Equity Trust client Tom from Illinois is using his self-directed IRA to help various under-privileged families get their feet back on the ground with an affordable housing solution – an approach that could benefit both his tenants and his retirement.
Tom is retired and works part time for his church and says he considers many of those in his church to be brothers and sisters.
“My brothers and sisters have experienced job loss and a loss of assets, including the loss of their homes. I use my Equity Trust self-directed IRA to help provide good shelter at lower-than-market costs for these families while making a strong, but low-risk, return,” he says.
Tom has used a lease-option strategy for his self-directed IRA real estate investments with the goal the tenants will purchase the home at the conclusion of their three-year lease. He involves the family in his investment process from the very beginning, never losing sight that there are people (other than himself) involved in his retirement investment.
Tom explains, “I first meet with the family to discuss their needs, their work situation, and sit down with them to work on their budget. We come to an agreement as to what they can safely afford and then decide when to move forward.”
He works with a real estate agent in the area who has helped him set up search criteria for the properties he is looking for and says he focuses primarily on distressed properties to allow for higher equity growth. Part of Tom’s model is that the family helps to improve the property while they live there so he attempts to match their skill set with any improvements needed on the home.
Tom then allows the potential renters to select their own home from a list of options provided by his real estate agent. This is important for his goal to have the tenant purchase the home after the three-year lease, but also because he wants the families he is helping to enjoy where they live. Tom visits the home they select and determines whether or not he approves of the purchase. This is important because as Tom puts it, “though the intent is to sell them the home in three years, I don’t want to have a home dropped in my lap that I wouldn’t want to own as a simple rental.”
Tom also factors rehab costs, any costs associated with his self-directed account, and other costs before he determines his potential for return. He tries to keep 9.6 percent as the minimum return on his investments (primarily through rent), but can recoup more if he profits on the sale of the home as well.
Another part of the agreement is that the renters must set aside “forced savings” to be used as a down payment at the conclusion of the three-year lease so the family can more easily purchase the home from Tom’s IRA. If the family elects not to purchase, his IRA keeps the down payment as part of his investment’s return. The down payment and the ability to select the home of their choosing help to bolster the level of commitment of his tenants, increasing the likelihood he can sell the property back to them when the lease expires.
Let’s let Tom explain how one of his families is doing:
“I am currently doing a three-year lease (with the option to buy) for a family of seven – a friend of mine, his wife, and their five young kids. They were renting outright for more than I am charging for rent, in addition to the savings I’m helping them set aside for the purchase in three years. We agreed on the work that needed to be done to the home and my IRA will pay as the work is completed. I budgeted $15,000 for rehab work and added that to the base of the investment when I was calculating my return. I still plan to make more than 9.6 percent per year over the next three years, plus any profit on the sale of the home when the lease expires.”
The word of Tom’s win-win investment properties has begun to spread and he now has a list of people waiting on a potential opportunity, allowing him to be more selective when choosing tenants. He’s even using the IRA funds from the sale of his first “win-win home” to help two other families get back on their feet.
A solid, steady 9.6-percent ROI is ideal for the retired Tom, but the ROI goes beyond the money he’s received tax-deferred back into his IRA. “They had financial troubles a few years back and this is helping them get back on their feet,” he recalls.
Self-directed IRA investors can provide a unique and much-needed funding source for families in need. The ripple effect of self-directed IRA investments go beyond the ROI for the individual investor, but extend to all those who are positively impacted by the investment itself.
Find out how you could potentially create your own self-directed IRA success story: Sign up for a free consultation with a Senior Account Executive.