Invest Your IRA in Real Estate?
Success stories prove you can. But it's not for the faint of heart.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, March 2005
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Become a landlord
Hanneke Jacobs of Irvine, Cal., and her husband, Peter, didn't know anything about investing in real estate when they started four years ago. But as the two of them approached 50, they knew they didn't have enough money to retire. "We didn't want to end up in a trailer park," Hanneke jokes. So on the advice of a real estate agent, they used the $100,000 in Peter's IRA as a down payment on a four-unit apartment complex. Rental income flows into the IRA, and the property has appreciated by about $200,000.
If you buy an apartment building or commercial space, you'll need to hire a property manager to collect rent and maintain the building. Depending on the IRA custodian, you may have to pay a transaction fee every time you authorize a check to pay a plumber or your property taxes.
Financing real estate inside an IRA, like the Jacobses did, adds more complexity because an individual cannot personally guarantee a loan to an IRA, and few banks will lend money to an IRA based solely on a property's potential appreciation. If you pay cash for a property, you give up the power of leverage. On the other hand, using leverage inside an IRA can trigger an arcane tax upon sale of the property on income attributed to borrowed money.
Spread the word
Despite the complexities, the availability of commercial lending is likely to increase as more financial institutions and professional advisers learn about this investment niche, predicts Tom Anderson, president and chief executive officer of Pensco Trust Co., one of the oldest self-directed IRA custodians. Of the nearly $3 trillion invested in IRAs, Anderson estimates that less than 1% is allocated to direct real estate investments. But he hopes to change that. "The only reason is a lack of knowledge and education," says Anderson. "Our message is: This is a relatively unknown avenue to build wealth in your retirement account."
That's what inspired Dana and Scott Jurak of Plano, Tex. The Juraks, who are avid scuba divers, stumbled on an intriguing investment opportunity when they visited St. Croix last year: a one-acre beachfront lot for sale for $550,000, a price they considered a steal. They made an offer on the property and spent the next few months figuring out how to buy it. With the help of Dan Cordoba of Asset Exchange Strategies (www.myrealestateira.com), the Juraks and six other family members established a limited liability corporation and used money in eight separate IRAs to buy the land.
--Research: Elizabeth Kountze