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Home arrow News arrow How it is to Retire with Real Estate
How it is to Retire with Real Estate Print E-mail
Friday, 21 July 2006
While many people continue to concentrate their retirement portfolios in big mutual funds like Fidelity Magellan or Contrafund or stocks like Cisco Systems , IBM or Johnson & Johnson, proper portfolio diversification demands the inclusion of hard assets like real estate, which have a long history of providing solid returns.

It has been a great investment-diversification tactic for two very simple reasons: Real estate generally appreciates over time, and if bought properly, positive cash flows can be realized right from the start. Many real estate professionals invest in real estate through their IRAs and retirement plans, because they understand all the idiosyncrasies of the market. For example, different parts of the country, even micro-markets, fluctuate when it comes to real estate investment opportunities.

In a softening market, a person interested in investing in real estate may consider maintaining a cash position and buying the property on its way down, making it a good deal for a buy-and-hold strategy.

If you employ this strategy through a Roth IRA, I think you have the best tax and investment deal around for an investor. The real estate is bought at a low-cost basis and later, maybe years later, sold at a respectable profit with no tax to pay.You buy a single family income property that has been on the market since a hot market cooled, and where the asking price has come down to $275,000 from $290,000. The cost to your IRA, after closing costs and commissions, is $270,000.

Anytime your Roth IRA sells property or receives income, there is no tax bill, and when you take the cash out after age 59 and a half, there still is no tax!

Foreclosed Property Foreclosures also present interesting IRA and 401(k) investment opportunities in a softening real estate market. When interest rates increase, adjustable rate mortgages follow suit, causing an uptick in foreclosures. Leveraged Property You can also invest in leveraged property through your retirement account. For instance, if your IRA has $40,000 in cash and you're interested in investing in a property selling for $200,000, the IRA can assume the $160,000 mortgage to complete the purchase.

Investment gains can be realized if the IRA sells the property later, say for $300,000, thus paying off the $160,000 loan and leaving a $100,000 profit in the account.

Please keep in mind, however, that the account might have to pay an unrelated business income tax or unrelated debt financing income tax of between 15% and 35% on the income from the financed portion of the property. Even with the tax payment, investing in leverage properties can still be a real advantage for your retirement account. In the aforementioned example, the IRA would owe a tax of about $25,592, leaving an after-tax payout of $74,408--a 186% return on the cash invested.

Partnerships If a real estate investment opportunity exceeds the available cash in your self-directed IRA or 401(k), there are other solutions. In short, buying real estate, even in a downward-sloping market, can be an excellent investment opportunity through a tax-free or tax-deferred IRA or 401(k).

By Mabelle Sese
http://realestatepress.org
 
 

 
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