Gone are the days when loadingan IRA with stocks wasconsidered the best way tosave for retirement. The sagging economycalls for more creative investingtechniques. Physician-investors maywant to examine the advantages ofincluding real estate in their IRA.
PAPER OVER PROPERTIES
According to ,investing in real estatepaper vs real properties is usuallythe best approach. Real estate taxadvantages are lost in an IRA. Everydollar that comes out of an IRA istaxed as ordinary income, regardlessof the fact that the moneycomes from selling real estate at aprofit. Also, you can't hold mortgagedproperty in an IRA.
Physicians can hold real estate inan IRA by investing in real estate-related debt. By doing so, your IRA isallowed to lend money to a borrowerwho will use the proceeds for a realestate venture. Your IRA could investin a Ginnie Mae mutual fund, forinstance, and earn approximately 6%to 7% per year, with little risk.
Consider the following activities:
• First mortgage loans—Thereturns can be substantial. And youcan charge points, which raise theinterest rate even higher.
• Second or third mortgageloans—Interest rates received will behigher than prevailing first mortgagerates. You can also charge points.
• Participating mortgages—With this method, you would share inthe profits of the owner. For example,you might structure a loan to pay aminimum interest rate or 25% of theowner's gains, whichever is greater.
• Options—With purchased optionson property, if the property issold during your option term, theseller is required to buy your optionback, resulting in a profit for you.
• Tax lien certificates—If theowner decides to reclaim the property,they have to pay back taxes, pluspenalties. This money is forwarded toyou as a return for your investmentplus interest, which may be higherthan the return on bonds or stocks. Ifa tax lien is not redeemed, you canforeclose and take over the property.In many states, other interests in theproperty are cleared, allowing the taxlien holder to own the property freely.
Once you have chosen your realestate venture, be sure to consider thetax and legal issues involved. Theloans should be formal, drafted withthe advice of a professional advisor. Abona fide loan will help protect youfrom a challenge that you participatedin prohibited transactions, as wellas from borrowers who might not behonest. Get a detailed valuation onyour IRA from an unrelated party.
Be sure to find an appropriateentity to serve as custodian for yourself-directed IRA. A good choicemight be a local bank or trust company.Check out a prospective custodian'sfee schedule and operatingprocedure.