Note: The following client was named Equity Trust’s 2018 Self-Directed Investor of the Year. As a result, his annual maintenance fee will be waived (up to $500 per year) on his Equity Trust account for life.
As little as two years ago, Mark of North Carolina had all of his retirement savings in stocks, bonds and mutual funds. In the short time since then, he has completed two real estate-related investments, which are benefitting his IRA with double-digit returns. In addition, Mark, who is in his sixties, has three more real estate investments in progress in his IRA.
“I wish I would have known about this 10 years ago,” he says of self-directed investing.
In 2017, Mark wanted to diversify beyond the stocks and bonds that his account held. He asked the financial institution where he completed stock trades about the possibility of diversifying with a self-directed retirement account. The company told him that he’d need to find a self-directed account custodian to handle this type of investing, referring him to Equity Trust.
At Equity Trust, Mark’s investing possibilities are expanded. Equity Trust self-directed retirement accounts enable investors to invest in a variety of assets in addition to stocks, bonds and mutual funds, including but not limited to real estate, notes, tax liens, cryptocurrency and precious metals. Mark, who had previously invested in condos, was interested in using his self-directed IRA to fund his real estate investments.
First Investment Nets 27-Percent Return
Mark’s first self-directed investment was a rehab property he learned about from a Realtor acquaintance. The first time Mark stepped into the house, it was like entering a time capsule. The previous owners bought the property in the 1970s and had recently passed away. The wallpaper and décor appeared to be unchanged since the 1970s.
“It needed a bunch
of work,” he recalls.
Mark’s Equity Trust IRA purchased the three-bedroom, 1,700-square-foot house for $89,000, based on the appraisal.
“I sat on it for four to five months,” he says. “I never did [real estate rehabs] before…I didn’t know where to start.”
Investments held in an IRA must follow IRS regulations, including prohibiting disqualified individuals (in this case, Mark) from performing work on the investment. Through his networking, Mark was referred to a contractor who was able to walk him through the process and provide the catalyst he needed. The contractor performed extensive updates to give the house a modern-day facelift, including new flooring, appliances, cabinets, HVAC system, landscaping, décor and paint.
Mark sold the property for over $200,000 just 14 months after purchasing it. After rehab costs close to $64,000, (which must be paid by his IRA, per IRS rules), a profit of $45,000 went back into his IRA. “You cannot generate that type of return in the stock market today,” he says.
Second Investment: 60-Percent Note ROI
While the house rehab was in progress, Mark learned of another real estate project in need of funding. The project was a house tear-down and rebuild.
Three investors contributed a total of $100,000 for the purchase and were looking for a loan on the holding costs. Mark’s IRA loaned $125,000 for the project with an unsecured note. The note was redeemed for just under $200,000 14 months later when the house sold. Mark’s IRA gained $75,000 – a 60-percent return.
How Mark Gained Momentum
The two investments were just the beginning of what has been a prolific, profitable period for Mark and his self-directed IRA, but he admits there was a bit of a learning curve in the beginning.
An investment involving an IRA requires different paperwork than an investment outside an IRA, so the process can differ from what the investor is used to.
“We had conference calls with Equity Trust, my attorney and me until we were comfortable with how to structure a partnership within the IRS rules,” Mark says, adding it wasn’t a major hang-up. “It’s just the cost of doing business,” he says, adding, “Once we set that up, we knew.”
Equity Trust helped Mark through the process, he adds. “[Equity Trust} has always been a pleasure to work with and you’re accessible, which is important. It might not always be the processor, but if I call someone will answer my question.”
Self-Directed Investing: It Takes a Team
After not knowing how to begin his first rehab, Mark now has a go-to contractor and a system for getting jobs done.
“I hired a contractor who knew what I wanted,” Mark says, adding, “I go out there weekly to check on it and see where we’re at and what is coming next.”
By doing this, Mark is able to request the money from his IRA to purchase supplies for the contractor’s next task. As an Equity Trust client, he is able request funds from his account or pay bills related to the investment from any internet-connected device with the account management system myEQUITY, saving time and effort.
Once Mark got through the learning process with those first two investments, he wanted to be comfortable before moving forward with partnering on other investments with some of the same investors. “Once those first two went well, I’m comfortable working with them and that’s why I feel more confident.”
Mark has initiated three more self-directed real estate investments, with even more to come. He has formed a relationship with a builder and a real estate agent and plans to continue using his IRA to fund luxury home construction in the $190,000 to $225,000 range. He anticipates a return of at least 20 percent on each property.
In addition to the learning experience of completing his first few self-directed investment transactions, Mark says he benefitted from knowledge of those he met networking. He received referrals from fellow attendees at the local Real Estate Investors Association (REIA) chapter meetings, and now he has a network of professionals to turn to – not to mention a source for prospective investments.
“There are opportunities out there, people just don’t realize it,” Mark says. “Go out and network and meet some people. Meeting a Realtor has really been a huge help for me.”
Hear More from the Self-Directed Investor of the Year: Exclusive Webinar
Learn more about the 2018 Self-Directed Investor of the Year’s journey: View this on-demand webinar
where Mark reveals more details about his investments, how he found them and how he became comfortable with self-directed investing.
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.