Self-Directed IRAs: Investing in What You Don’t Know

If you’ve been following our articles, then you know we have often talked about how self-directed IRAs give you the freedom to invest in what you know and understand with your retirement account. This is the first time that we will talk about investing in what you don’t know.

Setting the stage…

Introducing Jenna, she is new to real estate investing and knows some very experienced real estate investors she can lean on for advice. She’s looking for her first deal and has not yet mastered the art of networking.

Jenna’s Goal…

Jenna is looking for her first purchase with her self-directed IRA…a single family home for $60,000 or less in an area that currently has a shortage of rental properties available. She wants 50% equity in the home she purchases and, given her inexperience, she is looking for a home that needs very minimal repairs. Additionally, she wants a net monthly profit of $250 per month. Her goals are ambitious even for an experienced investor.

The Search…

Jenna has decided to scan Craigslist, local newspapers, and the MLS for homes that meet her criteria. She has also reached out to a number of realtors letting them know exactly what she is looking for.

Home Run…

In an unbelievable stroke of luck, Jenna finds a 2 bedroom home listed for $35,000. Jenna knows that quick action is needed so that she is the first offer to the table. She makes an appointment to see the home that evening. The home appears to need minimal work and it is in a great neighborhood. The comps for other homes sold in that area are from $60,000 to $70,000 which comfortably met her 50% equity goal. Running the numbers she finds that she will have a net monthly profit of $200 per month (just shy of her goal but acceptable).

The Offer…

Understanding this deal will be grabbed quickly by other investors; Jenna works with her IRA custodian and makes an offer in the name of her self-directed IRA for $30,000. To the dismay of the realtor, Jenna also puts in some contingencies including insisting on the furnace being turned on, a home inspection, and a general warranty deed (the home was being offered with a Special Deed). While the realtor is in Jenna’s corner, she is worried that Jenna is putting herself in a situation in which her offer may not be accepted given the low offer and the detailed contingencies. Still the seller wants cash ‘quick’ so the realtor places the offer and the seller quickly ‘accepts’ the offer.

The Inspection…

The seller drags their feet in getting the furnace turned on (it turns out they owed a lot of money to the gas company and thus had to pay it all before the service was restored). A day before the expiration of the agreed upon period, the utilities are turned on and Jenna gets her inspector out to the home. The inspection results reveal that the furnace is not safe to run which is likely why it had been red-tagged by the gas company. Repair is not an option…a complete replacement is in order.

The Neighbor…

As Jenna was preparing to leave, the next door neighbor came over and struck up a conversation. He asked her why she would want a property that had a right of way for an alley running through the area the front porch now occupied. He also informed her that the bushes touching the home she was trying to purchase were on his property. The home was built right on the property line! Upon verifying this information via a survey, Jenna ended the contract and the realtor promptly returned Jenna’s hand money.

The Lesson…

This time Jenna was lucky and her self-directed IRA was not adversely impacted. She had minimal costs invested in inspections and in the survey and she averted the disaster of having obtained the property with the bum furnace and double trouble with the property encroachments. In sharing this story with the experienced contacts she knew…she realized that it is wise to always make sure you have an ironclad contract (complete with appropriate contingencies) and that it is wise to consult with professionals and others with more experience if ever you are investing in an asset that you don’t know a great deal about.

Getting Started…

If you want to diversify your retirement portfolio with real estate, getting started is easy: Open an account with American IRA. You can start the process by calling us at 866-7500-IRA (472). We will send you everything you need to fund your account. Once your account is funded, simply provide us written instructions on the specific property, location, amount, and who we need to make the check out to. We will work with your professionals to ensure the property is titled correctly, and to ensure that you don’t unwittingly generate a prohibited transaction that could result in a penalty. American IRA does not provide any recommendation on the quality, profitability or reputability of any investment.