by Kiplinger’s Personal Finance Magazine
Painful memories of the bear market and continued frustration over low interest rates have a lot of investors looking beyond stocks, bonds and mutual funds for their retirement savings. A small but growing number have discovered they can use the money in their IRAs to buy real estate — from raw land to single-family homes to commercial buildings.
Still, there are plenty of success stories. If they intrigue you, be prepared for a lot of work. First, you have to find a property you want (you can’t use your IRA to purchase your own residence or vacation place). Then you have to find an IRA custodian that allows real estate investments. Don’t look to your local bank or mutual fund company for help — there are only a handful of IRA custodians who do this. You can find them by searching for “real estate IRA” or “self-directed IRA” on the Web.
Hanneke Jacobs of Irvine, Calif., and her husband, Peter, didn’t know anything about investing in real estate when they started four years ago. But as the two of them approached 50, they knew they didn’t have enough money to retire. “We didn’t want to end up in a trailer park,” Hanneke jokes. So on the advice of a real estate agent, they used the $100,000 in Peter’s IRA as a down payment on a four-unit apartment complex. Rental income flows into the IRA, and the property has appreciated by about $200,000.
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.”