Autumn Poulin, a realtor who works out of the Maine Real Estate Network’s Saco office, first heard about investing a self-directed Individual Retirement Account into real estate about eight years ago. She didn’t act on that knowledge right away, but kept it in the back of her mind as an option that she and her husband, Tom, who sells surgical equipment, might consider for the family’s retirement account.
Five years later, while planning a rollover of their IRA assets into a new account, she asked about the option and was surprised the investment advisor didn’t know much about it. That spurred her curiosity even more and she soon discovered that real estate, tax liens, mortgage notes, businesses, farm animals and sports teams were non-traditional investment opportunities for the family’s tax-deferred retirement account.
She also encountered enough caveats in her Internet research from the Internal Revenue Service and other websites about the numerous rules and regulations that must be followed to make her cautious. But she persisted and eventually hired Laurie Bachelder, a principal of Portland-based Freedom Wealth Advisors who specializes in self-directed IRAs, as the family’s investment advisor.
“I would never do it any other way,” says Poulin. “The IRS is looking at this stuff very closely and is very, very clear, there’s no wiggle room if you make a mistake.”.
Poulin says she and her husband switched all of the money from a traditional IRA, featuring the typical mix of mutual funds, stocks and bonds, to a Self-Directed Retirement Account managed by Bachelder’s company that would enable them to make non-traditional investments, in addition to keeping some of their money in mutual funds. In doing so, they’ve joined a small but growing group of investors that now holds 2 %, or $94 billion, in SDRAs, within the overall $4.7 trillion IRA market, according to a 2011 report by Investment Company Institute, the national association of investment companies.
“We both know real estate and feel more comfortable investing our money in it than in the stock market,” Poulin says.
Freedom of choice.
Bachelder launched her fee-only registered investment advisor firm about three years ago, bringing to that venture 16 years of experience managing traditional IRA funds.
She became aware of SDRAs about eight years ago, when she and her husband started investing in real estate. It was a bit of a surprise, she admits, to learn that real estate had always been an option since Congress created IRAs as a self-directed retirement plan using tax-deferred investments in a wide array of assets. She wondered why there wasn’t wider knowledge about it, spent more than a year learning all the rules and regulations governing SDRAs and eventually decided that there was a business opportunity for her to become a specialist in non-traditional self-directed retirement investing.
“It’s not something you can dabble in,” she says. “You either do it full force, or you don’t do it at all. It’s not for everybody.”.
First and foremost, she says, her goal is to educate people about the original intent of the IRA legislation, which she says largely has been lost over the past 40 years due to most financial institutions and advisors only offering traditional investment options to clients. In fact, she says, federal rules allow IRAs to be invested in a number of non-traditional options that can diversify the retirement portfolio and make it less vulnerable when the stock market falls dramatically, as it did in 2008.
“It’s a way to mitigate risk,” Bachelder says. “A lot of my clients want diversity. Some people don’t want to go into the stock market at all. A lot don’t understand it and they don’t like the feeling of not having any control over it. But they may know something about real estate and when they learn of this and realize they have an option to invest their IRA in real estate, it gets them thinking. The appeal of real estate is that it’s tangible. Every decision you make about it is tangible.”.
Making knowledgable investments
Bachelder’s clients, Autumn and Tom Poulin, are non-traditional Individual Retirement Account investors who understand and comprehend real estate: They acquired their first duplex in 1998 and possessed and handled financial investment homes throughout the state before returning to Autumn’s home town of Wells in 2004. Once they realized they might use their IRA funds to buy realty, Fall Poulin says, they began searching for a suitable financial investment home.
Poulin says she and her husband focused on southern Maine neighborhoods that she understood well as a Realtor, ultimately finding a distressed five-bedroom, two-bathroom home in West Kennebunk that was listed as a “brief sale” building. The house remained in exactly what she describes as a “extremely good community” and was structurally sound, but its interior remained in bad shape. It had not been foreclosed, she says, however the owner had actually noted it for less than its mortgage value largely due to the fact that it would require substantial remodellings to make it usable for a family.
“It was really, extremely strong, but the interior basically was trashed,” she says.
She and her spouse determined the most likely cost of the rehabilitation work, identified that equivalent sales of homes in that neighborhood remained in the $350,000 to $400,000 range, and made an offer of $170,000 making use of money from the SDRA trust fund that Bachelder had created for them in order to make non-traditional investments.
“There were 11 offers on it,” Poulin states. “But the great feature of using our IRA money is that we could be available in as a money purchaser, which made our $170,000 offer more attractive.”.
Nevertheless, she adds, since it was a brief sale, the procedure even for a cash sale was “really, very long”– about 4 months.
A vital distinction under the Internal Revenue Service rules for non-traditional IRA financial investments is that as soon as the Poulins closed on your home sale last August, ownership is held by their IRA trust and not themselves. There are also comprehensive rules governing how they might utilize that possession, including who they might hire to do the rehab work or sell it to as soon as that work was completed.
When the rehabilitation work was finished, the house went on the market and by mid-January it was under contract, with a closing set for late March. If all goes as expected, Poulin says, “We’re expecting a $50,000 return on our investment.”.
Even with some of the rehab headaches they needed to handle, Poulin says she and her partner are encouraged that investing the majority of their IRA cash in realty is exactly what’s best for them. “It’s a terrific way to fund for somebody who wishes to turn a house,” she says. “It’s great for the neighborhood, because it puts a distressed building back [onto the marketplace] at a greater value. It’s been a terrific experience for us. I can’t wait to do another one.”.
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