Real estate and self-directed IRAs |
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Hugh Bromma, CEO of The Entrust Group, an administrator
of self-directed IRAs, knows from his own experience how important
it is to maintain adequate reserves.
"I have two Florida houses in my IRA and I was
getting $1,300 a month on each of the properties; I had a slight
positive cash flow," he says. "But then both tenants moved
out, and in Florida the real estate tax rates almost doubled, so
I got a double whammy. My slight positive went negative because,
when the tenants moved out, I still had to pay the mortgages. Fortunately,
I had $10,000 extra in each account to pay for that eventuality
which came to pass."
While Bromma is prepared for the downside of real estate investing, he cautions that many people aren't, and they should think twice about risking their retirement fund.
"A lot of people have gotten into real estate
and thought they couldn't lose because the real estate market will
go up forever. They bought property thinking it would appreciate,
and a year later it's upside down and they have a real problem.
It's not like buying a stock and thinking it will go up. You probably
have more confidence in publicly traded assets and having an adviser
who can say this company has a good track record, here's its performance,
etc."
Not everyone thinks self-directed IRAs are a great
venue for buying real estate. "I tell people to not use third
parties in any real estate transaction," says real estate expert
Lucier, who is firmly opposed to the concept. "You're going
to get your best deal dealing directly with sellers and buyers without
a middleman. (The custodian and property manager) are unnecessary
layers that are stripping away money that should be coming to you.
It's going to kill any positive cash flow in a lot of cases."
High-risk investment
As with any investment, consumers should know how much risk they're
willing to tolerate and whether they have the financial wherewithal
to withstand any market downturns and the possible loss of their
money. This may be especially critical when using a retirement fund.
Some people may be better off limiting their real estate purchases
to real
estate investment trusts, or REITs, or mutual funds that specialize
in real estate.
Even if you plan to use someone to help you find properties, it's best to educate yourself about the various real estate markets that interest you. You should also speak with an IRA custodian to understand which types of transactions are allowed and which are prohibited.
If you're going it alone, Rice advises that in addition
to a custodian, you should have a financial planner who will help
you set goals; a real estate broker who will find properties; an
attorney who will draw up leases, purchase contracts and the like;
an accountant who can review all the numbers, and a title company.
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