Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

IRA real estate investing

Dear Dr. Don,
In an effort to diversify my portfolio, I am considering adding real estate to my IRA investment portfolio. Given the current market trends, would you consider this a wise selection?
Barbara

Dear Barbara,
I encourage people to take a holistic approach with their investments. If you have a net worth of $400,000 and half of it is the equity in your home, then you already have a substantial investment in real estate. Don't just look at what's in your IRA when deciding how to diversify.

That said, the easiest way to add a real estate component is to invest in publicly traded real estate investment trusts, also known as REITs. Besides the ease of investing, some REITs offer diversification benefits across geographic regions and among types of properties that would be hard to duplicate on your own. Economies of scale in managing the properties make for lower administration costs too!

You can own individual properties in your IRA; you just have to find a trustee to administer your self-directed IRA. The administrative costs can be expensive, but the potential returns may justify that expense. Read "Buying real estate with your IRA" to learn the steps you need to take to structure this account. Consider the tax implications of making this a Roth IRA vs. a traditional IRA.

A Ginnie Mae bond mutual fund is one of the most conservative ways to invest in real estate. These mutual funds invest in mortgage-backed securities. It's not what most people have in mind when they think about investing in real estate, but buying securitized mortgages does count as a real estate investment.

Two bad years in the stock market is a strong reminder that your portfolio needs to be diversified across investments, but it isn't a reason to rush for the exits and abandon investing in stocks. A real estate slump can negatively impact your returns, too.

-- Posted: May 6, 2002