How to invest IRA in Real Estate

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The uncertainty in stock market and continued frustration over low interest rates has a lot of investors looking beyond stocks, mutual funds and bond for their retirement savings. Many of these investors have discovered they can use the money in their IRAs to buy real estate - from single-family homes to raw land to commercial buildings.

Don't let your lack of knowledge about IRAs become a hurdle in investing IRA in real estate, warns IRA expert ED Slott of Rockville Center, N.Y. Investing IRA in real estate is not easy; the rules are complex and the stakes for mistakes are high. One mis-step can disqualify your IRA's tax-deferred status, forcing you to pay tax on its full value plus penalties if you're under the age of 59 ½. Slott suggests real estate investment trusts if you want to invest your IRA in real estate.

Kaye Thomas in Lisle, Ill is a tax expert and a author. he notes that owning property inside an IRA forfeits the traditional tax advantages of investing in real estate. "You can't deduct property taxes or mortgage interest, and you can't use depreciation," suggests Thomas. "When you sell the property, a traditional IRA turns profit into ordinary income rather than capital gains" (with a Roth IRA, profit would be tax-free).

Moreover, your IRA must have enough spare cash to pay property-related expenses like maintenance costs, taxes and management fees because all income must flow into the IRA and all expenses must be paid out of it.

Do the Homework
You must have read a lot of success stories. If they intrigue you, be prepared for a lot of work. First, you have to find a property you want (you cannot use your IRA to purchase your own residence or vacation place). Look for a good deal. Then you need to find an IRA custodian that allows real estate investments. Don't look to your local bank or mutual fund company for help because they won't be able to do it. There are only a handful of IRA custodians who take care of your IRA. Check out on the web - Google ‘real estate IRA' or ‘self-directed IRA'. You will find a few IRA custodians.

That's how Eddie Gant of Houston found Entrust Administration. He transferred his $150,000 IRA from his brokerage account to entrust last April and used $62,000 to purchase a run-down single-family home. He spent $16,000 to remodel the house and sold it within the year for $98,000. The remodeling costs came out of Gant's IRA; the profit went back in. He has since purchased three other houses with cash and estimates a minimum 50% return within one year. But Gant, 43, has a big advantage over most of us. He is a professional home remodeler.

Become a landlord
Four years ago, Hanneke Jacobs of Irvine, Cal., and her husband, Peter, didn't know anything about real estate investing. But as they approached 50 years of age, they knew they didn't have enough money to retire. "We didn't want to end up in a trailer park," says Hanneke. They contacted a real estate agent and he advised them to use $100,000 in Peter's IRA as a down payment on a four-unit apartment complex. The rental income flows into the IRA and the property was appreciated by about $200,000
Before buying an apartment or a commercial space, you have 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.

However, investing IRA in real estate, like Jacobes did, adds more complexity because an individual cannot personally guarantee a loan to an IRA. Few banks will lend money to an IRA based solely on a property's potential appreciation. You also give up the power of leverage, if you pay cash for a property. On the other hand, using leverage inside 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, the Juraks and six other family members established a limited liability corporation and used money in eight separate IRAs to buy the land.

Muhammad Siddique is Real Estate Investor for  years mostly in commercial real estate specially shopping centers, hotels, motels and recommends TRCBVideos.com to convert aticles into Videos automgaically.

 

You should follow me on twitter here or  go http://twitter.com/siddiquem

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