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Investor Insights Blog|Bouncing Back from Bankruptcy: A Real Estate Roller Coaster

Real Life Examples

Bouncing Back from Bankruptcy: A Real Estate Roller Coaster

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Failure is an inevitable part of life. Often, it’s how you respond that matters most. Do you learn from your mistakes and continue working toward your goals? Or do you let the failure define you?

This was the challenge facing Lowell, a client from California, after a few failed real estate investments forced him to declare bankruptcy.

His perseverance, and the potential he found in a self-directed IRA, solidified his financial footing again.

Lowell taught at the elementary, middle, and high school levels in California for 31 years and was energized by helping children and impacting their lives. For 25 years, he diligently saved for retirement with his 403(b) retirement plan and invested in annuities and mutual funds.

“I was very disappointed with the mutual funds,” he recalls. “I was earning around 4 percent and was not earning the returns that go with the hype of marketing mutual funds. In fact, the mutual funds were not doing much better than the fixed annuities.”

Lowell decided to pursue real estate to bolster his portfolio, but unfortunate timing and bad luck resulted in a major roadblock to his retirement dreams.

Attempt at real estate part 1: investing with personal money

Over a decade ago, Lowell decided he wanted to supplement his struggling 403(b) investments by diversifying with real estate. He had a few contacts in Utah and purchased three duplexes and two single-family homes as rental properties.

Not yet knowing real estate investments inside an IRA were possible, Lowell purchased the real estate outside of his IRA and needed mortgages to finance the properties. He covered the mortgages with the rental income and hoped to profit from the cash flow and appreciation of the properties over time.

“I have made more return on my IRA money in the past five years than I did in the previous 25 years in mutual funds and am able to help my community in the process.”

Lowell, Investor, California

This was prior to 2008, but Lowell was hit hard when the housing bubble burst and the market crashed.
Tenants stopped paying rent, his property manager struggled to keep the properties profitable, and soon Lowell was unable to cover the mortgage payments he owed.

Desperate, Lowell borrowed $70,000 from his 403(b) savings to cover the mortgages and try to keep things afloat. He burned through it in just three months.

This was the last straw. Not only were his personal finances tied up in the failing rental properties, but he was forced to drain his retirement funds after 25 years of saving.

“I looked at myself in the mirror and said, ‘You can’t keep doing this,’” Lowell remembers.

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Losing everything and starting over – the climb back

Lowell filed for bankruptcy and lost everything (except for his retirement account). He lost his investment properties in Utah and even his personal residence. “I essentially started at zero again,” he remembers, “I knew I was approaching retirement and knew the Utah rental properties were going to bury me.”

Lowell retired from teaching in 2010 and needed a way to rebuild what was left of his 403(b) retirement account. Disappointed in his account’s performance, he began searching the internet for different ways to invest his 403(b) money in the hope of a better return. “This is when I discovered self-directed IRAs,” he says.

In early 2011, Lowell rolled over his 403(b) into a self-directed IRA and “never looked back.” He explains, “I decided a self-directed IRA was the right fit for me because, with the right types of investments, I saw opportunities to quickly grow my retirement nest egg and make up for lost time.”

Attempt at real estate part 2: self-directed IRA success

Amazingly, Lowell felt he learned from his past mistakes and decided real estate was still a viable option for his retirement investing, despite his past hardships. When asked how he could possibly consider returning to real estate after it forced him into bankruptcy in the past, he replied, “My mistake was using mortgages because there was too much at risk,” he says.

“Since my IRA now owns each property, I know that even if a property sits vacant, I am not losing money other than the necessary costs of insurance and taxes. I don’t have mortgage payments to put me under.”

Recently, Lowell successfully sold two investment properties: a bank-owned single-family home and a single-family home he acquired through a county tax-sale auction. He’s stayed out of Utah and now focuses on properties closer to his home in California so he can keep a closer eye on them.

