Tue, Feb 09, 2010
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You Can Buy Real Estate With Your IRA or 401K
| | Tuesday, March 25, 2008 @ 11:07 AM EDT
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Contributed by: Pat Huff
Pat Huff Properties
Read more archived articles about Buying
Tired of seeing your retirement nest egg evaporate? Can't qualify to buy investment properties? Good news! You can make your IRA or 401K truly self-directed and purchase land, residential real estate, commercial properties, make mortgage notes, buy trust deeds, fund LLC's, or just about anything except collectibles and S-Corps. Your profits go directly back into your retirement account, even tax-free if you have a Roth IRA or Roth 401K.
This form of retirement investing has been available since IRA's started, but is getting renewed attention what with the stock market roller coaster ride of late. Be aware that the big brokerages might tell you that it's illegal to make your retirement self-directed (mine did). But that is incorrect!
There are rules that you must follow. The IRS has ruled that your self-directed IRA or 401K can't invest with yourself, your spouse, or direct descendents. Step-relatives are allowed. However, there are ways to accomplish investing with these individuals through all-cash transactions or by forming LLC's or Limited Partnerships.
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It is easy to make your present IRA or 401K self-directed so you can invest in real estate. Your 401K usually must be from a previous employer, but check with your current plan administrator. You simply roll it over to a custodian or administrator that allows you to make investments outside of the stock market. Investigate any tax consequences for your particular situation. For those with high incomes, you will be allowed to rollover your Traditional IRA into a Roth IRA, despite your high income, in 2010 and pay the tax penalty over two years. Your profits will then accumulate tax-free.
There are many custodian and administrator companies to help you and answer your questions. Some of them are: Pensco Trust-- www.pensco.com, American Pension Services-- www.aps-utah.com, Equity Trust-- www.trustetc.com, Fiserv--www.fiserviss.com, Trust Administration www.Services--www.trustlynk.com, and www.Guidant--www.guidantfinancial.com.
When you are ready to purchase your property, you will need a non-recourse loan. I can help you with getting a non-recourse loan. With a non-recourse loan, an individual doesn't guarantee the loan. So if the borrower defaults on the loan, the only recourse the lender has is to take back the property.
Obviously your retirement account is not an individual who can sign for a loan. Non-recourse loans are very commonly used to purchase commercial real estate, where cash flow determines whether or not the loan is approved. The same criteria are used for a property purchased with an IRA.
Cash flow determines whether or not the IRA non-recourse loan is approved. This actually helps you as an IRA investor, because you don't want to pay a negative cash flow out of your retirement account every month. The terms are designed to help you accumulate wealth in your retirement account.
Typically 30% is required down. Then a vacancy factor of 5%, management costs, taxes, and insurance are taken out of the monthly rental income. After these factors are taken out, your remaining monthly rental income should be at least the same as your mortgage payment.
I have invested myself with my self-directed IRA and know that it is a proven formula for jump starting your retirement nest egg. Many others are doing the same thing. Make a penchant for real estate into a pension!
Note: www.invest4yourfuture.com.
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