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Using IRAs to buy real estate

April 2, 2009

Six reasons to tap retirement funds now to buy rental property

For the entire story, please click here.

SAN FRANCISCO (MarketWatch) — One of today’s soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn’t make any money off it.

Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that — called a self-directed IRA — remains one of the least known and unheralded investment vehicles in the vast financial marketplace.

David Berson, chief economist of PMI Group, talks to MarketWatch’s Stacey Delo about how the housing market will rebound before jobs do, and why he expects home prices to bottom for most of the U.S. in early 2010. (April 1)With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.

The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.

Bear in mind homes purchased with IRA funds can’t be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.

Still, as an investment readily understood by anyone who’s been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times — especially for retirees whose fixed-income investments are paying paltry yields right now. Read more on setting up a managing a self-directed IRA.

Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:

  1. A solid alternative to stocks
  2. An investment well-suited for long-term investors
  3. Purchasing a significantly undervalued asset
  4. A steady income generator
  5. A safer means to play the stock market
  6. The ability to flip real estate with no tax bite

The ultimate choice

The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.

The question that bears asking: What will yield a better return in the next five to 10 years — shares of Microsoft, General Electric or Citigroup, or a modest rental home in a decent school district — selling for 30 cents on the dollar — whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?

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