Estimated reading time: 5 minutes
“When you own stocks and bonds, there’s only so much control you have… Some bad news comes out, which affects the price of that share that you own. When you own your own property, you are in control of the success or failure of the unit.”
That’s the view of Entrust client Carl Kaplan.
Carl spent years gradually building up the funds in his 401(k) before diversifying his retirement portfolio with real estate. Through a commitment to self-education and local market expertise, Carl made a savvy, tax-advantaged investment in South Carolina real estate.
In this Entrust client story, we’ll chart Carl’s journey from his first stock to his future real estate investment goals within his self-directed IRA (SDIRA).
Carl made his first significant investment in his early 20s. Like many first-time investors, he made the purchase with a single principle in mind: buy what you know.
“I used to eat a lot of McDonald’s as a kid,” Carl said. “I owned [shares of] McDonald’s for probably over 30 years before I sold. I felt it had reached a level that I was comfortable with exiting the position.”
Over the years, Carl sought to expand his financial knowledge through investing books and conversations with colleagues. He soon gained access to a 401(k) and gradually built up his retirement portfolio.
During his autodidactic education, he stumbled across a couple of books by Hugh Bromma, CEO and founder of Entrust. Due to his diligent saving, he was able to consider the benefits of real estate held in an SDIRA.
“To be frank with you, most people don’t have a serious pot of money to acquire a real estate investment property. Through my 401(k) and other investments, I did have a pot of dollars,” Carl said.
For many years, Carl vacationed with his family in Hilton Head Island, South Carolina – a resort town about an hour south of Charleston. Gradually, he grew familiar with the local real estate market.
In 2007-08, the housing bubble popped during the Great Recession. It proved to be the most challenging economic period in the country’s history since the 1930s Depression.
However, that period also presented an opportunity for those with the financial means to pounce on a bear market. For Carl, his eyes were set on the Hilton Head real estate market.
“I realized that, boy, why were these units triple the price a couple of years ago? And now, I don’t think you can rebuild them for the price per square foot that they’re selling at right now. So, something didn’t make sense to me. It just looked like a very good opportunity.”
During this time, Carl switched jobs. After leaving his former employer’s 401(k), he realized it was the perfect opportunity to diversify his retirement portfolio into real estate.
So, he rolled over his existing retirement funds into an SDIRA and purchased two units in Hilton Head — one held in a traditional SDIRA and the other in a Roth SDIRA.
Even with the seismic dip in prices, there was no guarantee that Carl was going to make a quick profit. However, by leveraging his expertise in the area, he made a calculated bet that the investment would likely pay off.
“Based on the price per square foot, having known the market, doing my research in the market… this same unit that was $300,000 a couple of years ago is now under $100,000. Boy, that seems like a good investment.”
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However, Carl’s initial foray into self-directed retirement investing wasn’t entirely smooth.
Before he made the real estate purchases, he needed to learn the rules and regulations. This included what you can and cannot do with an SDIRA and the forms necessary to remain in compliance with the IRS.
“I relied on a lot of the people at The Entrust Group to help me and guide me,” Carl said. “To be frank with you, they were always very helpful and very willing to explain what I needed to do.”
In particular, he cited Hermela Jembere, Entrust’s Manager of Cash Management, as an integral component of providing him with the information he needed to find success with his new SDIRA.
“Hermela, she is terrific. She is so quick to get back to you. Even if it’s not her area, she will make sure it gets to the right person. I rely on her. She’s wonderful; she really is an asset and a great representative or ambassador [of The Entrust Group].”
Of course, the primary goal of any investment account is to maximize financial returns. However, unlike most 401(k)s or IRAs, the rewards of an SDIRA aren’t purely financial.
For many investors, they find much greater meaning in the investments held in a self-directed account compared to a standard target-date retirement fund.
With an SDIRA, experienced investors are able to channel their hard-earned savings into assets they care about. Plus, if an investor has unique expertise, they may be able to achieve greater returns than those available with an index fund or REIT.
Carl found both: significant financial returns and the simple satisfaction that comes with improving his SDIRA-held investment properties.
“I like to call it pride of ownership. The units that I acquired… one of them was in excellent shape. The developer had just put in new appliances, it was spotless. The other one needed some TLC. I took some funds that I had and invested to make [the unit] what we call ‘marketable.’
From Carl’s perspective, picking the right properties is only half the battle. When you’re in the rental property business, choosing the right tenants is also crucial to reduce headaches and repair costs.
“My perspective has always been to [seek out] long-term renters. Short-term renters have a higher turnover and more wear-and-tear on the units.”
Now that prices have plateaued in the Hilton Head region, Carl is closely monitoring other real estate markets and seeking out new opportunities.
“I am thinking about diversifying into another area that I’ve been following closely. I might exit one of my Hilton Head Island properties… and look to make an investment with those funds into one of those other areas.”
Of course, no investment is without risk. The next housing market crash could be right around the corner, or the market could burn hot for years to come.
In Carl’s eyes, the most he can do to boost his odds of success is what he’s always done: ask questions and remain committed to investor education.
“Real estate, for me, dollar-for-dollar, whether it was just luck or timing, has been by far the best investment,” Carl said. “If you follow all the guidelines, ask a lot of questions, you’ve got a lot of excellent, qualified people at The Entrust Group that can definitely get you the answers.”
Want to learn more about investing in real estate with your retirement funds? Download our 5 Steps to Investing in Real Estate Guide. Inside, you’ll find a detailed overview of exactly what you can and cannot invest in with an SDIRA, and a step-by-step process to making your first investment.
Or, if you have specific questions about self-directed investing, get in touch with one of our SDIRA experts. While we cannot provide financial or tax advice, we may be able to provide information about SDIRAs tailored to your unique situation.