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Investor Insights Blog

First-Time Self-Directed IRA Investment Helps New Company Revitalize Baltimore

May 14, 2020
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

Finding an Investment Opportunity for his Self-Directed IRA

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.

With a self-directed IRA, it’s possible to invest in start ups, real estate development companies, limited partnerships, and more.

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.

Revitalizing Areas of Baltimore

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.”

Passive Investment Provides Financial Returns and Community Impact

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.”

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.

There are several reasons to open your self-directed account at Equity Trust Company, even before you have selected an alternative investment.

  1. If you are transferring cash/assets to your account from another custodian, you should allow time for the resigning custodian to process your request and deliver the account holdings to Equity Trust.
  2. You have the ability to invest in traditional assets while you are researching other opportunities.
  3. Once you have selected an alternative investment, you will not have other actions in process that may delay the funding processing.

Some of the investments Equity Trust clients make using their self-directed accounts include real estate, tax liens, digital currencies such as Bitcoin, private lending, purchasing notes, private placements, precious metals, forex and other investment options that are permissible under IRS guidelines.

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