Utilizing a Self-Directed IRA: A Case Study in Investing Outside of Wall Street- Part 2, by J.J.

In a conversation with a successful and well off friend, I discovered that it was possible to invest outside of Wall Street. I had experienced the extreme fluctuations of economic bubbles and wanted something more secure as I planned for retirement. After learning more about his approach, I took baby steps to reevaluate my own investment approach to move toward a self-directed IRA. In part 1, I shared the first step toward a self-directed IRA for investing outside of Wall Street to achieve greater safety and diversification and now let’s move forward.

Following the Wisdom of a King

In the book of Ecclesiastes– one of King Solomon’s books of wisdom in the old testament– Solomon gives us investment advice, not only for our wealth but also for how to spend our lives here on earth. The wealthiest man to ever live directs us to diversify in chapter 11, verse 1-2. In verse 4, he chides us to get off our butts and get the work done.

“He that observeth the wind shall not sow; and he that regardeth the clouds shall not reap.”

Don’t let the noise and apprehensions of the day keep you paralyzed like a deer in the headlights, keeping you from diligence in your work. Mostly, though, the preacher Solomon extolls us that all of life here under the sun is vanity and striving after the wind. Only a life devoted to God and knowing Christ can give Life, and to the fullest, in our days here on earth, under the sun.

Baby Steps Out the Door

I determined to move 40% of my overall balance into a self-directed IRA. The only current investment target for my self-directed IRA was gold and silver. I would pursue farmland and multifamily housing only if I could find what I felt was a purchase with good value.

I visited a local bank with many years experience as a Qualified Trustee for self-directed IRAs. Opening the account was very easy, and cash funds from my Vanguard IRA were transferred directly to the account. This is of paramount importance, because if the transferred funds came to you, in your name, to be deposited, the IRS would consider it a distribution, and if before 59 1/2 years of age, you would be in for a substantial penalty in addition to ordinary income taxes in the amount withdrawn.

Gold in Safety Deposit Box at Local Bank

I then went to my local source for buying gold. I was able to get a favorable buy on a quantity of gold, choosing the Buffalo coin because its 24-karat .9999 purity makes it acceptable for S-IRA investments. Next, I put the banker together with the gold man, and the purchase was made by my bank for my self directed IRA. I now have gold in a safety deposit box at a local bank with my name on it. While not as good as under my mattress, I feel good about it for these reasons.

First, the funds available in my IRA allowed me to purchase more gold than I could with my regular savings and still have all the security of a sound asset as a store of wealth. Secondly, since I would soon be 59 ½ years of age, at that time I could legally withdraw any amount or all of that gold, only paying ordinary income tax, with no penalty. Hopefully, I’d be awake enough to get this done in a SHTF situation. Lastly, gold is liquid, even in an S-IRA, and should I wish to sell it and buy another asset, it serves the purpose.

Baby Steps Down the Hall

It was only a matter of weeks when I got an opportunity to buy two rental duplexes. A business associate was interested in selling his duplexes and motivated to sell quickly as he wanted to pursue an investment into farmland. Both duplexes were in great shape, needing little in the way of improvements. He had good renters, who paid promptly and seemed to take good care of his property. He had a good bit of capital gain on the units, as well a depreciation that would be recaptured in the sale.

After talking, we determined he would benefit a great deal from a 1031 like kind exchange, where he can carry the gain in one property into the next and not pay tax on that gain by using IRS rule 1031. We agreed upon a purchase price for his duplexes, and wrote a purchase agreement between him and my S-IRA. The bank executed the closing as the custodian of my account. I sold some of my holdings in my Vanguard IRA and transferred funds directly to the bank to my S-IRA to fund the purchase.

Six months later I found a good buy on a six-plex nearby. It was a “second verse, same as the first” situation. I personally manage the properties, make repairs, collect rents, and take them to the bank, where they are deposited. While I cannot be paid in any way for any work, I can have the bank or custodian pay for supplies and material. And I can also have them pay contractors in my place. If I acquire more than the ten units, or if time constraints dictate, I will employ a property manager in my place. Of note, these ten units generate a 14% cap rate, netting over $9000 per month in return. While an S-IRA loses the benefit of depreciation, I’m loving the fact that this revenue stream alone would completely fund my current retirement needs.

Baby Steps Down the Road

Moving forward a year, I came upon a ninety acre farm that seemed a good buy. A mix of tillable row crop ground and timbered draws, again the seller was motivated. My S-IRA trustee swung into action, and soon the farm was in the account. Some caveats regarding owing land in your Self-directed IRA, you cannot utilize it for enjoyment, including hunting, camping, et cetera. I have, however, done the following. With every farm purchase that has timber, I have a timber management company, owned by a friend of mine, evaluate the timber and develop a management plan. He has planned three selective harvests over the next fifteen years, and a budget for planting trees every year.

