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VA Buyers srill get a $8000 rebate!
Real Estate Publication ArticleReal Estate Publication ArticleWoody O. Wood, GRI, CRS, ePRO, President, Broker Realnet Realty Inc. 303-663-9663 Woody@WoodyOWood.com Buy real estate in your IRA -- Expand your investment horizons "The basis of all wealth is Real Estate." Dr. Vincent Peale, “Think and Grow Rich”. If you've got an urge to diversify your IRA, there ARE other choices than stocks, bonds and mutual funds. You may want to consider real estate! Raw land, houses, condos, resort, commercial properties and even mortgage notes -- you can use an IRA/SEP 401(k) to broaden your portfolio. As a Realtor for over 25 years, I always wanted to invest in property using my IRA but that option didn’t seem available. My experience with stocks was as soon as I bought something the whole market went down. I may have been responsible for the tech sector crash of 2002. I attended a national real estate seminar shortly after my tech stock debacle, where a tax expert CPA mentioned that you could use an IRA to invest in real estate, and he was doing it! I was excited! I talked to my CPA and my attorney, and they had never heard of such a thing, and thought it was probably illegal. However, I stuck with it, learned how, and ended up buying income property, using my IRA. The rent goes into the IRA and it accumulates with the taxes deferred until its withdrawn. You can use an IRA for real estate investments whether you're a hands-on person like me, or an investor who prefers relying on someone else's expertise. But many people who do this seem to like being in the driver's seat -- and they're willing to learn. That’s the key thing about a self directed IRA/SEP 401(k). You are in control, not some greedy CEO. Whenever I use IRA in this article, I’m talking about all kinds of retirement accounts, IRA’s of all types, SEP’s and 401(k)’s. However, it takes self-direction. You can't buy real estate with your basic IRA; you need to open a self-directed IRA. Banks, insurance companies and brokerages will help you open a self-directed IRA, but, generally, they limit your investment options to the products they sell. To buy real estate you may have to find an independent administrator to serve as a trustee or custodian. Once you find an administrator, they'll walk you through the steps needed to set up a self-directed IRA. You can set up an account with new money, but then you'd only be able to fund it with the maximum IRA contribution each year. Or you could transfer some or all of the assets from your traditional IRA/SEP/401(k). However, there are some exciting options to help you build an account quickly, like a Solo 401(k) that allows a contribution of up to $40,000 per year! Administrators, unlike your typical stock brokerages, don't give investment advice, so you may need to rely on a firm that specializes in finding real estate that's suitable for your portfolio, and can help you find and select an administrator. If you are retiring or leaving a company, or have in the past, and you’re ready to rollover a IRA/SEP/ 401(k) into an IRA, then you are a self directed investor! You may however want to do something different from stocks and mutual funds, or to diversify a part of your portfolio. Real estate is an option! There are IRS regulations governing IRA’s, and specific rules about “self dealing”. One reason you probably shouldn't tackle an IRA real estate investment on your own is the IRS. The IRS has a lot of rules when it comes to using retirement funds for real estate. Probably the most common question I hear is, “'I've found a really neat timeshare and I want to buy it with my IRA, can I do that?' or “Can I buy a home and rent it out?” Yes, you can, but then they say, “I want to use the vacation home/condo for a couple weeks a year, or rent my investment home to my daughter.”' Well, no, you can't do that. The IRS allows you to use the land or building, but not while it's in your IRA. For instance, you could buy a retirement home, rent it to someone else, put the rental income in your IRA, and, when you retire, take the house as a distribution. Then you can move in. Just to show how complicated this can get: You cannot rent the house to your spouse or your ascendants or descendants -- grandparents, parents, children, grandchildren, etc., but you could rent it to your brother or sister while it's in your IRA, for fair market value. The IRA is best when used for true investment property. Whether you want to use an IRA for a retirement home or commercial property, the IRS doesn't really tell you what you can do with assets in your IRA -- it tells you what you can't do. I have an extensive section dealing with prohibited transactions on my Web site: www.WoodyOWood.com. You don't necessarily need a lot of money to make money on property with your IRA. You can partner with a spouse or a friend(s), even yourself to buy real estate. You also can leverage your investment by getting a loan on the property, but there are specific rules. Some of them are listed on my website. One of the best things about a self directed IRA is you can drive by and look at a neighborhood and your investment, hopefully near where you live, control the value of the property through maintenance, good tenants and foresee changes in the market a lot easier. Of course, professional property management is always an option if you don’t have the time or desire to manage a property yourself. One other option is Net leased real estate that can minimize your time expenditure, but you loose some of the control, as you are a “partner” in a larger usually commercial venture, called “Tenants in Common”. This can be an option for those who want cash flow and no headaches. If you use an investment-locator company, your best option is a knowledgeable Realtor, and you'll have the benefit of experts who can check out hundreds of properties and help you cherry pick the best ones. Figuring out if real estate is the right way for you to broaden your portfolio choices will take some work, but you may find it interesting and profitable.
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