By Jennifer D. Meacham
Broker Thomas Phelan went from residential to multi-unit sales before settling on his specialty: international properties financed by the tax-sheltered IRAs of American investors.
“It is no secret that many Americans are looking beyond the U.S. to invest, and perhaps someday retire,” Phelan says. “Using one’s IRA to facilitate this lifestyle change is a reality.”
Now Phelan runs a real estate consulting firm called IRA Choices and has penned three self-published books on the subject: “Rich IRA, Poor IRA”; “Rich Realtor, Poor Realtor”; and “How To Buy And Sell Real Estate And Never Pay Taxes (legally).” He consults on everything from boutique vineyards in Argentina to ranches and condos at Liberty Cove, a 6,500-acre development on Mexico’s Sea Of Cortez – all acquired as investments for IRAs. “Power Team Report” connects with Phelan at his Phoenix home.
Q. What have you learned about purchasing foreign real estate?
A. Foreign real estate is divided into two categories: those purchased “fee simple” like in the U.S. and those involving a country-run bank trust like “Fideicomiso” (fee-day-co-mee-so). For example, 42 percent of Mexico’s land mass – essentially ocean front and border areas — are “restricted zones” for foreign investment. This means anything in Puerta Vallarta or Cancun is out.
The exceptions are those that form a corporation in Mexico, and legitimately do business there, or ones that form a bank trust using a notary to approve a Fideicomiso. The IRA would then be the beneficiary of the trust, and could lease, encumber, sell or will the property for the IRA’s benefit.
Q. How do you take care of traveling expenses when looking for IRA properties?
A. Everyone dreams of being able to do that. If my IRA were to – say — buy a B&B somewhere, that is possible to run it with an individual 401(k), but traveling and scouting would be on your individual dime.
Q. IRS codes prohibit personal use of IRA-held properties. How would someone legally use it for vacation or retirement?
A. We were just in Belize and we saw people with an IRA buy an ocean-front condo using their self-directed IRA. They understand they cannot use it personally. They can however rent a unit next to theirs, and allow theirs to create cash flow for their IRA. Otherwise, they take the property as a distribution when they retire.
Q. What are the problems with international purchases?
A. Frequently financing is not available. Whatever you look at has to be [paid 100 percent by your IRA] where, in the U.S., non-recourse financing is available. There are several banks now specializing in non-recourse mortgages for IRAs, such as North American Savings Bank. Other developers are providing their own financing, like one in the city of Cortez who bought 47,000 acres and is parceling it out.
Other than that, overseas I would say just to do due diligence. Don’t get crazy like a kid with a credit card.
Panama and Boca DeTorra, which has islands that are as lush as Jurassic Park, have a legal process called “right of possession,” where you can’t get American title companies to insure. I’d stay away from that, in or outside an IRA.
Q. Has your background as a Realtor helped you out here?
A. Oh yes. It helped me analyze property, understand the world of 1031 exchanges, and be able to make comparisons. And I’ve learned that when it comes to finding IRA investors, don’t ever judge a book by its cover.
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.