Lincoln Foreclosure
The Real Estate IRA – Diversifying Retirement Assets
Individuals interested in diversifying their retirement portfolios with real estate have several options, the most common option being an account that holds physical property, also known as a “real estate IRA.” The first step in getting started is establishing a self-directed IRA (Individual Retirement Account).
Next, direct your IRA to purchase a property with your IRA, with the deed listing the owner as “<name of self-directed IRA custodian> FBO John Smith IRA ___%”. Here are some pros and cons of buying real estate outright in your IRA.
Pros
* Control – You, as the IRA owner, have complete control over the real estate your account holds, such as the purchase price, the tenants in any rental properties and the selection of a property manager.
* Diversification – Rather than investing all of your retirement assets in commonly held assets such as public stocks, bonds and mutual funds, real estate may help spread your risk and potentially enhance your portfolio return.
* Tangible investment – You own an IRA and that IRA owns a piece of real estate. Feel free to stand on your new land or walk through your property. An investor may feel more secure about assets he or she can physically touch, which makes real estate an ideal option for his IRA.
* Access to foreclosure properties – Properties that have been foreclosed on represent a potentially lucrative opportunity for investors. Since the lender now owns the real estate and probably isn’t in the property management business, you may be able to buy the property for a great price. Since many people have more money available for investing in their IRAs than, say, personal checking accounts, they can use their IRAs to acquire property at bargain prices.
* No mortgage payments – While a mortgage payment allows a person to work towards her dream of owning a home, the interest she pays adds up. On a property purchased for $100,000, 100% financed over a 30-year period at a 6% interest rate, the borrower can expect to pay the lender $115,548 in interest over the course of the loan. However, if the same property is bought outright with the cash in an IRA, no financing is required and all rental income (less expenses), the property generates is pure profit! (Mortgages are allowed to purchase IRA property as long as they are non-recourse loans)
* Cash flow stream – IRA owners typically direct their accounts to buy real estate that have positive cash flow streams, such as a rental property. Cash flow represents a real return as opposed to, say, most mutual fund dividends, which are used to buy more shares of the mutual fund.
Cons
* Unexpected expenses – in order for the IRA to stay in compliance with IRS regulations, all revenue and expenses related to the property must flow through the IRA. As an example, if a hail storm damages your roof, the cost of the repair must be paid with IRA cash. Be sure that your IRA has plenty of “cushion” to handle these types of situations or you may have to liquidate assets to cover the cost
* Maintenance – Real estate assets require maintenance such as paying bills, finding good tenants and evicting bad ones.
* Lack of personal benefit –You cannot live in, or use as a vacation home, any property owned by your IRA; this is considered a prohibitive transaction by the IRS.
The wise investor should include diversification in her list of “must haves” for her financial portfolio. Real estate may be a great way to diversify holdings rather than owning standard-type assets only.
About the Author
Jonathan Lincoln is the author of this article on Real estate IRA. Find more information on Self-directed IRA here.
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