Rather than go at it alone again, Lowell connected with a real estate agent in his area. His agent has been instrumental in his success, helping Lowell identify opportunities and work with the banks to acquire the properties.

His IRA acquired his first property from a bank-owned REO sale for $85,142 ($84,000 purchase price plus closing costs). “This is where a good real estate agent can help negotiate with the bank and get them to liquidate at a lower price,” Lowell explains.

Lowell rented the property for two years, providing consistent cash flow and growth deposited back to his IRA, until the property sold just over two years later. Between the rental income and the sale price, the property generated a 76-percent return on investment (ROI).

The other investment property was acquired from a county tax-sale auction. Lowell subscribes to a service that allows him to monitor trustee and tax sales. He identified a home built in 2007 but, as with most tax sales, Lowell was unable to fully inspect the home because it was locked up and boarded.

“You really have to follow the clues that you can see,” says Lowell. Clues he looks for include the extent of any vandalism, the conditions of the roof and garage door, the surrounding neighborhood and the build of the home.

“The condition of screens on doors and windows is, surprisingly, one of the big ones for me,” he says. “I’ve often found that torn or damaged screens are red flags to the condition of the interior.”

Lowell purchased the property at auction for $55,261 and, after adding around $10,000 in repairs and maintenance, sold the property just over a year later for a total ROI of 69 percent.

The ripple effect of his success

Since retiring in 2010, Lowell estimates he’s revived 15 properties in his community, either directly through his self-directed IRA or by loaning money from his account to other investors. “I live in this community, and it was obliterated in the crash of 2008-2009. Probably 10 percent of the homes were lost,” he says.

“When I drive around my community and see yards that are trashed or houses in poor condition, or even to see homes vacant – it pains me – because I know there are people who are looking for nice places to live.”

One family comes to mind for Lowell: “I recently rented to a young couple. The husband gets weekly dialysis due to kidney issues,” Lowell recalls. “They have children and were hoping for more stability.”

The couple was receiving public housing assistance until it was pulled abruptly near the holidays. After hearing the news, Lowell stopped by with an early gift.

“I changed the terms mid-lease and lowered their monthly rent by $125 to give them some more breathing room. I remember the father telling me in that moment ‘prayers really do come true.’”

Lowell also donates salvaged items from his properties. In one investment shared earlier, the cleanup crew dropped off two trailer loads of furniture and household items to charity along with ten large 30-gallon trash bags of clothes.

“It is wonderful that my IRA grows, but I get great satisfaction in seeing a home come to life and return as a viable part of our community,” he says.

Furthermore, tales of Lowell’s success have caused similar changes in those around him. The topic typically comes up when people ask what he’s doing in retirement.

“When I tell them that I invest in real estate with my IRA, they usually get a confounded look. I can tell they do not know what I’m talking about, but my success gets people interested,” he says.

Lowell’s wife and mother-in-law opened accounts at Equity Trust. His brother-in-law is in the process of doing the same. Lowell’s wife just completed a transaction on another trustee sale home with the intent of renting it. However, the prospective tenant was interested in buying the house, and with that sale, his wife’s IRA earned a 48-percent ROI in less than 150 days.

Lowell now focuses his self-directed IRA on bank-owned foreclosures and tax-defaulted properties, but he’s also done several hard money loans. On one of his transactions, he loaned $40,000 to a real estate investor for three months and earned $10,000 tax-deferred back to his IRA.

Lowell says the potential that self-directed IRAs can offer makes them worth looking into.

“I would tell an IRA account holder that now is the time to get a self-directed IRA. I have made more return on my IRA money in the past five years than I did in the previous 25 years in mutual funds and am able to help my community in the process.”

Discover more real-life investor stories: Access your free Case Study Guide

 

1

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

2

Am I restricted to only purchasing residential property with my IRA?

You are not limited to residential real estate. Your IRA can hold various investment properties such as commercial buildings, vacant land, condominiums, mobile homes and apartment buildings, in addition to residential property.

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.

 

 


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