InvestorLoft Real Estate Investing Blog

Real Estate IRAs - Save Smarter!

The self-directed or real estate IRA is a powerful tool and growing in its popularity. However, as with any other way of investing your retirement funds, it’s not to be taken lightly.

Rental and other income property can be excellent vehicles that provide long-term appreciation potential and a steady flow of income as you work towards retirement. We spoke with Jenn Dizmang, a national speaker and former securities professional who teaches investors and real estate professionals how to properly use a real estate IRA for some advice on common mistakes that people make in the process.

Jenn shared with us that the following are the most common AND the most easily avoidable mistakes she sees people making with their real estate IRAs:

1. They either live in or vacation to the property that their IRA owns
2. They try to let family members use or live in property that the IRA owns
3. They don’t realize that when an IRA takes a loan, an additional tax may be due called UDFI (Unrelated Debt Finance Income Tax)
4. They try to lease the property back to themselves from the IRA
5. They try to do rehab work themselves on a property that is owned by the IRA. (You have to hire a contractor that is an unaffiliated party to perform the work!)

Where to look for the best real estate deals

Real estate investors – looking for the best markets for new deals? FORTUNE online just published a comprehensive pictorial tour of their “best markets” for retirement homes – and InvestorLoft is right in line with their estimations. There are subtantial values to be found in each of the named markets, earning each a place on this list of 12 key cities to consider for the retiree – AND the real estate investor in search of investment property for their portfolios.

The article names Miami, San Diego, Las Vegas, Tampa and Denver as the top markets for this article, citing lowered home prices, quality of living and local amenities for each.

In a separate article, they identify Phoenix as a key location for picking up a “deal in the desert.”

If you’d like to take a quick search through InvestorLoft’s available properties in each of the 6 markets listed in these two articles, just click on the links below and we’ll take you there in a jiffy:

Miami investment property

Tampa investment property

San Diego investment property

Las Vegas investment property

Denver investment property

Phoenix investment property

As a reminder, every property listed on InvestorLoft has been listed by a licensed real estate professional – no “fly by night” or under the table deals here. We make it simple to search for, identify and analyze investment property with just a few clicks of the mouse and firmly support the role of the real estate professional in every stage of the transaction.

Good decisions outweigh bad markets with SDIRAs

All our lives we, as investors, have been told to put money away for those rainy days. Today, investors are on the seemingly neverending search for solid investment ideas that produce sound returns with balanced risk. Consequently, advisors are looking for council on a lesser-known and often misunderstood category:alternative assets.

Alternative assets include a wide-ranging group, such as partnerships and private equity. But the largest segment of alternative investments has been and continues to be real estate. In fact, almost 60 percent of alternative asset investments are in this category. Investors can invest in condos, rental properties, raw land, commercial buildings and other types of real estate from within a Self-Directed IRA (SDIRA).

Most Americans already have real estate investments, i.e., their home, and most (given the opportunity) may prefer to invest in asset-backed investments over paper-backed investments. Many investors are wondering if today’s retreating real estate market means that the good times are over for real estate, or whether new opportunities will emerge from the wreckage. I believe that it’s the latter. Real estate advisors, with whom my company works, suggest that falling real estate prices, combined with increasing inventory, may create new investment opportunities. As prices begin to fall back to earth, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the United States may already be starting to enter this situation. Consequently, many typical real estate investors are being squeezed out of the market due to the current credit crisis.

This has created a unique opportunity for cash-rich retirement plan investors who are in a position to purchase real estate outright. Who are these cash-rich investors? Baby boomers. 2007 marked the beginning of the wave of more than 78 million baby boomers that will begin to retire over the next two decades. This group controls more than $14 trillion in retirement plan assets, which will transition from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income. When you add the factors noted above with the possibility of real estate appreciation, it is easy to see why retirement accounts that invest in real estate are growing in popularity.

Just because you can invest in real estate in your IRA does not automatically make it the best decision for all account holders. Opponents of using a self-directed IRA to invest in real estate suggest that there are specific tax implications foregone by choosing real estate as an investment. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15 percent. When a SDIRA sells a piece of real estate, there are no taxes due at the time of sale. However, depending on the type of SDIRA, when the owner takes a distribution from a retirement account, the proceeds will either be taxed at the person’s ordinary income rate (for a traditional SDIRA) or will, potentially, be tax-free under a Roth SDIRA.

This is an important issue because ordinary income tax rates are typically higher than long-term capital gains rates. SDIRA investors cannot depreciate property or write-off interest from their mortgage on their personal tax return.

In general, real estate investors experience increased return potential because of their use of leverage and its favorable tax treatment. Most real estate investment experts advocate the use of leverage to build wealth. Most SDIRAs do not use leverage to buy real estate, although it is permissible. Without the use of leverage, real estate begins to look more like income-producing bonds with equity upside. The lack of leverage may also reduce one component of risk for investors as well since the rental income is not being immediately used for debt service. If a property goes unrented the account holder owns the property outright and may not be subject to foreclosure proceedings, as with most current leveraged properties. Consequently, the methodology for buying real estate inside a tax-deferred retirement account may differ over time from real estate purchased outside the account.

