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Real Estate Investing With Your IRA


Low-risk opportunities abound, you just have to know where to look.

Editor's Note: This post first appeared in the February edition of: Cirios Trends: In Search of Real Estate Opportunities.

At cocktail parties and around the water cooler, the familiar refrain that "now is a great time to buy," is piquing the interest of even the most casual real estate investor. For many, however, taking advantage of "distressed" real estate opportunities remains difficult, at best.

For some it's a simple question of economics. Buying a distressed property often requires an all-cash purchase -- a daunting task with high home prices. And after the stock market's swoon in 2008, it's seemingly untenable recovery in 2009, and a recent blip downward to kick off 2010, many investors are just trying to get back to where they started.

However, for those with a desire to diversify away from the limited transparency afforded by investing in stocks, tax-protected retirement money can be used to invest in real estate.

It's a well-kept secret that money held in IRA accounts can be invested at the owner's discretion. Brokerages and money managers earn money from controlling IRA investments for their clients. This gives them little incentive to provide information on "self-directed IRAs," which give investors the ability to diversify their retirement savings, while still retaining IRA tax protection.

Only tiny fraction of the trillions of dollars that are in IRA accounts are self-directed. And with cash-flush investors stepping back into the housing market, an increasing share of deals are being snatched up by buyers using tax-protected retirement funds at the closing table.

Not surprisingly, the IRS keeps close tabs on this sort of investment, so anyone considering this option should seek the advice and consultation of an investment and tax professional.

IRS regulations require that either a qualified trustee or custodian hold self-directed IRA assets on behalf of the IRA owner. Most big wealth managers offer the service while a few firms that specialize in self-directed IRA investments have been gaining market share in recent years.

Custodians and/or trustees facilitate investment transactions and hold the assets in trust for the IRA owner, just like a traditional IRA. The primary difference is that the owner, not the manager, calls the shots.

Once a self-directed IRA is opened, the custodian or trustee permits the client to engage in a broad range of investments that are approved by the IRS. These options include: real estate, stocks, mortgages, franchises, partnerships, private equity and tax liens. There are rules for each specific investment type, but it's easier than you think to diversify away from the stock market and into other asset classes.

One important aspect of self-directed IRA custodians is their inability (legally) to provide investment and tax advice. They act simply as intermediaries, not advisors. The idea is to give investors control; there are plenty of options to pay someone to professionally manage your retirement money, self-directed IRAs are designed for investors who want to be 100% in control of some portion of their retirement funds.

Of the restrictions on real estate investments, one of the primary ones is that the property cannot be for personal use. That is, you can't move up into that mansion you're family has been eyeing with cash set aside for retirement.

So even though retiring Baby Boomers can't pick up a getaway in Hawaii, they can opt to invest in something a bit less volatile than stocks. Low-risk opportunities abound to make smart real estate investments in this environment, you just have to know where to look.

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