Real estate and self-directed IRAs
|By Laura Bruce
If you're tired of being limited to the typical lineup
of stocks, mutual funds, bonds and CDs that most brokerages allow
you to buy in your IRA, you might consider creating a self-directed
IRA that enables you to invest in real estate.
The addition of real estate can diversify a portfolio
and, to be sure, buying actual property to be held in your IRA is just one way
to do it. The process is not terribly complicated, but as with any retirement
account, you must follow the letter of the law or face penalties from the IRS.
Additionally, unlike the run-of-the-mill self-directed IRAs that allow you to
invest in the aforementioned stocks and bonds, a self-directed account that holds
real estate arguably requires considerably more work on your part. It is also
a much higher-risk investment.
In his book, "The No-Nonsense
Real Estate Investor's Kit," Thomas Lucier writes, "... the real estate
investment business is full of four-letter words such as: hard, work, risk and
If you don't know much about real estate, if you're
not willing to do a lot of so-called "due diligence," and if you're
not financially or emotionally prepared to handle significant risk, don't attempt
this. Sure, you can make painful mistakes in the stock market, but, generally
speaking, your investments are liquid and you can cut your losses quickly if you
feel it's necessary. The real estate market is not as forgiving.
an IRA custodian does
But if you're determined, start by opening
a self-directed IRA or self-directed Roth IRA with a custodian
Although this article focuses on real estate, a self-directed IRA can hold trust
deeds, secured and unsecured notes, limited partnerships, private stock and other
nontraditional investments. An Internet search will probably turn up a couple
dozen companies that will handle these types of investments.
don't expect them to advise you on what properties to buy. A custodian is a neutral
third party and it is not allowed by law to give that type of advice.
act only as the IRA custodian," says Kelli Click, vice president at Sterling
Trust Company in Waco, Texas. "This is a simple illustration of what takes
place, but an individual comes to us, sets up an IRA and tells us they want to
purchase the property at 100 Main Street. They find the title company, get everything
in place, tell us to wire the funds to the title company and here's the closing
date. We purchase the property and make sure it's in the name of the IRA account.
We hold the property and provide the account holder with a quarterly statement,
and we provide any IRS reporting for the IRA account."
for custodian services vary, so be sure to get a complete list of fees before
You can use your self-directed IRA to buy your
future retirement home, but you can't live in the home until you retire. You also
cannot put a piece of property that you currently own into your IRA.