During the last few years, the stock market has been very volatile. Volatility tends to cause heartburn for the individual investor as they watch the value of their portfolios fluctuate. Helplessness to control the roller coaster ride that is “The Market” causes investor inertia.
Baby Boomers are unsure of when or if they will ever be able to retire and retirees have had to return to the workforce to make additional contributions to their retirement assets. Investor cash has been sitting on the sidelines, parked in low yielding certificates of deposit or money market funds.
Financial advisers rarely recommend investment in property for retirement accounts. Generally, they do not get paid to do so. Also, the media continually reports on the collapse of the real estate market and the multitude of foreclosures taking place on a monthly basis.
To grow your retirement portfolio today, it could pay to be a contrarian and stop following the crowd. Yes, the housing market has collapsed. It is also true that the unfortunate depression in housing values has presented savvy real estate investors the opportunity to buy properties at a deep discount. Your IRA could be a source of financing for the acquisition of these discounted properties and provide your retirement portfolio with above average returns – especially if you negotiate a “piece of the action”.
So how do you go about investing your IRA in real estate?
IRA real estate investing requires the same due diligence that should be applied to any investment vehicle. Determine how you want to invest. Do you want the IRA to own the property and collect rent (and maybe appreciation) to fund the growth of your retirement account? This option positions you as the hands on landlord, somewhat distasteful to some investors.
A second option is to locate one of those savvy investors mentioned earlier and negotiate with them to have your IRA invest as a Private Lender. In this scenario, your IRA replaces a bank as the finance source for the transaction. A mortgage and note is issued, establishing your IRA as the first lien holder. You determine the terms of the deal directly with the professional investor who has negotiated a deeply discounted price for the acquisition and repair of the property in question. If you don’t like the property, ask to see others. Caution – do not invest more that 70% of the after repaired value of any property and make sure you request acceptable evidence of the value.
What Do I Have To Do??
Procedures to have your IRA invest in an non-traditional estate can appear cumbersome. Your IRA cannot be a prototype IRA from a mutual fund investment company, nor can it be a self-directed IRA through a brokerage firm. It must be a self-directed IRA through a qualified custodian. Here is where your real estate professional can add additional value. He/she knows these custodians and will work with you to make the transfer to the new custodian as painless as possible.
Real estate is an excellent option for both a traditional IRA and a Roth IRA. Remember that contributions to a traditional IRA are from pre-tax income and the earnings in the account are taxed at retirement when the proceeds are distributed to you. Contributions to a Roth IRA are from post-tax income. The earnings in a Roth IRA are tax free forever. Your investing professional and the custodian you choose will work with you to make sure your IRA remains in compliance with all IRS regulations.
Private Lending in an IRA is worthy of consideration and due diligence.
The return is worth it.
David Scheuring is President of Pembroke Property Solutions, Inc., a professional real estate investment organization. More information is available at www.privatemortgagenow.com. Please send any comments or requests for more information to: info@privatemortgagesnow.com
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