Investing in Real Estate with Your IRA

Real estate can fund your retirement—but brace yourself for lots of risk and rules.

Self-directed individual retirement accounts allow people to diversify their investments into assets other than the traditional stocks, bonds and mutual funds that make up most retirement plans. Examples of alternative investments include real estate, precious metals and oil and gas holdings. The catch: The IRS requires a qualified trustee or custodian to administer the assets, such as handling transactions and managing paperwork and reports. So far, only about two dozen companies in the U.S. can act as custodians of self-directed IRAs. 

One of these is Advanta IRA, a self-directed retirement plan administrator in Largo, Fla., which oversees about $820 million in assets. “A lot of our clients are already real-estate investors, so their IRA is simply a new source of capital,” says Scott Maurer, director of business development for Advanta IRA. “And for others, they don’t like being at the whim of the stock market.”

At Advanta, investors open an account, fund it by transferring cash from an existing IRA, and then identify the property they wish to purchase—which typically is a single-family house that will be rented out. Advanta purchases the property on behalf of the investor’s IRA. Nearly all the transactions are cash deals, bypassing mortgage lenders. Rental income from the property is remitted to Advanta, which also pays the bills for the property. The cost for this service: about $200 to open the account and purchase the property and then a flat $295 a year to manage the account. (The company doesn’t handle property repairs or maintenance, tasks typically performed by a property-management company.)

The rules governing real-estate IRAs are anything but simple. IRA owners are forbidden from engaging in certain transactions regarding the property. Even something as simple as mowing the lawn of a property you own in an IRA can run afoul of IRS regulations—and render the account owner susceptible to losing the IRA’s tax-favored status, which could trigger taxes and penalties. That’s because IRS rules require contributions to an IRA to be made in cash, not in services, Mr. Maurer says. In fact, the U.S. Government Accountability Office issued a report on retirement security last month and stated that “people who invest their retirement accounts in unconventional assets—such as real estate or virtual currency—may be placing their savings at risk.”

Bob Starks has been purchasing real estate for his IRA since 2009. “I do have some stocks and bonds, but 80% of my IRA is in real estate,” says Mr. Starks, a commercial real-estate agent in Duluth, Ga., who owns five rental houses and a small apartment building. He’s also flipped over 20 houses through his IRA. 

Since Mr. Starks is 71½ years old, he’s now required to take required minimum distributions of his retirement funds, so he’s tapping his rental income.


Here are some things to consider when creating a real-estate IRA. Consult a tax professional or financial adviser for the finer points of self-directed plans.

• Not for everyone. “There are plenty of easy opportunities to invest in real estate using mainstream methods like mutual funds or real-estate investment trusts,” says Mari Adam, a certified financial planner in Boca Raton, Fla. “It only makes sense to do direct real-estate investments if you’re a seasoned pro and are convinced the project you’re investing in is an absolute winner.” 

• Hire a property manager. The best way to ensure that you comply with applicable landlord-tenant laws and avoid prohibited transactions is to hire a third-party professional to manage the properties in your IRA. Expect to pay a commission equal to the first month’s rent and 6% to 10% of the monthly rent thereafter, says Mr. Starks. 

• Distribution options.Some investors take distributions from their real-estate IRAs “in kind,” by having the account administrator actually deed to them a percentage of the property, according to Jason Craig, president of the Entrust Group, a self-directed IRA administrator in Oakland, Calif. “For example, I can take out a 10% distribution and then re-register the asset so my IRA owns 90% and I personally own 10%,” he says.


