I’ve been looking for a good, relatively risk-free investment that offers the opportunity to earn double-digit returns year after year and think I’ve found one. I think the stock market is overvalued and bonds don’t look so good either as interest rates rise.
But there are a bunch of units in my condominium complex and others around my home here in Connecticut that are for sale at prices about a third less than what they were going for five or so years ago. I figured a smart buyer would be able to buy one of these units for $100,000 or so and rent them out for about $1,000 a month, or $12,000 a year. That’s a return of 12% a year, before expenses.
Unfortunately, the only money I have to invest with is in my IRA. If only I could use the money in my IRA to buy one.
Well, it turns, you can.
I had been under the impression that you could only buy conventional paper assets with IRA funds, such as stocks, bonds and mutual funds. But you can also buy alternative investments like real estate investment property, although there’s a specific process you have to go through.
The trick is that the assets have to be held by a custodian that follows the IRS guidelines for tax deferred accounts to ensure that the investment grows tax deferred. There are several firms that can help you do this, including Guidant Financial, Sterling Trust, IRA Resources and PENSCO Trust. The firms act as custodian of your self-directed IRA, holding the property and dealing with all associated expenses. Of course, they charge fees for this service. There’s even an industry trade association, called the Retirement Industry Trust Association.
Actually, there’s a wide variety of alternative assets you can invest in through your IRA, including non-publicly traded securities, promissory notes, real estate, precious metals, LLCs, tax liens and partnerships, as well as publicly traded securities.
The types of real estate you can purchase through your retirement account include single-family and multi-unit homes, apartment buildings, co-ops, condos, commercial property and improved or undeveloped land.
But there are rules on what you can and can’t buy. For example, you can’t buy property that you previously owned yourself or someone in your immediate family did. You also can’t live or work in a property you buy or lease it to an immediate family member.
You can even take out a mortgage to buy the property if you don’t have enough to buy it outright. However, you have to pay the mortgage with funds in the IRA, such as income from the property itself or annual contributions or other assets in the IRA, but not your personal funds. That’s because the property actually belongs to the IRA, not you personally.
Is investing in residential real estate any less risky than investing in the stock market? I’m worried about a stock market bubble myself. It can certainly be argued that house prices are in bubble territory too, but they’re also 25% below the peak. I would think they have a lot less further to fall than stocks. Besides, you’ll still be getting the monthly rental payments even if the property value falls.
Home prices are up nearly 13% so far this year, according to the National Association of Realtors, but are still down more than 20% off the 2008 peak. By comparison, with two months still to go, stocks are up way more than that. NASDAQ is up more than 30% through October, while the S&P 500 is up more than 25% and the Dow is up more than 20%, with the latter two indexes both at or near record highs.
But the Fed says none of these assets are in bubble territory. But then they always say that. Unfortunately, they’re often wrong. But this time around, housing may be the safer bet.
Disclaimer: George Yacik is not a licensed or professional investment adviser nor has he ever played one on television, on stage or in the movies. The information presented here does not purport to be investment advice and should not be construed as such. This article is presented solely for educational purposes and to give the reader something to consider. You should consult a professional before beginning any aggressive or moderately aggressive investing or exercise program.
About The Author
George Yacik has been a financial writer for more than 30 years. After working 12 years at The Bond Buyer and American Banker as a reporter and editor, he joined SMR Research Corp. as a vice president, where he was the lead research analyst and project leader for SMR’s studies on residential mortgages and home equity lending. Since 2008 he has been writing for a variety of mortgage-related and financial publications. George is based in Stratford, CT, and can be reached at firstname.lastname@example.org.