Prohibited Transactions

Investing in real estate with an IRA requires that advisors and their clients be knowledgeable about prohibited transactions and what constitutes them. A prohibited transaction can jeopardize the tax-deferred status (and tax-free status if a ROTH) of the account, and can result in serious tax consequences. Another important issue for real estate concerns the access and use of property held inside the SDIRA. In such situations, neither the account holder nor their family members (ancestral & lineal) may have personal use of said property. To do so would result in an immediate prohibited transaction.

Partnerships

For an advisor who is seeking a niche, SDIRAs might be the answer. It takes time to develop expertise in this area and an advisor who invests time in understanding real estate investments with SDIRAs can create a competitive advantage.

Today, many advisors are partnering with those who have alternative products in which to invest, whether they are real estate-related or other private offerings. These partnerships provide the advisor with the ability to meet the changing demands of their clients. Advisors are learning to work more closely with clients who may have a property or real estate professional already in mind. As investors’ needs change, alternative assets and self-directed retirement accounts will become important tools for advisors to help clients diversify and grow their retirement wealth. Those advisors that are prepared for this change will be at the forefront of the financial services industry for years to come.

TJ Valenzuela is with TAS (Trust Administration Services), a leading personal management provider of self-directed IRA retirement accounts, retirement planning services, and custody accounts at www.trustlynk.com

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.

Your Virtual Key to Real Estate Investment

We find so much powerful information across the web on a weekly basis that we wanted to take a moment and fill our readers in on the “coolest of the cool” in this week’s real estate and investment markets.

Back on April 3rd, we posted Real Estate: the Self-Directed Perspective and have found that this subject is really heating-up across the web. Here are two complimentary posts on the subject of “retiring with real estate” that our readers might also find useful:

Real Estate: Market Slowdown Offers Deals for Real Estate Investors – DailyPress.com. Real Estate is on sale and the market’s current slowdown is offering great deals for real estate investors in the Norfolk, VA region. InvestorLoft members can search Virginia for investment property!

Using IRAs to Buy Real Estate: Six Reasons to Tap Retirement Funds Now to Buy Rental Property - (Chris Pummer) MarketWatch.com. There’s a lively discussion going on over at MarketWatch on Chris Pummer’s series of articles on investing in real estate with your retirement funds. This let us know that we’re doing the right thing at InvestorLoft by helping educate our members and site visitors on the details of using their IRAs to purchase real estate. Have you seen our 7-part series on the Basics of Real Estate and Self-Directed IRAs?

Bellevue, Wash. and DENVER – (April 13, 2009) - Guidant Financial Group and InvestorLoft.com announced today that they will be joining efforts to create more awareness around real estate IRA investing through both companies’ websites. Combining Guidant’s award-winning expertise in alternative investment facilitation with InvestorLoft’s reach within the real estate investment community, both companies are excited at the expanded offerings.

“Many would-be investors contact us looking for investment opportunities,” says David Nilssen, co-founder of Guidant, a leading provider of self-directed IRA services and business-financing solutions. “By combining InvestorLoft’s resources with our self-directed IRA services, our companies create an opportunity for investors to identify, evaluate and purchase real estate investments.”

Guidant’s website includes audio and video about self-directed investing, a glossary of investment-related terms and a plethora of informative articles,” says Nilssen. “The inclusion of InvestorLoft content will help fill a gap in our curriculum.”

InvestorLoft is the first technology-driven real estate investment marketplace to effectively solve the challenges of identifying, analyzing and funding investment opportunities. Having experienced a similar gap in educational content and trusted resources for referral, InvestorLoft is enthusiastic about the resources that the relationship with Guidant offers their site members as well.

“With an estimated 70-90 percent of IRA holders unaware of their ability to purchase real estate through their IRA, there is a strong need to educate our members by providing solid educational tools, particularly information about innovative investing solutions as offered by Guidant,” says Walter Charnoff, co-founder and CEO of InvestorLoft. “We’re excited about the relationship with Guidant and look forward to leveraging their expertise on the utilization of retirement funds for purchasing real estate and other alternative investments.”

By teaming up, Guidant and InvestorLoft plan to help investors take a more active role in their future investments and get one step closer to achieving their investment goals.   

About Guidant Financial Group

Guidant Financial Group provides self-directed IRAs and business-funding solutions through IRAs and 401(k)s. Guidant’s services allow investors the freedom to make investments in real estate, franchises, businesses, tax liens and more by accessing their retirement accounts without penalty before retirement age. For more information on Self-Directed IRAs or Business Financing please visit www.guidantfinancial.com.

