Five Steps To Purchase Real Estate With Your 401K or IRA

The financial book Aftershock has some dire predictions going forward in the global economy with the large generation baby boomers aging and pretty much selling off in the stock market. Of course no one has a crystal ball on these things but extrapolated out would you be shocked in 2012 IF ???

Dow Jones Industrial Average     4,000 level ???

Unemployment     30%  ???

Something to consider in "diversifying" where you might put your money. Put it in something people NEED. HOUSING!!

Real estate has always been an investment category but not so much from investment financial advisors who sell more equities, bonds, mutual funds, annuities, etc.

Your local real estate agent does have the pulse on the best investment properties available, and can assist if that is their focus in making a good investment decision based on your head and not your heart.

If the numbers make sense then go for it. But do you know the source of your funds can be your 401k account or an IRA? This is a tricky area to set up this transaction so you need to work with those specialists in this area to review options for your own particular needs.

The flow chart to the right illustrates the complexity of doing this. Basically to build wealth from the cash flow and possible appreciation from real estate inside your 401k or IRA follow these five steps:

1. Contact your trusted REALTOR to search for investment properties.
2. Contact a specialist company of your choosing in this area to walk you through the benefits of either using a 401k or an IRA. Setup fee is typically under $2,000. An example company used in OUR OFFICE.
3. From there you need to set up a checking account with a bank where you will be the Trustee of the account that the 401K or IRA uses to purchase property. There are specialists at banks that will help you with this.
4. Apply for a mortgage for your qualified property for a non-recourse IRA loan (positive cash flow), e.g. like bank  North American Savings Bank.
5. Make an offer on the home with your 401K or IRA plan as the buyer. The buyer is the 401K or IRA plan and sign it as your name "as Trustee."

With stock market woes possibly preventing you from building wealth in your retirement account, looking at having positive cash flow investments in real estate in there may be something to consider if you see a huge downturn in the markets in the outlying years. Take your time with this category of investment in understanding the pros and cons both by talking with the specialty advisors and also researching it on the Internet. There is a word of caution with this investing as well that is watching that what you do with money going in and out of an IRA does not fall into prohibited transactions. Check with the IRS. Doing the wrong thing the consequences can be severe like paying heavier than normal taxes, 10% early distribution penalty, and disrupting the normal use of an IRA like it would have been for retirement had you left it alone. Investing during a real estate bubble would ALWAYS be a problem, You do lose alternative real estate investment tax benefits such as depreciation deductions, and possible application of the unrelated business income tax. So for those reasons some recommend buying shares in a REIT or a mutual fund that holds REIT shares for diversification and professional management and not have the headaches of managing individual houses or messing up your IRA possibly with the prohibited transactions I mentioned earlier.

There is no right or wrong answer in HOW for YOU that you should invest in real estate using an IRA or 401K, I just present that if you are not doing this NOW, you may want to look at it much more closely over the next 12-18 months cause it may be FAR safer and much more highly lucrative to you than stocks and bonds.

I know, I've given you just enough information for all of us to have our head spin and be dangerous. But keep this in mind when you review your investment strategies going forward.