House with a foreclosure sign in the yard

Investing in foreclosures with your self-directed IRA is one of the riskier, more challenging investments (as we discuss in this blog post), but it can also be very rewarding in a variety of ways.

The long-term returns can be significant, and it could also be that you find your dream home when it’s in foreclosure. If you are able to purchase it for a much lower price, then you can spend years fixing it up into your forever home.

All of those options are worth the time and money of the investment for many people, but there’s another aspect to investing in foreclosed properties we will explore further in this post, and that’s investing in properties so that you can really do some good.

Let’s look at a case study:

After the housing crisis of 2008, many homeowners were stranded with underwater or upside down mortgages. They owed more than the homes were worth. This led to many families losing their homes and many neighborhoods practically turning into ghost towns.

A few years after this, a real estate investor named Bob decided he wanted to use his self-directed IRA to purchase a foreclosed home. He had a target area in mind, and knew what his budget was. He spent some time driving around neighborhoods in the area checking out what houses were available and in foreclosure.

He came across a house that had a plaque with the family name inscribed on it. This made an impact on him, so he left his card at the door. The homeowner called him and explained what was a sad situation. Due to various family circumstances, they were about to lose the house they’d owned for 30 years. Bob told the owner he wanted to purchase the home and said that he would do his best to work out a deal allowing the family to stay in the house.

Bob purchased the home for $50,000 (this includes some rehab costs he covered from the self-directed IRA funds). He allowed the family to stay another month rent-free while his IRA completed the sale.

He then worked out an agreement with the owner who met with a lender to make a credit improvement plan. They made a rent-to-own agreement. The family would pay Bob $600 a month (the money was returned tax-deferred to his IRA) and he provided a small personal loan to help pay off bills. During the time that the family was renting the home, Bob was able to make repairs and improvements to return the house to a good condition inside and out.

When the family was able to afford it after about a year, Bob sold the property back to them for $70,000. This was about $20,000 less than market value at that time, but Bob’s IRA earned a significant 65% return on investment.

It was a situation where everyone ended up happy. Bob earned the profits tax-deferred in his retirement account. But more importantly to him, his investment helped the family have time to get their finances in order and save up enough money so they could buy the house back and remain in their home. His investment had a positive impact on this family and the community as a whole since he helped restore a house that was previously in disrepair.

While this case study may tug at the heartstrings a little more than most, there is a story behind every foreclosure. For those who are interested in using their investment to help others and do some good, foreclosures can be a great option.

IRA Innovations provides self-directed retirement account administration and education. As the experts when it comes to “alternative” investments including private equity, they can provide the necessary tools and information to get started with a real estate IRA.

You might also be interested in

fair market valuation
health savings accounts
Coverdell education savings account