Friday, December 14, 2007

The Self-Directed IRA: An Alternate Way To Invest In Real Estate

Used correctly, a self-directed IRA can dramatically increase the returns an investor earns in their retirement account. If used imprudently, however, the opposite can happen. A few months ago, NuWire Investor published an article about self-directed IRAs that spoke about the advantages of using a self-directed IRA to achieve true diversification.

Some will argue that people can and should buy real estate, for example, in a traditional IRA account through a REIT, and claim that the method is much safer, more liquid and so on. While there are advantages and disadvantages to both routes, the fact of the matter is that the two methods are very different.

One potential problem with REITs was pointed out by MoneyWeek in their daily newsletter recently:

“As one property fund manager told The Sunday Telegraph, ‘If the liquidity levels in these funds fall much further, managers will start to get very worried. They are trapped between an illiquid property market and the highly liquid structure they offer investors. In markets such as these, the two just don’t tally.’

….Property funds of course, are able to freeze withdrawals, if necessary, more easily and legitimately than your average savings bank. But the first one to do so will virtually guarantee a run on the others.”

With the current state of the real estate market, this is something people should pay more attention to. If these funds are faced with the reality that the only way they can raise the funds needed to pay off investors wanting out is to start fire-selling their buildings, investors in REITs are going to be in big trouble.

Once people start to get worried about the prospects of this happening is precisely when the runs will start to happen, and as MoneyWeek pointed out, it will likely be industry wide, not just contained to a fund here and a fund there.

If you, too, are worried about investing in REITs, but still want to stay involved in the real estate market, a self-directed IRA is something to consider. With a self-directed IRA, you are in control, and the success or failure of the investment relies upon you rather than the whims of other investors or fund managers.

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