A mother of three teenagers, Carmen of North Carolina knows how quickly time seems to pass by. Recently, she feared opportunities to bond with her children were fleeting.
“My oldest son was about to turn 18, and I knew he wouldn’t live at home forever,” Carmen recalls. “I wished we had a common interest to connect us.”
Carmen, a real estate agent, often talked to her sons about financial literacy and real estate income as a way to secure their financial future. She was thrilled when her oldest son took an interest in real estate and began to talk to her about building passive income through real estate investing.
“My son had listened to all the Bigger Pockets (real estate investing online community) podcasts prior to the age of 17 that kept touting the benefits of generating passive income,” she says, adding, “I saw this as a unique opportunity for us to connect on something.”
Carmen wanted to encourage her son’s interest by showing him a real estate investment close-up, but she was short on funds to make an investment. Soon after, another real estate agent told her she could use her retirement account to invest in a variety of assets including real estate. A self-directed IRA or other account at a custodian such as Equity Trust made such investments possible. Carmen decided to roll over her 401(k) into an Equity Trust IRA.
“I opened this account so that we would have the ability to put into practice what my son was learning... in real time,” she says.
Real-life lesson in real estate investing boosts retirement portfolio
For her first self-directed investment, Carmen’s IRA purchased two duplexes near a local hospital. Her initial investment was $110,000, plus the cost of updates, which included new roofs and windows.
All expenses related to the property must come from Carmen’s IRA, per IRS rules (more information can be found at IRS Publication 590
). She found it convenient to manage any expenses and payments online through the account management system myEQUITY. The system allows her to set up one-time or recurring payments quickly on any internet-connected device.
“The ease of paying vendors is fantastic,” Carmen says, adding, “I’m a raving fan!”
The rent was around $500 per unit when she purchased the properties. The duplexes already had tenants, who were able to stay in the units during the updates.
Carmen’s son introduced her to an app called Cozy, which provides insight into the average rent in the area. After research, she decided she could charge as much as $620 per unit once the updates were completed, bringing the rent more in line with the regional average. This income will bring her annual return on investment to 13 percent.
Adding more properties for future stability
With the initial self-directed investment experience completed, Carmen is on a roll. She added units to her portfolio and is now receiving income from six rental units. Her goal is to accrue enough rental properties in her portfolio that she can receive $10,000 per month in passive income back to her IRA.
Carmen says she “probably won’t really retire” but seeks the peace of mind of having the stream of passive income coming into her retirement account. Income as a real estate agent can vary, so this would give her something to fall back on in later years. “I want something more stable coming in,” she says.
Carmen is also planning for her children’s financial future. So far she has opened a Coverdell Education Savings Account (CESA) for one of her sons, with plans of helping him grow his account by co-investing her IRA with his CESA in real estate investments. An added bonus is that she’s teaching her children financial fitness in the process.
While she is imparting financial and investing wisdom to her children, Carmen admits the enrichment is mutual.
“My son is making me a better landlord through his hours of learning,” she says.
Want to read more self-directed investing case studies like this? Download your complimentary guide featuring 11 client case studies.
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.
Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.