Rolling an IRA into rental property
Dear Money Matters,
I have been investing my IRA savings in mutual funds until now.
I've given up on waiting for stocks to supply any growth. I was
told recently that I can roll over my IRA into property, specifically
rental property. Can I do this and, if so, how?
I sympathize. The recent sluggish performance of the stock market
as a whole has been frustrating. I'm certain you're not the only
investor on the block looking for alternatives.
It is possible to roll over your IRA into rental property,
although the mechanics can be somewhat convoluted. First, as I understand
it, you simply can't roll over your IRA from mutual funds into real
estate as effortlessly as you would roll it over from one fund to
another. The most complicated and troublesome element is finding
a suitable custodian. This would be an entity, such as a bank or
a trust company. You would have to open a self-directed IRA with
them, and they, in turn, must be willing to accept the deed to the
property as an asset in the account.
Needless to say, it may be a bit difficult to track
down a custodian who's comfortable accepting property as an IRA
asset. Out of curiosity, I called three banks where I live and none
said they would be willing to do so. Of course, it may be different
where you are, but it may be the case that many banks and other
similar institutions -- conservative and close to the vest as they
are -- may be a bit gun shy about straying too far from the IRA
You should also know that rental property has its
share of pitfalls, just like any other sort of investment. For one
thing, there's no guarantee that property values where you live
are going to appreciate. Similarly, there's no certainty that you're
always going to find tenants, let alone tenants who -- gasp! --
pay the rent in full and on time. That can leave you paying the
mortgage and upkeep out of your own pocket. Lastly, give careful
thought about how involved you might want to be as a landlord. If
you're going to handle things yourself, that may mean being rousted
out of bed at 2 a.m. to charge over with a plumber's wrench in hand.
By contrast, if you hand off your rental to a management company,
the cost will cut into your return.
If the notion of real estate appeals, you may want
to consider putting at least a portion of your IRA into a Real Estate
Investment Trust. These are bought and sold like mutual funds and
invest in real estate. There are three types -- Equity REITs own
property directly; Mortgage REITs deal in mortgages; and a third
hybrid does both.
Unlike many stocks which don't pay any sort of dividends,
all REITs pay dividends. And the rate is, historically speaking,
rather good. For instance, last year REITs paid an average of 8
percent in dividends. Additionally, since the REIT would be in your
IRA, you won't owe any taxes on any of the income until you start
withdrawing the money. Finally, although REITs can move up and down
with the markets as a whole, they inherently offer diversification
across a number of properties. If, by contrast, you put your money
into just one piece of real estate, your fortunes are tied solely
to that one property.
-- Posted: July 8, 2002