Over the past five years, David watched as several homes in his rural neighborhood of southwest Ohio succumbed to foreclosure. He followed the recent activity as a resident, but it also piqued his interest as an investor.
In particular, David was intrigued by the house across the street from his own 54-acre farm after the previous owners, friends of his for more than 20 years, passed away.
At that time the property was acquired by someone else, but David kept his eye on the property and waited patiently for a few more years – hoping he’d have another opportunity to purchase the home.
Patience and Timing Fall into Place
Beginning in the summer of 2016, several factors converged that would lead David to complete his first self-directed IRA investment – one that would earn him Equity Trust’s 2016 Self-Directed Investor of the Year Award
After several years monitoring the property’s status, David discovered it was near foreclosure and saw his opportunity to make a private offer to the current owner. He described market volatility in the summer of 2016 as the deciding factor for him to look into purchasing the property with his retirement account.
“I watched my stock go down considerably that day (the day of the Brexit vote) and grew concerned about the level of volatility in my portfolio, especially now that I’m 50 years old,” he says. “I wanted to diversify a portion of my retirement savings outside the market and it just so happened that this opportunity appeared.”
David then asked his 401(k) custodian about purchasing real estate with his retirement funds and they provided a phone number for Equity Trust.
“Living in Ohio, I knew there was a company in Cleveland that would allow me to do this,” he recalls. “So I started researching and asked friends and associates in the Cleveland area for more information about Equity Trust.”
He decided to visit the Company headquarters and met with a Senior Account Executive to set up his account and rollover funds from his 401(k).
Personal Knowledge, Homework, and a Team of Professionals Help Set the Stage
David was familiar with the property, having lived across the street for more than two decades. “I knew the house intimately and knew the man who built it, so I had a good understanding of the property,” he says.
David admits there were emotions involved, including his desire to help clean up his neighborhood and improve a nuisance property. “There's a tremendous amount of foreclosures in this area,” he says. “I just imagined if this house was foreclosed upon that I would be looking at it every day and be pretty powerless.”
However, he guarded against an emotional decision by taking his time to perform his due diligence and working with a trusted team of professionals.
“I did my homework,” he says. “I watched other houses sell in the neighborhood to help estimate my bid price and took a lead from a delinquent tax report in the local paper to identify just how underwater the current owner was.” He discovered the current owner owed approximately $77,000 in back taxes and liens.
David credited three people for helping to facilitate this investment: a local lawyer specializing in real estate, a representative from a local real estate auction company, and a friend who owns 30 rental properties.
“Even though, emotionally, I really wanted this place, I had to trust in my experts to keep me focused,” he says.
David worked with the auction company to help place his IRA’s bid and his IRA purchased the property for approximately $175,000. Equity Trust issued a check from his IRA to his attorney, who helped navigate the closing, including paying off the liens and working through issues that arose from the inheritance of the property to the current owner.
“It was a complicated closing,” he remembers, “but it all worked out.”
David proudly recalled the results, not only of his first self-directed IRA investment, but also his first foray into real estate investing: “This is the third house I’ve ever bought and it was the first house I bought as an investment property,” he says.
Helping More than His IRA
Three months after closing – in March, 2017 – David’s first tenants signed a one-year lease. David was willing to lower the rent if it meant having tenants he could rely on to take care of the place.
David’s new neighbors are a couple he’s known for many years – a Korean war veteran and his wife who were unhappy in their previous location and wanted to return to the countryside.
David referenced the comfort he has knowing his tenants and the close proximity of his first investment property. He even praised how they’ve decorated the place and made it feel like home since moving in. “It looks amazing,” he says. “It looks better than anything I would have done and I’m very happy they’re enjoying their new place.”
David’s IRA receives $1,000 per month in rent, returned tax-deferred to his account, and also had the property appraised recently at $225,000.
“When my IRA bought the place for $175,000, I had a feeling it was undervalued, but I was pleasantly surprised how much it was really worth,” he says.
Finally, David shared how his very first IRA investment benefitted more than just his retirement savings:
“My timely purchase allowed the previous owner to pay off her debts, avoid foreclosure, and step down into a more reasonable home,” he says. “The bank got paid, the county got paid, the previous owner was given a fresh start, and my IRA receives monthly rental income. And, as a bonus, my new tenants have a nice place to live in the community.”
The above case study is for educational 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.