How One Investor Is Building Wealth and a Legacy with Real Estate
Real estate has a wide variety of benefits as an income-producing asset in retirement. While we usually think of the traditional buy-and-hold landlording model, like other alternative assets, real estate can be held in a self-directed IRA (SDIRA).
One of my long-time clients, Dirk Zeller, has had massive success building wealth this way using long-term rental properties. He has acquired 80 rental units, 40 of which are held in his Roth SDIRA. These produce a healthy cash flow for him each month.
If you’re wondering how a serious real estate empire is built inside a self-directed IRA, this is how it’s done.
Getting Started in Real Estate
Dirk Zeller started diligently saving for retirement in his late 20s, fully funding his and his wife’s retirement accounts. He states, “I believed my financial advisors were experts, so I just turned the money over to them.”
In 1999, he lost most of the money in stocks and bonds as a result of the dotcom bubble. Dirk was philosophical about this loss, accepting that this was part of the investing game. He continued to save and save and save, building back up he and his wife’s retirement funds.
But in 2008, he lost almost the entirety of his portfolio — again. And this time, he was furious.
Dirk explains, “I started searching for other investing opportunities. I decided that if I lost all my retirement savings again in 20 years, it would be because of my decisions and errors — not because I was left at the mercy of the stock market and economic failures.”
Luckily, the third time was the charm. Dirk managed to completely rebuild his retirement savings through the vehicle of real estate inside an SDIRA.
How Dirk Landed on Real Estate as an Asset
Dirk owned real estate investments successfully before getting started in self-directed investing. So rather than passively investing in stocks or bonds over which he had no control, he decided to bet on himself and his own real estate knowledge to invest his retirement savings in a self-directed IRA.
Homing in on a Niche
In 2010 after he’d suffered not one, but two, catastrophic losses, Dirk studied 25-30 different real estate markets for his retirement holdings. He crunched the numbers and calculated the cash flow. His previous misfortunes were met with a stroke of luck as banks were selling foreclosed properties at a discount to offload them. This was just two years after the financial crisis of 2008, so there was a glut of these discounted properties on the market.
Through his meticulous research, Dirk crossed two-thirds of markets off his list because hedge funds were already in the game of buying real estate, and he didn’t have the resources to compete with hedge fund money. In the end, he settled on Tucson, Arizona as his preferred market.
Dirk recounts, “I discovered I could buy three homes in Tucson for the price of one in my hometown of Bend, Oregon. Tucson is attractive because it’s a college town with a constant need for housing. Even if you’re not invested directly in student housing, you’ll typically do well due to strong employment statistics and economic activity.”
Running the Numbers
In his search for the perfect place for his real estate investments, Dirk found some gems in Tucson. Given the favorable market conditions at the time, he could buy a four-year-old home with four bedrooms and three bathrooms for $65k and rent it for $950. This put the cash-on-cash return around 17%-19%. (For reference, most investors are happy with returns of 8%-12%.)
He could also find duplexes for $90,000-$100,000 that would rent for $750 each side. He knew that these numbers were extremely favorable, but his strategy for acquiring properties differed from that of most investors during that time.
“I felt good about offering over the asking price to the banks as they sold foreclosed properties. Other investors got greedy and were trying to offer less, but the numbers were so insanely good that it was worth it to me to make the deals work so I was able to buy the properties I wanted.”
In this way, his previous experience with real estate helped him recognize this once-in-a-lifetime opportunity for what it was, and it gave him the confidence to jump on it.
On Acquiring Investment Properties
Dirk’s goal was to buy as many properties as he could using his SDIRA, leveraging the assets he could.
One unique aspect of SDIRA investing is that there is no opportunity for sweat equity; all the work must be done by hired contractors using SDIRA funds. Because of this, Dirk’s team was critical to his success.
He discovered that a small handful of banks were willing to lend to an IRA, and he developed strong relationships with them to further his portfolio. Dirk also received substantial help from a trusted real estate agent to help him locate investment deals.
The Sweet Spot: Small Multiplexes
Because all the work on real estate held in an IRA must be professionally contracted, Dirk decided not to pursue any flips or extensive renovations. “I don’t have the extra time and tolerance to focus on managing such projects from the ground up,” Dirk explains. “Flipping requires a ton of personal involvement, and that wasn’t for me.”
Instead, he found that the best use of his time and funds were small multiplexes with two to four units — especially for SDIRA investing. These require less capital than large apartment complexes of 20 or 30 units, which would require him to hoard cash for a long time before he could afford to buy one. Instead, he can buy a couple of multiplexes each year.
They make slightly less money per unit (Dirk estimates about 9% less) than single-family homes, but the multiple units make the deal more profitable. They’re also easier to sell, as there is a larger market for smaller properties.
Having multiple units in a single property also insulates him from vacancies. “Vacancies are less of a concern with multiplexes because you can have a single unit vacant, and you may not lose money. However, you definitely would lose money with a single-family vacancy. Vacancies translate to a lack of cash flow and the need to write checks back to the SDIRA — something I have an abhorrent aversion to.”
Why Use a Self-Directed IRA to Hold Real Estate?
A self-directed IRA offers some unique opportunities for real estate investing — opportunities that Dirk has taken full advantage of. He has always mindfully put his best investments into a Roth because “the income I receive on these properties will never be taxed. I can pass these assets on to my kids. It’s my way of creating legacy estate planning.”
His children can run the properties for 10 years after Dirk passes (thanks to the SECURE Act), and the income will be tax-free. When the properties are sold out of the IRA at the end of the 10 years, there are no taxes on the distributions of the sale either.
Dirk has been very happy with how the real estate investments in his SDIRA have performed. “If I had to start all over again, I would have my Roth IRA own all of my properties and pay $0 in taxes on the growth.”
Advice for Self-Directed Real Estate Investors — From Someone Who’s Been There
We asked Dirk what advice he would give someone considering investing in real estate via an SDIRA. Here are his favorite nuggets of wisdom.
Real Estate is Like an Annuity — But Much Better
“Even in retirement, you can buy assets like real estate that produce consistent, reliable income with really great returns. The income reliability is similar to an annuity, except that when you die, the annuity payments are done and your family gets nothing. With real estate assets, your family will continue to receive the income from the properties after you’re gone.”
SDIRAs are Great for the Entrepreneurially Minded Investor
“Self-directed investing as a strategy is good for people who have entrepreneurial spirits like doctors, dentists, attorneys, business coaches, etc. People who already have a business mind can do really well with a self-directed IRA.
There are a lot of options and ways to self-direct retirement investments. You have to find your way — one that aligns with your risk tolerance, goals, and areas of expertise”
Don’t Go It Alone
“You absolutely need an expert to help you. Steve is one of the best at strategy and tactics as a self-directed IRA administrator. He is the best for power users of SDIRAs who need somebody with a higher level of skill and strategy. He has discussions with his clients about how to accomplish their goals.
I have structured deals based on Steve’s insight that he wouldn’t otherwise have thought about that are still within compliance. You have to have the right team on your side!”
If you’re interested in learning more about building a team to administer and advise you on how to purchase real estate in a self-directed IRA, visit Real Estate Champions.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.