a real estate investor. He was provided a home as a condition of employment when he became president of a local college.  He decided to rent his personal residence. Two years later his mother-in-law became ill and unable to live alone. Alan purchased her home to add to his rental properties – using the rental income Alan was able to pay off a loan to his mother-in-law while also providing her with a supplemental income in addition to her Social Security.

Both experiences of renting homes, while initially causing Alan uncertainty, ended up being positive. He discovered an aptitude for real estate investing and began to think about including real estate in his retirement portfolio.

“My long-time financial advisor had stressed the value of diversification and rebalancing of assets, and I decided to take action with my portfolio,” Alan says.

Real Estate Investing in an IRA Generates Wealth for Retirement
With the knowledge and experience gained from the previous rental experiences, Alan opened a self-directed IRA to invest in real estate. His goal was to take the knowledge of investing outside an IRA and apply it to a tax advantaged account.

“I wanted to stabilize my retirement portfolio,” Alan says. In 2010 he went to his advisor for guidance on investing in real estate in an IRA, stating he benefited from learning from his long-time financial advisor on the value of diversification and rebalancing the traditional assets in his portfolio and, as he says, “paying reasonable attention to the performance of his savings.”
In addition to transferring funds he was also bringing the knowledge, experience, market insights, network, and other learnings from renting outside of his IRA to stabilize his retirement savings in a tax advantaged account. Alan purchased his first IRA-held property shortly after opening his account. 

With Self-Directed IRAs, Alan Generates Nearly $33,000 Annually After Expenses
After opening his Equity Trust account, Alan found a home facing bank foreclosure in June of 2010. The property was rehabbed and turned into a rental property.

“I was apprehensive at the start, but I am open to learning new things and felt comfortable as I went through the process,” Alan says.

Alan’s Traditional IRA purchased the property for $71,000 and updated it over time with approximately $20,000 in improvements. Today, the property has an approximate appraised value of $123,000 and generates $1,350 per month in rental income. “The return on investment varies from 8-13 percent depending on maintenance cost and increases in taxes and insurance,” Alan says.

Completing the first transaction with his Traditional IRA gave him confidence to do it again. This time his traditional IRA purchased a property at an estate sale in December of 2010, and again after rehabbing turned the property into a rental. He then converted the property from his Traditional IRA to a Roth IRA, stating he “anticipated the long-term tax benefits even though it meant paying higher taxes in 2011.”  The property, now valued at $79,000, earns $1,200 a month – deposited directly into his Roth IRA.

Alan established a network of people he contracts and works with to complete rehabilitation and updates to properties.  Using Equity Trust’s myEQUITY account management system is straightforward and allows him to easily pay vendors. He also has established agreements with long-term tenants, helping him keep rental income steady and boost his portfolio.

Alan has purchased six rental properties; three in his Roth IRA and three in traditional IRAs with Equity Trust over the years.  Now retired, Alan says he receives Social Security and a stable flow of rental income due to his decision to diversify is retirement account into self-directed IRAs.

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Case studies are provided 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.