He established an orchard of apple trees the first year, with a local grocery chain anxious for the crop. While I nor any other “Prohibited Individuals” (i.e. spouse, children, grandchildren) cannot enjoy the use of the land, other individuals, even siblings, can. So including cash rent on the tillable ground, periodic timber sales, future orchard sales, and hunting lease proceeds, gross annual return on this farm parcel will be in the 7-10% range, in addition to the appreciation of the land itself.

Survival

I tend to assess any property or asset as a business, one that generates a dividend or cash return each year. It also grows in appreciation. Your entry point in the asset usually predicates your appreciation. All markets are cyclical, but owning assets you understand and have managerial control of, is an advantage. It’s survival, Baby!

New Horizons

With regard to your survival plans, I hope this article opens new horizons to you. If you’re as I was, in a “cash-poor” situation with almost everything in retirement accounts, utilizing your IRA for hard, honest assets outside of the Wall Street roulette wheel can be a key component to your preparedness goals. Investment property in remote locations can fit the bill for both a good return and a safe haven if things unravel. In addition, it’s not only good diversification, it’s being a good steward of your blessings.

In conclusion, a Self Directed IRA is not for everyone, and even if it is something you’d like to pursue, I encourage you to do it with eyes wide open. The old adage “To the Investor Beware” has never been more true, not only for the due diligence needed in vetting the investment but also for the diligence in adhering to the regulations involved. You’re investing for your future, and lazy thinking won’t get you where you’d like to be!

Post Script

My initial decision to hold 40% of my retirement investments in hard assets has become 60%. Proceeds from the real estate holding have been used to purchase more metals and hopefully another rental property soon. Of note, the hunt is on for a rental property in a remote location (WY, MT, ID, Belize). Rental properties held in a S-IRA may be utilized by the S-IRA owner as long as the value of the period of use it reported as a distribution. Again, siblings are not “Prohibited Individuals.” (Read, “Brother can you spare your condo?”)

See Also:

• Utilizing a Self-Directed IRA: A Case Study in Investing Outside of Wall Street- Part 1, by J.J.

SurvivalBlog Writing Contest

This has been another entry for Round 78 of the SurvivalBlog non-fiction writing contest. The nearly $11,000 worth of prizes for this round include:

First Prize:

1. A $3000 gift certificate towards a Sol-Ark Solar Generator from Veteran owned Portable Solar LLC. The only EMP Hardened Solar Generator System available to the public.
2. A Gunsite Academy Three Day Course Certificate. This can be used for any one, two, or three day course (a $1,095 value),
3. A course certificate from onPoint Tactical for the prize winner’s choice of three-day civilian courses, excluding those restricted for military or government teams. Three day onPoint courses normally cost $795,
4. DRD Tactical is providing a 5.56 NATO QD Billet upper. These have hammer forged, chrome-lined barrels and a hard case, to go with your own AR lower. It will allow any standard AR-type rifle to have a quick change barrel. This can be assembled in less than one minute without the use of any tools. It also provides a compact carry capability in a hard case or in 3-day pack (an $1,100 value),
5. Two cases of Mountain House freeze-dried assorted entrees in #10 cans, courtesy of Ready Made Resources (a $350 value),
6. A $250 gift certificate good for any product from Sunflower Ammo,
7. American Gunsmithing Institute (AGI) is providing a $300 certificate good towards any of their DVD training courses.

Second Prize:

1. A Model 175 Series Solar Generator provided by Quantum Harvest LLC (a $439 value),
2. A Glock form factor SIRT laser training pistol and a SIRT AR-15/M4 Laser Training Bolt, courtesy of Next Level Training, which have a combined retail value of $589,
3. A gift certificate for any two or three-day class from Max Velocity Tactical (a $600 value),
4. A transferable certificate for a two-day Ultimate Bug Out Course from Florida Firearms Training (a $400 value),
5. A Three-Day Deluxe Emergency Kit from Emergency Essentials (a $190 value),
6. A $200 gift certificate good towards any books published by PrepperPress.com,
7. RepackBox is providing a $300 gift certificate to their site.

Third Prize:

1. A Royal Berkey water filter, courtesy of Directive 21 (a $275 value),
2. A large handmade clothes drying rack, a washboard, and a Homesteading for Beginners DVD, all courtesy of The Homestead Store, with a combined value of $206,
3. Expanded sets of both washable feminine pads and liners, donated by Naturally Cozy (a $185 retail value),
4. Two Super Survival Pack seed collections, a $150 value, courtesy of Seed for Security, LLC,
5. Mayflower Trading is donating a $200 gift certificate for homesteading appliances, and
6. Two 1,000-foot spools of full mil-spec U.S.-made 750 paracord (in-stock colors only) from www.TOUGHGRID.com (a $240 value).

Round 78 ends on September 30th, so get busy writing and e-mail us your entry. Remember that there is a 1,500-word minimum, and that articles on practical “how to” skills for survival have an advantage in the judging.