WRITTEN BY STEPHEN L. DECKER, REAL ESTATE BROKER
JUNE , 2010
I, like many Americans, who diligently save for the day I can stop working for a living, took a rather huge exception to my stock brokers question; “What is your tolerance for loss?” I asked, “Why should I be willing to have any tolerance for loss? This is the hardest earned money I have. It is the money that I have made over and above what it takes to live”. He, in an almost put off sort of way said, “well, if your not willing to take a risk of loosing money, than you can’t make money either”. Sound familiar. The financial industry has decided this is what we should all be willing to accept. It’s total crap. They’re merely setting us up, so we call them in a panic about our stock portfolio, begging for advice, so they can churn our account. I fell right into their hands, for a while. When the stock market was at an all time high, just over 14,000- DJIA, it took a little slip downward. I called my new financial advisor, because my last advisor moved onto bigger accounts, and my account was given to the next new guy on the floor, that happen several times, I digress-sorry, I told him to sell everything and put it into “money markets”. He of course gave me the same old crap, you should buy when the market drops, not sell. “Sell it”. That turned out to be a good move in January of 2007. By the time he sold the mutual funds and what ever else I had, the account had recovered and I escaped without loosing anything. I advised my wife to do the same, she listened to her broker, and six months later lost 20% of the capital. Then she moved it into money market accounts. So now all the money is sitting in a money market, safe, secure earning perhaps 2% or less. Not a good choice, but better than leaving it in the stock market. I then started seriously trying to figure out a better alternative. It’s called a Self Directed IRA. Just a few companies offer it. I buried myself into reading all the rules and regulations and discovered a lot of stuff that really boils down to a pretty simple procedure.
Transfer your money from the Dean Witters, Meryl Lynches, or where ever you have it, to a company that handles “Self Directed IRA accounts. I chose Fiserv; they have an office in downtown Denver, and have since changed their name to Lincoln Trust. By the way, the transfer took over six weeks. It seems you can give them your money in an instant, but takes a bit longer to get it back. I started raising the roof, and after six weeks, suddenly the money arrived.
Decide what you want to invest in. I chose Real Estate. It could have been a lot of things, including stocks, bonds, mutual funds, mortgages. I talked to a fellow from Ohio last weekend, he's from a farming community, and thought he could by farm land and lease the land to a local farmer. I found a property, wrote a contract, in my own name, subject to assignment to my IRA account’s name. Lincoln Trust sets up a Trust account for my benefit, which holds the title to the Real Estate I bought. I sent the contract to Lincoln Trust, real estate department. They handled the rest of the paper work. When closing came, the docs were sent to me to review and accept. Then Lincoln Trust signed them as my trustee, sent the money out of my account to the closing title company, and whala, I now owned something real in my IRA. I could actually walk in it, sit in it, but not sleep in it. A rule says, “No self benefiting”, I know kind of crazy, but it is what it is.
I improved the property, with money from my IRA, sent to me via a simple form and put into a separate checking account for that specific property, and proceeded to start doing the work necessary on the property. Once I was satisfied with the property, I then had a choice, sell it or lease it out.
I chose to lease the property out. I kept good records for the entire transaction. One of the rules is that you as owner of the IRA can not use the money, in any way. You must appoint a property manager. The rules do allow a family member to be your property manager. I decided that I had paid for a college education for my boys, so now was pay back time. I named one of them as the property manager; the account has to be in his name. I could deposit money in from rent, but when any expenditure happened he had to write the check. I had him sign a bunch of checks and away I went. Easy Peasy, Nice and Easy.
I decided to sell the property to the tenant after he rented it for one year. I contacted the Real Estate Department at Lincoln Trust, sent them the contract and the Title Company information. When closing came, I reviewed and approved the docs and Lincoln Trust signed the closing docs. The proceeds went directly back into my IRA account.
Did you happen to notice something missing? The part about the money went back to Lincoln Trust into my IRA account, no taxes, none Zippo, Nada, that went for all the proceeds from rent I received as well. You see, it’s the same as if you owned stock, and received dividends, or made a profit when you sold the stock, it all stays in your IRA. You pay the taxes, normal income, when you begin to take it out.
