by Phoebe Chongchua
Mistake #1: Do-it-yourself kits
Mistake #2 Overpaying for legal and expert help
While using experts to set up an IRA LLC may initially cost more than a do-it-yourself kit, most find the benefits outweigh the risk. Nabers also points out that you don’t have to get sucked into paying an outrageous price if you comparison shop. “A lot of times people will end up paying $10,000 or more to get an LLC put together and an opinion letter,” says Nabers. He says a more reasonable market rate for getting that service is in the range of $4,000 to $6,000. But great deals can be found at www.iraaa.org. The association offers its members a significant discount on this service. Do your homework and shop around before you commit to an attorney. Full-time investor, Jason Merritt, discovered he was overpaying for his IRA LLC set up fees. “[The money] adds up because we usually set up a different IRA or LLC for different projects or ventures that we go into,” says Merritt. Merritt discovered the organization and has taken advantage of the discount that he gets for being a member. “For about $1,500 he can set up an LLC for us,” he says. Merritt adds that over the course of a year he has been able to save thousands of dollars.
Mistake #3 Not understanding prohibited transactions
Investing with your IRA can be risky business if you don’t understand what constitutes distributions and prohibited transactions. A common mistake is that people think that their IRA can invest in a second home; your IRA, however, can only be used for investing purposes. “For instance, here in Myrtle Beach, a lot of times people will buy a property as an investment but part of their motivation for buying it is that they can come and spend a couple of weeks here and there vacationing in that property. But if their IRA owns the property they can’t get any personal use out of it,” says Nabers.
Mistake #4: Putting all your eggs in one basket
A healthy financial portfolio is one that is diversified. For instance, it’s not recommended that you take all of your money from the stock market and put it all into real estate. “It’s about freeing up your retirement funds to be invested without undue limitations,” says Nabers. The diversity creates better financial stability—if a particular area isn’t performing and you have your investments diversified you’ll be able to experience gains from your other financial strategies. Having plenty of options to increase your financial wealth provides greater security.
Mistake #5: Not using experts
Many people first go to their attorney or CPA to ask about a self-directed IRA. Nabers says the problem with this is that the average CPA or attorney simply doesn’t have the time to do enough research to know all the ins and outs of what you can and can’t do. He says instead of admitting that they haven’t done the research, it is not uncommon for attorneys or CPA’s to steer their clients away from self-directed IRA investing in an effort to keep them as clients. If you’re interested in using your IRA to invest in real estate it pays to consult the experts to walk you through the process.
Phoebe Chongchua is a motivational speaker, real estate writer and Realtor in California. Visit her site, www.phoebechongchua.com