How to Buy a Foreclosure, Part 2: A Specialized Retirement Account

If your own housing is secure—knock on wood—you may have been watching all these bargain-priced foreclosures from the sidelines, thinking that because you’re not in the market for a new home, you couldn’t take advantage of an appealing investment opportunity. What you may not have known is that there’s a type of IRA that lets you use your retirement funds to buy, rehab, and rent investment property, including foreclosures…


If your own housing is secure—knock on wood—you may have been watching all these bargain-priced foreclosures from the sidelines, thinking that because you’re not in the market for a new home, you couldn’t take advantage of an appealing investment opportunity. What you may not have known is that there’s a type of IRA that lets you use your retirement funds to buy, rehab, and rent investment property, including foreclosures.

A self-directed IRA allows investors to choose how to invest their funds. “People who are fed up with the stock market can jump into alternatives to the stock market and mutual funds this way,” says Daniel Hanlon, a business development officer for Entrust, one firm that administers self-directed IRAs. “One of the biggest alternatives right now is the foreclosure real-estate market,” he says.

Hanlon and Amanda Bermudez, a manager at Entrust, emphasize that buying real estate through a self-directed IRA is not the same thing as borrowing against your retirement funds, nor is it subject to withdrawal penalties. But the practice is carefully regulated by the IRS, which stipulates in this publication and elsewhere that the investment must happen at arm’s length—which means for real estate that it must be used strictly as investment property, not as a home for the owner or the owner’s family members.

“We get people who want to buy a condo in their children’s college town and let them live in it,” Hanlon says. “You can’t do that with IRA funds. It has to be a separate [investment] transaction that you don’t benefit from.”

Except in the long run, of course: The whole point of buying foreclosures now is to take advantage of their bargain prices—foreclosures typically sell for at least 30 percent below the value of conventional homes—and watch them make up the difference in future growth years. If the growth comes, self-directed IRA investors reap the benefit in their retirement funds.

Real-estate investment via IRAs has been available since the retirement accounts were first established in 1974, and many large-scale investors use IRAs to invest in commercial real estate. “But now that [residential] real estate is so cheap, more people want to buy foreclosures,” Hanlon said. Bermudez says the number of Entrust clients investing in real estate has quadrupled in the past year, and 90 percent of them purchase single-family, condominium, or multi-unit investment property. She could not determine how many of those properties were foreclosures.

It’s also possible to make a self-directed IRA a partial owner of a property, combining those funds with non-IRA money from you or other investors. But be sure to have an investment adviser determine how the rules apply.

The role of a self-directed IRA administrator, such as Entrust, TD Ameritrade, or Charles Schwab is not to find and buy the foreclosures but to legally sanction and manage the investment once account holders find the property, and to report the IRA’s annual income or losses to the IRS.

It’s not for everyone, but people who would like to take advantage of the huge foreclosure inventory as investors can explore doing it via a self-directed IRA.

Entrust’s Chicago office will host a February 1st early-evening free-admission seminar on buying distressed properties via IRAs. Call 312-235-0300 for details.

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3 years ago
Posted by Tony Curtis

interesting. very interesting. Never heard this before.

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