Tuesday, June 29, 2010

Question of the day: real estate or Roth IRAs?


We maintain an active presence on Twitter @family_finances, giving out a financial tip every day, and also taking questions from our followers. On Monday, we received a question from @therealbrandon1 who asked, "Curious what ur thoughts r...real estate vs roth ira?" Dan Danford's answer is below.

This is a question of apples and oranges. A Roth IRA is a type of account that can be invested multiple ways. Real estate is a broad investment option, much like stocks or bonds. Some real estate requires active management - rental properties, say, or construction - while others is more passive. The passive variety can be packaged into securities such as REITS or unit trusts. Actually, those securities could be purchased in a Roth or other IRA just like stocks, bonds, or mutual funds. Active real estate investors know that leverage (borrowing money to buy properties) is one of the appealing aspects of ownership. IRAs are prohibited from borrowing, so that's one reason why active real estate isn't a strong choice for IRA investing.

But I do think real estate can be one component of retirement investing. Many of the world's great fortunes were made in real estate. The two big factors to consider are liquidity and leverage. Liquidity simply means that it's tough to monetize your real estate investments when you need money. You must sell or borrow against them, and neither option is fast or assured. Leverage is what makes real estate so potentially profitable, but it's a double-edged sword. That same leverage makes it risky, and banks foreclose on real estate every single day. It's a high-risk, high reward business. For most people, owning their home is the only exposure they need to this sector of investing.

2 comments:

  1. One of the best retirement plans which people prefer nowadays is Roth IRA. This plan is chosen by a number of people due to its tax benefits. If you want to find the right plan for you, it is wise to approach a trustworthy financial planning firm.

    ReplyDelete
  2. Thanks for that. Roth IRAs are a great investment tool and something we highly recommend.

    We had a follow up question from the original person who posted the question to us on Twitter. He wanted to know if we've done much IRA investing in real estate. Here's Dan Danford's answer:

    Depends what you mean. If you want to use IRA money to buy a house or piece of property, it gets very complex. Typically, you run into prohibitions against borrowing or self-dealing. I've seen some sophisticated schemes to avoid those prohibitions, including Family Limited Partnerships or shares in a brand new corporation. The complexities are expensive, and I'm always concerned that they might falter under IRS scrutiny. There are law firms that specialize in this sort of stuff, but I'd be very cautious.
    However, more passive IRA real estate investors might choose to invest in REITS or homebuilder stocks, or certain limited partnerships. We help a lot of people with specialized IRA investments.

    ReplyDelete

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