Contact: 

Marty Weishaar 
Guidant Financial Group^TM 
Phone: 888.472.4455 ext. 3248 
Facsimile: 888.418.0374 
marty.weishaar@guidantfinancial.com

Real estate saw one of the most turbulent markets in 2008 that we’ve seen in years. Now, as we prep for 2009, we’ve compiled this list of top move-forward trends to keep an eye on in real estate during 2009:

1. Realtor and Mortgage Industry Attrition – Those who got into real estate to ride the wave of yesterday’s boom are faced with dwindling client lists and tremendous regulatory changes. Realtors and yesterday’s mortgage brokers will have to a different type of business to have real “staying power” in the current economy. Those who persevere will find that nothing replaces superior customer service partnered with an unsurpassed level of expertise.
2. Growing Levels of Specialization in Residential Real Estate Sector – The recent crisis has demanded a certain level of specialization for real estate professionals. Those that know their way around short sales, alternative financing, foreclosures, seller carry-backs and investment property have pulled ahead of the masses and will likely continue to do so thorughout 2009.
3. Mortgage Metamorphasis – We’re on the lookout for more realistic lending standards. A-paper buyers can’t qualify and the sub-prime borrowers can’t pay, so what’s left? Look for banks to get creative, for the 20% downpayment of our parents’ era return as the norm and for lenders to consolidate and form national lending platforms that are more appealing to Joe American (and likely LESS friendly to Mr. Investor).
4. Hard Money Won’t be So Hard – Purchases still have to close and with the equity markets having been so turbulent, folks are looking for alternative investments in an asset class they know and trust like real estate. Look for a resurgence in private money lending as the real estate industry gets creative.
5. 1031 Exchanges: Hot, Hot, Hot – With 2008 having been so turbulent, we’re expecting more and more investors to look into the benefits of 1031 tax exchanges. Their value for a real estate investor’s portfolio is undeniable so we’ll be bolstering our educational content in this arena for our members.
6. Self-Directed IRA and Real Estate IRA Investing Will Surge – We’re predicting an all-time high level of assets rolled over into truly self-directed IRAs. Investors are seeking alpha outside the stock market and self-directed IRA custodians are wasting no time putting marketing dollars to work to educate investors about this valuable option. Take a look at InvestorLoft’s Self-Directed and Real Estate IRA Learning Center for our 7-part series on the basics of Real Estate IRA investing.
7. A Marketing Paradigm Shift for Real Estate – When lenders and other professionals realize that liquidity lies in the real estate investor’s realm, we expect to see a significant shift in marketing and advertising tactics. Why not advertise and market where your products will be seen by those with the need, desire and liquidity to purchase? Crazy stuff, we know!
8. Home Price Stablization – We can’t speculate as to where the bottom of the market is, but we expect to see home prices stabilize in Q1 of 2009 and remain static until about Q4. It’s a new Presidency and once tax time passes, we’ll see some available dollars head back into the real estate arena as folks see that prices have held for a few months.
9. Refined Refinancing – With so many mortgages set to adjust in the first half of 2009, we’re predicting a new scene on the refinancing front. Sure, rates are low, but if you can’t qualify – what’s the point? Lenders will snap-to and get savvy, tapping into the refinance market to pick-up great borrowers for their books and send high rates packing for those who can qualify. It won’t be so much about the rates this time, but the service and ability of lenders to work with a borrower’s personal situation as the mortgage industry continues to right itself from the 2008 capsizing.

In these days of tightened lending criteria and the stated income mortgage having gone by the wayside, what’s a real estate investor to do? Creative financing requires putting on your thinking cap and looking for new, untapped sources of liquidity. Forget thinking outside the box – you need a whole new frame of mind when it comes to your real estate financing needs.

The process of purchasing real estate in your IRA is relatively simple, yet widely unknown and the subject of this week’s blog. For those in search of a financing source for their real estate investment goals, we’ll plant some seeds worth cultivating today.

The lending environment today is a far cry from where we were 12-24 months ago. While many of the tools that real estate investors used to achieve their goals have now been dispensed with (i.e.: stated income loans, 80/20 loans and the Option-ARM), there’s a pile of money just waiting to be used and it’s likely you’ve been sitting on it this whole time: your IRA. Most investors aren’t aware that they’re able to expand beyond the norm of mutual funds, stocks and bonds with their retirement kitty, but it’s an easy process.

Here are 3 tips to get you started on the path of utilizing your IRA to invest in real estate:

1. Find a custodian for your IRA. There are specialized custodians for self-directed and real estate IRAs. Consult our handy list of custodians to begin your due diligence process.
2. Learn about non-recourse loans and how they can help you finance your real estate purchase by using leverage in your IRA.
3. Review permitted and prohibited transactions. Purchasing real estate in your IRA doesn’t come without Uncle Sam’s restrictions. Once you know what they are, finding a qualifying property is simple! 

 

 

Online Self-Directed IRA Learning!

Click and learn! We’ve had such incredible traction from investors who currently use their self-directed IRA to invets in real estate that we wanted to let everyone know how it’s done. We’ve launched our Self-Directed IRA Learning Center and invite you to stop by an have a look-and-learn.

From a detailed seven-part series on the basics of self-directed and real estate IRA investing to more advanced strategies, this section of our Resource Library is ready and waiting. There are also the most up-to-date IRS publications available for download for our members’ convenience. One-stop shopping and learning for your investment goals!

There are so many people out there who don’t know that they can use their retirement fund to invest in real estate, and self-directed or real estate IRAs make it simple.

Have an idea for an article you’d like to see in this category? Drop us a comment here.