Real estate emerging as alternative to stocks, bonds and mutual funds for IRA investors
Photo / Tim Greenway
Shawn Lyden, principal of Coastal Realty Capital, and Laurie Bachelder, principal of Freedom Wealth Advisors, work together to help clients invest IRA funds in real estate.
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 IRA investors who know and understand real estate: They purchased their first duplex in 1998 and owned and managed investment properties across the state before moving back to Autumn's hometown of Wells in 2004. Once they realized they could use their IRA funds to invest in real estate, Autumn Poulin says, they began looking for a suitable investment property.
Poulin says she and her husband focused on southern Maine communities that she knew well as a Realtor, eventually finding a distressed five-bedroom, two-bathroom house in West Kennebunk that was listed as a “short sale” property. The house was in what she describes as a “very nice neighborhood” and was structurally sound, but its interior was in bad shape. It hadn't been foreclosed, she says, but the owner had listed it for less than its mortgage value largely because it would require extensive renovations to make it usable for a family.
“It was very, very sturdy, but the interior basically was trashed,” she says.
She and her husband calculated the likely cost of the rehab work, determined that comparable sales of homes in that neighborhood were in the $350,000 to $400,000 range, and made an offer of $170,000 using 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 says. “But the great thing about using our IRA money is that we could come in as a cash buyer, which made our $170,000 offer more attractive.”
Even so, she adds, because it was a short sale, the process even for a cash sale was “very, very long” — about four months.
An important distinction under the IRS rules for non-traditional IRA investments is that once the Poulins closed on the house sale last August, ownership is held by their IRA trust and not themselves. There are also detailed rules governing how they could use that asset, including who they could hire to do the rehab work or sell it to once that work was completed.
Once the rehab work was completed, 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 had to deal with, Poulin says she and her husband are convinced that investing the majority of their IRA money in real estate is what's best for them. “It's a great way to finance for someone who would like to flip a house,” she says. “It's great for the community, because it puts a distressed property back [onto the market] at a greater value. It's been a great experience for us. I can't wait to do another one.”
Other non-traditional options
Not every non-traditional investor will be as willing to take on the stress of being as hands-on with their real estate investment as the Poulins, Bachelder says. For those wanting to invest their IRA funds in real estate, but who don't want to become a landlord of a rental property or a property manager overseeing a rehab for what they hope will be a quick flip, there are other options, she says.
For example, working with Shawn Lyden, a principal of Portland-based Coastal Realty Capital LLC, Bachelder says she's able to offer clients the opportunity to invest their IRA funds in mortgage notes, secured by a specified mortgage loan made by Lyden's firm that spells out the interest rate and repayment terms to the investor.
“Ninety percent of the people who come to me to do non-traditional IRA investments in real estate want to be passive investors,” she says.
For Lyden, who got his start in the mortgage business in 1991, Bachelder's self-directed IRA clients represent an alternative source of capital to fund short-term real estate bridge loans that conventional lenders typically don't handle. Coastal Realty Capital was formed in 2010, he says, to fill that lending void.
“We're a full-service lender,” Lyden says, noting that two other affiliated firms, Maine Capital Mortgage and Realty Finance Co., provide traditional residential mortgage and commercial real estate loan services as well. “I look at Laurie's clientele as one of our lines of credit. It's a great business marriage, based on the needs of some of our clients for short-term bridge loans and the needs of some of Laurie's clients who want to invest their IRA money in real estate.”
Bachelder says Lyden's company provides her with underwriting packages identifying prospective properties in need of capital, their appraisal values, the borrowers' reasons for seeking a bridge loan and the repayment terms. She then provides that information to clients who want to invest in real estate. “Shawn never talks to my clients, I'm really the gatekeeper of the funds,” she says. “My role is to figure out who might be a good fit for a particular package.”
Both Lyden and Bachelder regard non-traditional IRA investments in real estate as a viable investment alternative that benefits Maine by making capital available for local projects.
“I think the trend is going to pick up,” Lyden says. “It's going to have a big impact. The reason: It's a new source of funding.” To which Bachelder adds: “It's untapped capital.”
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