Simply Junior

An IRA certainly has greater flexibility than a 401(k) and other plans for one’s retirement. It can be used for virtually any type of investment one chooses, from stocks and bonds to mutual funds to real estate. One might consider whether or not making an IRA real estate investment is a wise move. Many people are under the misconception that doing it at all is illegal. It isn’t illegal, nor, however, is it simple.

Continuing frustration about the phenomenon of low interest rates, coupled with recent memories of the bear market, have caused some investors to seek answers beyond mutual funds, stocks and bonds to plan for a secure retirement savings, and an increasing number of them are beginning to use their IRA funds to purchase real estate. In recent history, they have been quietly picking up everything from single-family homes to tracts of land to commercial apartment buildings with their IRA real estate investment transactions.

While IRA real estate investment is a real possibility, experts are warning that investors exercise caution. The stakes are high and the rules are quite complex. A single mistake can disqualify the tax-deferred status of an IRA in a split second. This forces the investor to shell out the cash for taxes on the full value and penalties.

Property ownership inside of an IRA means forfeiting the better-known tax advantages inherent in investing in real estate. With IRA real estate investments, one is not allowed to deduct mortgage interest nor property taxes. Furthermore, depreciation funds cannot be used. When the property is sold, what would have been a traditional IRA transforms profit into standard income instead of capital gains. Additionally, the IRA has to have enough spare funds to pay all of the expenses related to the property such as taxes, maintenance costs and management frees since the total amount of income has to flow into the IRA and resulting expenses have to be paid out of it.

Research! Research! Research!

If an investor does the research and adheres strictly to common sense policies, he or she can be one of the success stories that are beginning to result from IRA real estate investment strategies. However, if this is the plan, the investor should prepare for a lot of work.

The first step involves finding the right property. The IRA may not be used to purchase one’s own residence or vacation land or home. Next, one has to find a custodian for any IRA that will allow real estate investments. One should not look to one’s own mutual fund company or one’s own local bank for assistance. There are very few IRA custodians who are willing to do this. They can be found by doing a search for “self-directed IRA” or “real estate IRA” on the Web.

There are restrictions involved in selling the property as well. Buying or selling property to oneself, one’s family members or to and from individuals and/or firms that provide services to one’s IRA are, in most cases, also unfortunately, disqualified.

Preparing for your retirement by creating a real estate IRA trust is one of the best ways of ensuring that you have made provision for the future. Facing retirement can be a daunting process especially if you are not sure if the investment that you have in your existing IRA will be able to cover the plans that you have. No one wants to carry on having to work when they could be retired, but the fact is that many people find themselves in this position, which could have been avoided with good financial planning and professional advice from a financial adviser.

Real Estate IRA investment is a way of putting the money in your IRA to work for you before you reach the age of retirement. There are a number of ways of accessing the money and using it to benefit you and your family during your retirement. Real Estate IRA investments are one of the most secure and risk free investments that a person can make. Even in an economy that is struggling to perform, real estate is still one of the sectors of the economy where people can make a lot of money.

Ways of investing in a Real Estate IRA for your future

1. Invest a portion of the funds in your IRA into a real estate IRA Investment Trust. This form of investing allows you to buy the shares and stock in any real estate investment fund in the same way that you would invest in mutual funds or an Exchange Trade Fund (EFT). There is very little risk, and although the shares do trade up and down depending on the prices and the state of the stock market, they are a remarkably safe way of letting your money work for you.

2. Invest in a Real Estate IRA self directed account. This type of investment allows you to set up a self directed IRA fund and to transfer an amount of money from your IRA account directly for use from the self directed IRA account. The freeing up of this money allows you to make a direct investment in a property that can be used to create a residual income that must be paid into the IRA. This method of investing requires some thought, but there are many professional independent lending companies who will be able to find you an investment that will fit your risk profile.

3. Hard Money lending. This form of investing works like a loan. You loan the money in yourself directed IRA to individuals or businesses for a short period of time, with an extremely high return on investment. The return is somewhere in the region of 12 – 15% and it does mean that the rewards are great. The risks however are equal, as you are investing in the potential and the promise of a return that is not guaranteed. It is always wise to consult with a private money lending company who will advise you on the best investment for your IRA funds.

Whichever method you choose, you will be satisfied to know that you and creating a Real Estate IRA that will give your retirement funding a healthy injection of money, so that you are able to enjoy retirement.

Investing in real estate can be very expensive. Investors are expected to put down a larger amount when purchasing a property than do people who purchase a home to live in it. If you purchase a $100,000 house, you may have to put down $20,000 to purchase the property AND this does not include closing costs, taxes or insurance. Then you may have to spend money on top of this in order to get a property ready to be rented out. Investing can be very expensive which is why many people cannot afford to enter the business. The smartest move you could make is to get a partner.

A partner will have many advantages if you are investing in real estate. A partner can pay for ½ of the down payment costs and the rehab costs. This allows both of you to purchase a property with ½ of the money that you would have needed if you purchased the property by yourself. If you are short on funds a partner can be a great way to help in getting started in investing in real estate.

A partner will give you an extra set of eyes and a level of experience that they bring to the table. They are able to give input on how repairs should be done or how to handle collections of rents. Your partner may have a better idea on how to handle an issue that you would have had by yourself. A partner provides a shoulder to lean on when times are difficult. 

A partner will also help in completing the workload. Sometimes you may need to be at the property at a designated time period in order to meet with contractors or other workers. If you are out of town for business or for vacation, then your partner could be available to meet with the contractor. You could swap off with your partner and have assigned weeks in which one of you is responsible for handling all repairs during the week. 

