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Brian, an active duty member of the United States Army for over 15 years, and his wife bought a house near the army base where he was first commissioned. For a better part of a decade, Brian’s home alternated as a rental and a residence between deployments.
“It worked out well,” he says. “It was a home and an investment all at the same time, which was great.”
This was prior to opening a self-directed IRA. Per IRS rules, you cannot personally use or live in an asset held in your IRA.
After selling the home when he was deployed overseas, the experience stirred a curiosity in Brian that continues today. “I was kind of bit by the real estate bug and never really let it go,” he recalls. “Even overseas, I kept looking for properties and things to invest in.”
Upon returning to the United States, Brian wanted to get back into real estate investing, but faced challenges many investors encounter.
After purchasing a new home for his family (not with his IRA) and working full-time, he felt he didn’t have the capital nor the time needed to invest in real estate.
Despite the limitations, curiosity and determination continued to drive Brian.
To this point, Brian’s experience in real estate was solely with his personal funds. He didn’t yet know it was possible to use retirement accounts to invest in real property.
He previously focused on stock and mutual fund investments with his Roth IRA until he learned about self-directed IRAs and the ability to invest beyond traditional investments.
Once Brian discovered a self-directed IRA could invest in real estate, he realized the investment capital he was searching for could be found in his Roth IRA.
“I learned that when the government created retirement accounts, it created them so you could invest in almost anything – with a few exceptions,” he recalls of his discovery.
In fact, self-directed IRAs and alternative investments, such as real estate, have been permitted by the IRS since the IRA was established in 1974.
With his newfound knowledge, Brian decided to move forward. He transferred a portion of his Roth IRA to a self-directed Roth IRA at Equity Trust, while maintaining traditional stocks and bonds in the previous account at another financial institution.
I decided to start investing in other things and truly diversify. Not just diversify within the stock market, but diversify into real, tangible investments.
Brian, Equity Trust Client
Brian remained active in his real estate investing market – regularly attending local investor group meetings and networking with like-minded individuals. He connected with a team of investors that had recently formed a limited partnership focused on revitalizing a key area of residential real estate in Baltimore.
Brian, who describes himself as a “measure twice, cut once kind of guy” performed his due diligence on the limited partnership and their investment strategy.
He traveled to Baltimore to meet the investors and to see the properties the limited partnership was already renovating and the neighborhoods it was targeting for investment.
Satisfied with his due diligence, Brian directed his Roth IRA to invest $10,000 for a 10-percent ownership in the real estate limited partnership in August 2016.
The limited partnership was targeting an area of east Baltimore near John Hopkins University. The neighborhoods were full of vacant and blighted properties, including “rows of boarded-up townhouses with no one in them,” Brian says.
Despite the surroundings, the area was not without hope.
“You could see people trying, little by little, to turn it around,” Brian recalls of his visit. He described neighborhoods where one of the 20 houses was recently renovated. “You could see there was one person, who bought one house, trying to fix it up.”
The strategy of the limited partnership – and what attracted Brian’s interest – was to invest in an entire block. “Instead of doing one at a time, the goal was to pool funds to renovate properties on the whole block or several blocks,” he says.
The limited partnership’s approach is to help provide Section 8 tenants a place to live, while the guaranteed income from the government-backed program helps provide the financial return for investors like Brian. After the time required by the Section 8 program, the limited partnership has the option to continue renting or sell the unit.
Another potential benefit that interested Brian was the property values. “The price values for each house are partially based on the surrounding properties,” he says. “So if the entire block is improved, all the properties potentially benefit from the price increase and hopefully the values of all properties go up.”
The limited partnership “had all the pieces in place,” Brian says, including acquisition, construction, renovation, and property management. Brian felt this structure was scalable and allowed him to remain passive throughout the entire process.
At the time of publication, Brian’s Roth IRA received a total of $756 through the first nine months – keeping pace with the 10-percent annual percentage yield (APY) he expected when first making his investment.
The payments are set to continue through the first two years until his initial investment is returned. The returns are tax-free because he used a Roth IRA.
Brian admits a cash investment in a Limited Partnership is a risk, with no collateral or tangible property – a characteristic that first attracted him to real estate. It was a risk he considered worth taking after performing his due diligence.
“That’s the case with any investment, you need to accept the risks that go with it,” he said. “You don’t take your grocery money to the casino because you need to be willing to lose whatever you invest.”
His first self-directed IRA investment was financially motivated to help save for retirement, but Brian admits “it’s pretty cool” his investment is helping in other ways. His Roth IRA investment is helping to revitalize run-down areas in Baltimore and provide affordable housing to residents in the area.
Brian’s story is another example of the flexibility self-directed IRAs can provide investors. “Now that I’ve done it once, I know I can do it again,” he says.
“I love real estate and love being involved in real estate, but I just don’t have the time. This investment allowed me to be part of the process and learn about the real estate industry without taking away from my family or my job,” says the 16-year active duty member of the U.S. Army, adding, “which is pretty important too.”
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Case studies provided are 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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