How We Used Our IRA to Invest in Real Estate

Recently I discovered how to invest in Real Estate using a Self Directed IRA, commonly referred to as SDIRA. Now that we’re a little further down the road with this one, I wanted to document our experience in hopes that it helps others. Keep in mind I’m not a legal or accounting professional and this is for your entertainment only ūüôā


real estate investing pensacola fl
So a SDIRA is just that. An individual retirement account, directed by you, to invest in other types of assets instead of the typical mutual funds & stocks associated with a traditional IRA or 401k. By other types of assets I mean, other companies, property, tax liens, etc. We used our SDIRA to purchase a couple of rental properties in Pensacola so I’ll focus this post on our experience thus far.

First off, going from a standard employee provided IRA to an SDIRA was an easy thought process for me to make. I had a Simple IRA from a previous employer that was no longer being contributed to and lost about 10% last year. I was in some risky mutual funds and quite frankly didn’t pay much attention to the IRA at all. I figured that was just money that was hopefully going to be there when I retired. After learning about SDIRAs, I couldn’t help but think my interest in Real Estate could only help me pay attention to the IRA in turn allow me to grow my retirement account exponentially better than any stock/mutual fund. Borrowing a quote from Dave Ramsey, “The more I manage my money, the more money I have to mange.” Bu really, how can I do this? Let’s just say the #’s that make up real estate investing are much easier for me to understand than those of the stock market & mutual funds. Here is how we started investing using a SDIRA:

Step 1: We found a financial institute that offers SDIRAs that could perform as our custodian. Not all financial institutions provide this service. I essentially Googled SDIRA and researched the several that came up before making a decision. Unfortunately I didn’t find any in Pensacola :(. The criteria we used for selecting were: reputation via online reviews, ease of use, responsiveness & fees.

Step 2: We started the necessary paperwork for the transfer of my old IRA funds to our SDIRA. The financial institution we worked with allowed all or some of my old IRA to transfer. Just something to keep in mind to help you diversify your portfolio. The transfer took longer than expected (several weeks) and the communication on where we were in the process didn’t happen as often as I had hoped. Nonetheless, it took approx. 3 weeks for my old IRA to transfer and my SDIRA ready to be used for real estate investments. When we started the transfer process, we didn’t have a property in mind, but we were searching the Pensacola area daily.

Screen Shot 2018-02-05 at 4.00.05 PM

Step 3: We found a great Real Estate deal and put it under contract. The process to find a great deal that meets our investing strategy took only a few weeks. This is because we have a good realtor who knows what we’re trying to do. Every expense associated with the SDIRA asset (rental property for us) has to be paid using the SDIRA fund – this includes Earnest Money Deposit for the contract. For our custodian, this is a process that starts online but doesn’t fully process until a signed paper form is sent in (lesson learned). Regardless, we’ve made it through and are set to close in a couple of weeks.

Projections on this asset ¬†in Warrington show a cash-on-cash return of >20%. I’m hoping to provide an exciting update in a few months on how our SDIRA property is actually performing, but these conservative projections sure do beat a 10% haircut I was taking with mutual funds/stocks.

If you have a non- or barely performing IRA or 401k, I would highly recommend looking at diversifying your portfolio using a SDIRA for real estate investing.

Related Posts:

More info on SDIRAs:

#REI  #RealEstateInvesting #HelmsREI


How We Use Our Tripod of Adopted Investing Criteria

We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.


real estate investing pensacola fl

If you’ve been following us you know we have adopted a tripod of investing criteria we use to analyze ever potential acquisition. There are many criteria and tools used in real estate investing, but our current REI focus in the Pensacola area is buy & hold with an emphasis on cash flow. Since cash flow is the #1 goal, we start our analyzing there but each criteria I mention below¬†must be met before we make an acquisition.

Prerequisite: Asset Must Rent @ 1-2% of Acquisition Costs
Also known as the 1 or 2% rule. I was introduced to this rule by the guys over @ and is the first hurdle any potential asset must leap for us to pursue any further. I try to analyze at least 3 Pensacola properties a day with this prerequisite. Takes approx. 15 minutes or less with this prereq and if it passes, we move onto Criteria #1: Cash Flow.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

The 1 or 2% rule is fairly straightforward – the asset must have a monthly rent of 1-2% of its potential acquisition costs. For example, using the 2% rule, if a potential asset has a total acquisition costs (purchase price, closing costs, capital expenses/repairs to make it livable) of $50,000, it must rent for $1,000/month. Knowing the rent values in our investment areas, makes this a quick prerequisite to jump through.

Criteria #1: Cash Flow is >=$100/Month Per Unit
I go into how we calculate cash flow on the Real Estate Investing Terms: Cash Flow post, but essentially you add up all your monthly expenses, subtract those expenses from gross rent. What you have left over is Cash Flow and our target here is $100/unit or in other words $100/door.

