By Jennifer D. Meacham
RISMEDIA, Feb. 1, 2007-Spry at age 77, Portland, Oregon Realtor Bob Sutton wasn't about to retire just because he was required to take distributions from his Individual Retirement Account. Instead, he began investigating everything his IRA could do for his retirement. What he discovered opened up for him a whole new world of real estate sales.
The RE/MAX Equity Group agent discovered that IRAs, when managed by a custodian that allows it, can invest in real property. Since 40% of households own one or more IRAs, Sutton says he saw his previous home buyers as a ready-made market of IRA accountholders-logically already sold on the concept of real estate as a solid investment-who might jump at the opportunity to acquire investment real estate using money in their IRA, without cashing out or getting penalties.
"This concept is the most exciting revelation in the 46 years I've been in real estate," Sutton says. "Our clients and colleagues need to know about this concept because it would have saved a lot of people from situations like those that were left holding worthless Enron stock.
"Plus, for real estate investors," he says, "this has the tax-sheltered benefits of a 1031 exchange, without the requirement to find a replacement property and where even the rental income is tax-sheltered. It's a win-win for everyone."
He picked up a book on self-directed IRA investing to learn the sales process:
• Clients can use any of the self-directed government savings accounts-Roths, Health Savings Accounts, Coverdell Education Savings Accounts, self-employed accounts like SEPs, Keoghs, solo 401(k)s and SIMPLE plans-as long as the account's custodian permits real property. A dozen or so self-directed custodial firms specialize in these "real estate IRAs," and financial companies such as Wells Fargo and even Charles Schwab now offer real-estate-allowed accounts.
• Custodial firms often ask for a few extra sheets of paperwork prior to closing, which they'll review and must approve;
• The IRA is listed as the buyer on all paperwork (Bob Sutton's IRA c/o the IRA's custodial firm);
• Custodians wire the funds from the IRA account to escrow, and hold the title to the property in the IRA's file;
• Any rental income or sale proceeds is sent to the custodian for deposit into the IRA's tax-sheltered account.
The next step was to tell his 46-year-long list of clients. So over the past two years he's begun individually calling or e-mailing each one to let them know he has "more information about the concept of securing IRA funds with real property."
Suddenly he had a dozen or so former clients asking him to scout for investment properties, for their IRAs. "I ended up having a banner year, without doing a lot of extra work," he says.
Meanwhile, Sutton is continuing to build his own retirement account using real estate. He says he's getting "10 percent on real-estate-related buys." And this means more money.
"Slowly but surely the real estate industry is catching on to how we can really help people build the type of assets they want and need when they retire," Sutton says. "I'm just glad to be a part of that."
What Clients are Saying
To categorize his client list, Portland Realtor Bob Sutton asks each potential IRA real estate investor this question: "Do you want to get involved in actively managing the investment, or do you want to be a passive investor."
Here's how his new roster is shaping up:
1) Some are going for long-term cash flow into their IRA from rental real estate like duplexes and non-owner-occupied vacation rentals.
2) Some want dividend-style returns by investing in Tenancy-In-Common arrangements. Lately these transactions have been through real estate development companies. "I put a doctor in a TIC, and within six months they had an offer for 160 percent of what they paid for it," Sutton says.
3) Some want short-term appreciation before putting the property back on the market, with Sutton, again; and
4) Some want to buy their retirement home now to rent out until they're ready. Internal Revenue Code on the subject of IRA investment allows for IRA investors to take the value of the real property as an IRA disbursement after age 59 ½ and then personally assume title to the property.
Still, as a former apartment complex owner Sutton is realistic that investment real estate often takes a time commitment, so it may not be for every IRA accountholder. Hence he suggests opening up the options: "If your clients want to do it on themselves, I would encourage them to use their IRA to buy land in the path of growth. Either buy it with his or her own IRA dollars or buy it with a collection of IRA dollars from a group, each of which would be a ‘tenant in common.'" – JDM
Jennifer D. Meacham is a business and personal finance columnist for The Oregonian and co-author of "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" (Square One Publishers, $16.95). Nominate a "Self-Directed Real Estate Professional" to be profiled here or e-mail your self-directed retirement investing questions to Jennifer at email@example.com.
Source: RISMedia's Power Team Report, February 2007