. Details of First Purchase: Bryant Street. I found a bank owned property that had been sitting on the market for some time. It was December, the best time to buy Real Estate, and I figured the Bank was ready to deal on the property. I made an offer, it was countered, and I accepted. I did the inspection, and basically found what I expected, so I moved to closing. Once my IRA account owned the property, I had access to start working. I transferred some money from the IRA account to the property management account and commenced rehabbing the property. A short term tenant came along, that only needed the property for two months, and was willing to do some of the work. Great. He painted, did some landscaping and just handy kind of work. I collected his rent, and paid him for his work. It worked out that he lived there for free while I got the work for free. Win, Win. Once he moved out, I finished up the project and put a for rent sign in the yard while I was there. Within an hour, I rented it out. That tenant ended up buying it in December a year after I bought it. Net gain on the transaction: $53,000 on a $97,000 total out of pocket investment. This includes rent proceeds, expenses, everything. That looks pretty close to 50% gain over twelve months. Ask me if I miss my stock broker?!
Obviously, this kind of return is not what I expect, I did get lucky. What I really based the purchase on was return on investment, long term. I was receiving $995 monthly rent, after taxes and insurance, it still was cash on cash return of approximately 10%. That worked for me until I saw a chance to take advantage of a market place that increase the value, because of a government tax credit incentive. The tenant now owns the home for less than the rent he was paying and basically bought the home with no money down after the rebate. Win, Win.
The second purchase, Jamison St. I thought, well I got lucky, maybe I should go back to the stock market, it’s recovering, right? Come on now, by now you know better than that. I found a great bank owned property that was actually over priced and had been sitting there for a few months, so I made an offer that worked for me. The bank accepted and off to the races again. I bought a townhome this time. The investor world was going crazy over the single family detached home market, driving the prices beyond value, but had not yet discovered the value in multi family units. I basically see the crowd heading one way, and go the other direction; recently I was called a non-conformist. If the shoe fits-----. Jamison is a really nice place, a newer home with a partially finished basement.
I pulled money from the IRA to finish the basement and rehab the rest of the house, including redoing the work the previous owner had done. By the way, when I say, “I fixed it”, what I really mean is, I contracted the work to be done, I’m not a good repair guy, trust me. Jamison now looks brand new, with four bedrooms and four baths, a fully finished basement, nearly 2400 finished sq. ft. I got on Craig’s list and did a rent analysis, and figured $1695 was a good number. I actually did the rent analysis before I bought the property, that’s how I figured out what it was worth to me. I now have $178,000 into the property, all in, purchase, closing costs, and rehab. HOA dues are $152/mnt, property taxes are $162/mnth-paid annually, net monthly contribution to IRA account: $1382. I just received the first check yesterday, happy days! That’s 8.4% return on the investment. But wait, there’s more. I couldn’t help myself. I did an analysis on the property based on the new condition, and the additional square footage I added, $215,000. If I sold it, after I paid the realtors there due, the net would be about $200000. So if I add the net gain of $22,000 plus the net proceeds after one year, $15,000 that would be $37,000. Cash on cash return of approximately 21%. Wow, Wow, Wow. Again, I don’t expect that, and it’s not really real until I sell the property and find out, so for now, it’s just a nice feeling. Kind of like I got when I had my money in the stock market, yeh right!
So, how about you? Do you have a nice feeling about your IRA account? Maybe it’s time to take a look at an alternative. After all, the investment I have suggested here has one really basic truth. It’s a product that everybody needs, they sleep in it. Buy the way, you can partner with others to buy these properties so you don’t have to have the entire amount it takes to buy a property yourself.
I suppose I better say something like, “this is how it worked for me, individual performance is not guaranteed, you could loose money, I’m a genius and your not, so be careful. You know what I mean, and if you know me, you know the last part of that statement is just flat out hilarious. While I tried to keep this article light, the situation I described is very real. Good luck, I would love to hear some feed back.
Steve Decker
Real Estate Broker
Commander of my own IRA.
303-548-5247
This is an article that gives you an alternative to the "Wall Street" investments. It's worked really well for myself and my clients.