Criteria #2: Projected CoCR is >= 15%
Cash-on-Cash Return (CoCR) is a way we analyze Pensacola properties to see how they compare to one another, but also how well they compare against other non-real estate investment avenues (i.e. IRA/401k, stock market, etc.) In the post How We Used Our IRA to Invest in Real Estate, I talk about how previous IRA and current 401K provides a return of 8% on their money. While our criteria is 15%, anything over 12% we look at in more detail. I’m posting in detail how we calculate CoCR and I’ll link back here.

Criteria #3: Asset Acquired @ 20% Below Market Value

Screen Shot 2018-02-05 at 4.00.05 PM
This essentially means we make a lot of offers, low offers. My realtor team calls me Mr. Low Ball and I’m ok with that :). The primary reason we do this and especially right now, is preparing for a dip to happen. The Pensacola market has been on the upswing for a while now and many of the local experts are predicting a dip or slight correction in the next 3-5 years. As the market tends to shift, we will slide the % on this criteria. The biggest takeaway from this criteria is look for a deal!
We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.

Acquisitions are one thing, exits are another. We currently hold 2 criteria as our exit strategy and more to come on those later.

Related Articles:

#REI  #RealEstateInvesting #HelmsREI

How We Used Our IRA to Invest in Real Estate [6 Month Follow-Up]

Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront. 
real estate investing pensacola fl

In April of this year, I wrote the article How We Used Our IRA to Invest in Real Estate. Now that we’re 6 months into owning this asset, time for a little follow-up.

Quick Recap: the Pensacola property we purchased with our SDIRA, had 2 trailers on it, both occupied, both with one year lease agreements with a record of paying on-time tenants. At such a low purchase price and high cash flow, I went in expecting $5-10k of deferred maintenance. Six months into it, I was dead on. Thanks to my awesome wife for taking this photo at closing and our little man for making sure we signed in all the right places.

Month 1 (April): Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront.

Month 2 (May): no issues!

Month 3 (June): Unit B’s AC goes out again. Upon further inspection a leaky coil resulted in replacing the entire unit. A home inspection by my Pensacola property management company revealed a faulty breaker box also on Unit B. Total costs for repairs = $4,100. That should be it for Unit B, as Unit A needs the real work.

REI Strategies. Lessons Learned. How-Tos. No Spam…Learn More.

Month 4 (July): Stove repair in Unit B: $104. Crickets on Unit A.

Month 5: (August): Oh boy, where to begin. A failed eviction on Unit A, charlie foxtrot of a situation. Nonetheless, I turned this thing around which resulted in me taking on managing the property myself, signing the existing tenant to a new lease – a lease that was mutually beneficial for the both of us. A great time to reiterate how important it is to have the right team members, especially a quality property manager.

Month 6 (Sept): Unit B, no issues. Finished up deferred repairs on Unit A (roof, bathroom floor, plumbing, windows, A/C…yea, a lot not done by the PM group): $2,293.

Before we get started on the #s, a few reminders:

  • Last year (2015) my traditional IRA returned a whopping -10% (that’s a negative, as in going the wrong way, ten percent) and my 401K returned 1.4%.
  • Cash-on-cash return for this asset was projected to be >20%
  • Even though these units were occupied, major repairs (>$500) were expected to bring these units up to code and thus added to the acquisition costs below.

Six months into our first SDIRA Pensacola Real Estate investment, here’s how the #s breakdown:

  • Total Acquisition Costs: (purchase price, closing costs, major repairs): $38,293
    • Purchase Price¬†+ Closing Costs: $31,900
    • Major Repairs: $6,393
  • 6 Months of Operating Expenses: $2,001
    • Minor Maintenance & Repairs (6 months): $1,115
    • Property Management Fees (6 months): $231
    • Eviction Costs (6 months): $400
    • Insurance (6 months): $255
  • Rent Revenue (6 months): $4,989
Cash-on-Cash Return (the return I’m comparing to my other investments) is calculated by dividing the annual before-tax cash flow by the acquisition costs. Since we don’t have a year of expenses and revenues yet, I’m doubling what has transpired over the last 6 months for minor repairs, fees, insurance, and revenue to obtain the estimated annual cash flow.
Screen Shot 2018-02-05 at 4.00.05 PM
  • Expected Annualized Operating Expenses: $4,002
  • Expected Annualized Revenue: $9,978
  • Expected Annualized Cash Flow: $5,976
  • Cash-on-Cash Return = $5,976 / $38,293 = 15.6%¬†

So, not the expected >20% that we estimated, but a helluva¬†lot better than a negative 10%! We’ll see how all the #’s shake out in another 6 months when we can put estimates behind us and put a year of real world #s in our calculations.


Related Posts:

#REI  #RealEstateInvesting #HelmsREI