Having a partner can have many advantages. The biggest challenge is finding a partner that has the right temperament and has a compatible personality that you can work with. If you are not able to get along then your partnership will end in failure.

What’s been happening with the real estate market in the United States over the last few years? With unemployment and foreclosure numbers (and bailouts) at all time highs, how long is this recession going to last? Are the experts really able to predict what the economy and real estate market is going to do in the future?

How we got here. If you haven’t heard, the primary reason there are so many foreclosures is because some of our alleged “leaders” decided that almost everyone in the country should own a home, even if they couldn’t afford it (I say “alleged leaders” because true leaders would admit their mistakes and take corrective action, not blame everyone else and give bailouts to banks, but that’s beside the point). Many Americans over-leveraged their incomes and homes by buying more than they could afford. That, coupled with high levels of credit card debt and unemployment, created this economic “consumer unfriendly” climate.

With all the doom and gloom we hear every day, it’s good to see some encouragement once in a while, isn’t it? A few days ago I saw a billboard that said “Recessions 101: the funny thing about recessions is that they end.” How true. In most cases, an economy cannot go down forever. There’s a cycle, and it will turn around. The question is when?

Most economic experts are not in agreement about whether we’ve hit the bottom of this cycle. Still, I’ve had conversations with business owners who have weathered many real estate cycles who say we are not yet at the bottom. With government debt and spending also at an all time high, the value of the U.S. dollar is dropping rapidly, which in turn may cause inflation. What does that mean for the average American? In simple terms it means the $100 you have in your pocket may only be worth $93 next year. It also means that the debt you acquire this year will cost you more to pay off next year. It truly is a time to pay off your debts and have cash reserves in place; something which the average American is not an expert. Dave Ramsey dot com is a good resource for help accomplishing this is.

Job growth may be the number one factor that affects the real estate market, so what has the job market been saying lately? Besides the influx of temporary Census jobs, job growth has been nominal nationwide. Each state has different statistics, but across the country, the unemployment rate remains at 9.6%. As soon as we see these numbers going up consistently (actual numbers, not projections), we can most likely expect the housing market to start rising again.

In light of this info, what trends are we seeing? For the most part, people are spending less on consumer goods and saving more money. Some are even selling their homes and renting instead (or moving in with family). People are becoming adaptive and are finding ways to survive, just like our American ancestors who founded the country. Others are finding new businesses to start and are thriving.

In times like these, it’s important to take the time to keep good track of our income and expenses, and to spend less money than we make. If we do those two things, we will be sitting strong and will be ready to prosper when the economy decides to turn around. For those who don’t want to wait for the economy to turn around, find someone who is doing well in this down economy and copy their habits. You know what “they” say: if you do what someone does, you’ll get what they’ve got, every time.

Many states have been hard hit by the collapse of home prices nationwide and the sluggish economy. Many mortgage brokers expect a slow but steady come back in the real estate market. Still there remains a glut of foreclosures and unsold properties, and job growth remains stagnant.

A few years ago, a booming market was a seller’s market. Buyers were plentiful, the competition driving home prices upward. This led to speculators buying homes for the sole purpose of selling them six to twelve months later to make a tidy profit, further driving home prices upward. As long as the nation had a dynamic economy, it was still possible for homeowners to buy and prosper. It seemed like everyone was getting their share of the American dream.

As housing prices collapsed, followed by a deep recession, unemployment topped out at 12.5%. Housing depreciated by 40% to 50% as the rate of foreclosures soared. Residents who bought before the crash saw their equity disappear.

Now for the good news. Home sales are on the rise. Inventory is still high. Strong price corrections have already occurred. February 2010 sales were up 21% from February 2009. A large number of foreclosures and a glut of unsold condominiums in tourist areas continues to keep prices low. This is good news for buyers, bad news for sellers.

Lower prices mean residents can buy a higher quality home for a reasonable price with a low mortgage rate. Slow but steady growth should result in appreciation of home values allowing those of modest means to make economic progress. Although unemployment remains high, temp agencies are now adding jobs, usually a precursor to real job growth. Job losses have slowed, but until the unemployed get back to work, sales will remain weak. Prices will remain low.

New home building has rebounded ever so slightly as building costs have decreased. This trend is limited to areas near large cities where the jobs are. New home buyers are primarily first time buyers and retirees who are finding affordable again. Construction is proceeding slowly. Builders remain cautious. Major concerns are the weak job sector and the continued glut of foreclosures for sale.

Some investors are betting that the economy will improve and beach cottages and condominiums will be in increasing demand for seasonal rentals. Many investors are buying and leasing to foreclosed homeowners who can’t qualify for a home loan. There has been some return to lease options between investors and renters. There are many opportunities and pitfalls to be considered. The cyclical nature of economies and real estate has to be factored in to any buying decision. An investor buying today should plan to hold his investment several years until the market rebounds.

Expect mixed signals and uncertainty to continue through 2011. Although strong price corrections have already occurred, the real estate market may not yet have hit bottom. Home prices and mortgage rates are expected to remain low throughout 2011. A lot depends on the job sector. The unemployed don’t buy homes. Home owners who lose their jobs may lose their homes to foreclosure. Residents who fear job losses do not buy homes. For those who can and are ready to buy, low home prices are allowing more residents to purchase homes and low cost rentals are bringing seasonal visitors and tourists back to many areas of the country.