Invest Your IRA in Real Estate!

You can use your IRA to invest in whatever you want, with major limitations. One of my favorite places to invest is Real Estate. Using your IRA to invest in real estate has limitations, but it allows you to take advantage of a primed real estate market and grow your retirement.

American Pension Services is one of the few IRA Service Providers that allow true self direction as far as the law allows. They have numerous education resources to help you know how best to use your IRA. With true self direction you can invest in what you know (my favorite way to limit risk). Their fees are a little steep, but it's worth it if you are actively managing your IRA.

There are a few simple rules that you must follow when using an IRA to invest in real estate:
1. You nor a family member can benefit directly from the investment. All benefits are to go back to your IRA.
2. You nor a family member can live in the real estate.
3. You nor a family member can work on the property directly.

Always consult a tax attorney when making these kinds of decisions. If you like real estate, it might be worth it to look into this kind of investing.

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When Good Deals Go Bad: Tittle Issues

A lot of people think that they don't need a real estate agent. That's because they don't know what can go wrong. Paying a small commission can save you a lot of money WHEN GOOD DEALS GO BAD.

When buying "Dream House" everything went smoothly. Inspection, financing, docs, etc. Except for one little title issue.

When you sell a house you are responsible to provide a clean and marketable title. If you still owe money or don't even own the house completely, it has to be cleared up before or when the house is sold. The seller's agent chooses a title company, and the title company makes sure it's clean and clear.

The buyer's agent used a different title company that actually did it's job. Apparently a 20'x300' strip of the property for sale had never been deeded to the current seller. Essentially, the sellers unknowingly had been using and tried to sell property they didn't ever own...Yes. It happens.

The seller's title company refused to communicate with the seller's title company. They insisted they could and had cleared title.

At closing the buyer's title company insisted on seeing how the seller's company cleared title. Turns out the seller's title company didn't even know about the problem and never checked if they did.  Suddenly, closing was canceled and now the sellers were in default.

A Real Estate Purchase Contract (REPC) is a bilateral contract. That means that both the buyer and the seller are committed to the transaction. The buyer has to buy and the seller must sell, with certain exceptions. If the buyer doesn't buy, the seller keeps the earnest money. If the seller doesn't sell, they must match the earnest money. In either case, the defaulting party may be responsible to pay agent commissions as well.

In this case, the seller could not provide clean title. They would be responsible for matching the earnest money, commissions, and some repair costs. In total almost $20k. All because the agent used a bad title company.

The seller's agent blamed the buyer's agent, but the fact is that it was the seller's responsibility to provide clean title. Luckily, the buyer's agent was amazing. He convinced the seller's agent to tell the seller's title company that they needed to honor their commitment to insure. They insured despite the title defect and the transaction was completed.

Long story short, if it wasn't for the buyer's agent, the sale wouldn't have happened. The seller would have been on the hook for $20k, and no one would have been a winner.

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Real Estate to Protect Against Inflation

What is going to happen to real estate as our economy unwinds? There will likely be inflation because the government has tripled our money supply. Read more about this by clicking inflation. How will inflation, unemployment,  and social unrest affect real estate?

Traditionally, to protect against inflation an individual would invest in a physical asset with intrinsic value. I feel that real estate is an excellent choice for this. Real estate provides shelter, and no matter what the economy is like, everyone needs shelter. As inflation begins to affect the buying power of our dollar, the value of real estate in terms of dollars will increase. Also, most real estate is purchased with borrowed money. In an inflationary situation the amount of money you owe will not increase. You can pay off the loan with inflated dollars.

So, should you invest in real estate? The biggest problem with using real estate to protect against inflation is indirect factors. In the event of inflation, the government will likely raise interest rates in an attempt to control inflation. This will make any type of new borrowing extremely expensive. The amount of real estate buyers will shrink. When there are more sellers than buyers, prices fall. So, even though the price of real estate will rise, it may not keep up with inflation.

How can I use real estate to protect me from inflation? The key is cash flow. If you purchase a rental property that cash flows sufficiently, you can raise rents with inflation and pay off the loan with inflated rental dollars. How quickly or slowly the price of the property inflates doesn't matter, because you win three ways; 1. Pay off loan with inflated dollars. 2. You can raise rents with inflation. 3. The intrinsic value of real estate will help protect you from inflation.

Remember, your home is NOT an investment. Even in the best market, the best "return" is not enough to offset the money you spend in the form of maintenance, taxes, interest, utilities, decorating, landscaping, and purchase. Your home is an expense and will NOT protect you from inflation. However, if you are planning on staying in your home for a long time than feel free to find a good deal and stay there. Interest rates are low and there are a lot of good deals out there. There are a few good government programs that don't need much down. Invest that money somewhere else.

The reason why I like real estate instead of gold is because no matter what happens, I win. If the economy recovers, my property values go up. If the economy crashes my property value is protected. Either way, my tenants pay the mortgage, insurance and taxes and give me some passive income. It's a win, win, win.

Investing in real estate is far from risk free. You can't just decide to go out and buy an investment property. I've seen plenty of people do that and loose everything. You MUST educate yourself, at least a little bit. You have to be able to recognize good deals and good properties. My favorite, all encompassing real estate book is The Wall Street Journal: Complete Real-Estate Investing Guidebook. It isn't everything you need to know, but it's a dang good start.

Do it right, be smart, and thrive.

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