According to an article written by Amy Hoak from Market Watch, there is a new trend among investors to use their retirement funds to purchase distressed properties or forclosures. She says, that in order to make these purchases people are “using self-directed individual retirement accounts, which allow them to invest in assets other than stocks, bonds and mutual funds. With a self-directed account, people can invest in real estate, mortgages and local businesses, according to The Entrust Group, a Reno, Nev.-based provider of account administration services for these plans.”
It’s important to understand that there are IRS rules that an investor must follow but “the average investor can alternatively gain real-estate exposure through real estate investment trusts.” If this isn’t enough for some investors then they will “make short-term (45- to 60-day) loans using funds in his self-directed IRA. People he lends to will sometimes fix up properties and put them back on the market when they’re finished. Today, it’s more likely that people will improve the properties, then refinance and rent them out.”
Although some are reluctant to use their retirement money to invest in such a shaky market, there are those who love the idea of investing in real estate for retirement.
The first step is to find a group that specializes in real estate investment of this sort. Some examples the article gives include the Entrust Group, Guidant Financial Group and Sterling Trust Co.
Tips included in the article
If you’re buying property, funds to refurbish and maintain the property also need to come from the IRA account, Smith said.
The IRS also stipulates that if you’re making a loan with your IRA, parents and siblings can’t be involved in the transaction, Bromma said. It can be a challenge to find borrowers; the firm you’re working with may be able to help match people up, but it isn’t obligated to do that, he said.
If the borrower defaults on the loan, the investor has to be prepared to acquire the property, Theurer said. It’s best to have a plan for that scenario before it happens.
One reason why people like the idea of investing their retirement funds in real estate is because its a “familiar purchase.” Many have purchased real estate in the past and have some understanding of the ins and outs of such an investment. “Not many people have experience buying stocks and bonds and mutual funds,” said David Nilssen, CEO of Bellevue, Wash.-based Guidant Financial Group and he points out that if it’s a rental property they’re purchasing, then there’s opportunity for income.