By Robyn A. Friedman 

Originally Published in the Wall Street Journal


Market Beat

By Joseph Lucier    
With a potential real estate bubble becoming the topic of conversations all over the city—from cocktail parties to soccer field sidelines—one wonders whether this is a good time to purchase a home. While many people are looking forward, my two decade long tenure at Sotheby’s has shown us that there’s value in stepping back and taking the long view, to see what the recent past might teach us about the future.  
For example, this past decade started as the credit bubble and real estate markets were reaching a bursting point, continued through the worst financial crisis in living memory, and then gave way to the meteoric rise in San Francisco property values, fueled by low interest rates and a voracious surge the Bay Area’s tech sector. 
Joseph Lucier.jpg
How would buyers have best positioned themselves in San Francisco’s residential market 10 years ago?
If Hindsight Realty LLC--my imaginary real estate investment firm blessed with perfect foresight-- had made a single family home real estate trade in 2006, it would have wisely invested in Noe Valley (up 82.1%). We would have also told clients to invest in Cole Valley (up 80.4%), more so than West Portal (up only 52%), though a 10-year bet in Pacific Heights would be looking good in 2016 (up 75%).
A decade ago, Hindsight would have also preferred Atherton to Ross, but it was close: Atherton rose 7.8% per year, compared to 6.2% in Ross.  Outside the San Francisco Bay Area, our clients would have been better off in the Napa Valley. It’s true that the Carmel/Pebble Beach area usually beats the Napa Valley, but not over the past decade.  But really, any of us would be happy to be recipients of the returns of prime locations in Northern California looking ahead in the decade to come.
So what are the greatest lessons from the past 10 years? It’s as much of a risk to be out of the market as in it.  Gains (like falls) tend to come in a rush—as they did in spring 2012.  Hindsight Real Estate gets timing right; you almost certainly won’t.  For those who want to enter or move-up in the market now: Know what you know, and accept what you don’t; there has never been a greater amount of data for buyers or sellers. But one should not confuse information with expert knowledge.  If you are serious about buying in this balancing market, hire a real estate professional with a broad scope of experience to help you identify where the opportunities and challenges lie in the nuanced landscape of this balancing real estate market.
Looking ahead, there are a few golden rules that never cease to be true. Always worry about the purchase price.  You don’t know about future returns, but present values are known, and likely to be extended in the future.  Location, location, location.  Whether the market is up or down when you decide to sell, properties that are well located in San Francisco will always have qualified parties interested and will be better positioned to hold value even in stiff market headwinds.  Identify expansion potential.  No more land is being built in the city, but excavation, re-purposing an attic, or extending your building envelop creates value opportunities beyond market appreciation.
And most importantly, there are many more important things in life than exactly when you buy in a real estate cycle.  Few of us have the privilege not to have to worry about money, but we urge our clients to deliver themselves from the agony of a real estate purchase to the greatest extent possible – and get on with the things in life that really enjoying your home!


The Pacific Heights Bet

2865 Vallejo Street

2865 Vallejo Street

1997 - Sold for $1,825,000

2003 - Sold for $2,750,000

2014 - Sold for $6,995,000

2016 - Sold for $7,450,000


2204 Pacific Avenue #4

2204 Pacific Avenue #4

1998 - Sold for $1,000,000

2009 - Sold for $2,400,000

2011 - Sold for $2,720,000

2014 - Sold for $3,900,000

2016 - Sold for $4,200,000


By Joseph Lucier

Pacific Heights known the world over as San Francisco’s premier neighborhood is home to architecturally significant residences, quaint boutiques, and, of course, iconic views of the Golden Gate Bridge. Since 1996, the median price for a Pacific Heights single family home has increased 367% from $1,200,000 to $5,600,000. The condominium market followed showing a 286% gain to $1,450,000. There have been downturns during this time - most notably the precipitous value drop in 2009-2011; but a long term real estate hold in this blue chip neighborhood remains a wise investment. Even so, buyers (and sellers) often hedge and play the market timing game.

“In 30 years in this business, I do not know anybody who has done it (market timing) successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently.” So were the words of John Bogle, founder of the Vanguard Group of Investment Companies. Cycle after cycle, we continue to note a strange phenomenon with well heeled individuals in the high end market. With a balancing market ahead, sellers need to be careful of their psychological penchant for "rear view mirror" pricing and avoid following the market down to capture reduced gains. During the inevitable market correction, buyers tend to resist the opportunity to buy real estate on sale. This is when the truly savvy take advantage of discount pricing and ride the market when it turns. Again and again in a hot market, we hear, “I am going to wait until the market cools off to buy.” And yes, they do wait…and wait…and wait!  Most agree that timing the bottom (or top) is luck.  Without the confidence of seasoned professional advice,  we always see many “smart” buyers fervently chase each other back to the multiple offer market place after the market turns upwards. Makes sense right? Uh?

"These numbers show one thing for certain. Time is your friend when owning a home in San Francisco. Blue chip properties protect value in a downturn and take the most advantage of a market cycle in full swing."

The reality of purchasing a home often relies on factors outside of market economics. A job transfer, an equity event, a marriage, and downsizing are some of the life events that call for a new home. My advice to San Francisco clients today looking at a mature market cycle is to protect themselves by specifically buying blue chip real estate. Practice time honored fundamentals. Location, location, location. Buy the least expensive house on the best block. Get into the 2000+ sqft condominium market. Of the 2,694 condominiums in Pacific Heights only 427 are 2000 sqft or more. This is a relatively safe sector since buyers are increasingly getting priced out of this neighborhood's single family home market and alternatively choosing to stay by purchasing a large condo.  Playing defense in a balancing market is an astute way to build confidence and be prepared to strike when the right property comes along.

In the last twenty years the Pacific Heights market has topped twice. The 2001 high water mark of $3,684,000 toppled with the dot-com bust, then another peak achieved in 2007 with a median price of $4,037,000. The market took approximately five years each time to climb back to peak values. Currently, the Pacific Heights single family home median price is up 38% from the 2007 top to $5,600,000.  How about that!

What to make of these market cycles when coupled with the lives we lead in our homes? Well - time is your friend when owning a home in San Francisco. Take note that blue chip property protects value in a downturn and is the most advantageous when the market moves again.  I encourage a bet on Pacific Heights real estate as a prime asset to any financial portfolio and a place to enjoy life amidst the San Francisco real estate merry-go-round.