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Author: canuck104 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: self-directed IRA custodian Date: 4/10/2011 3:20 PM
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BruceM:
I hope you've had a chance to read the last couple of posts I made as not everything you say is 100% correct and think you should look at this option for your clients (I see you are a financial planner).

Where you are correct (or sorta correct):
1. You may not use the properties you purchase for personal use. 100% correct.

2. You can't do property maintenance. You're right that you can't do property maintenance YOURSELF. No sweat equity. Some (especially my wife) would argue that that is a GOOD thing! No night and weekend work -and our property management company charges us $38/hr for licensed and insured contracting services which is very, very reasonable. Will it cost more money in the long run? Probably -but not when I factor in what my and my wife's time is worth.

3. If some big expense comes up you can't pay out of pocket and would have to use a non-recourse loan to pay for it. True, but not the only option. If you have money in other IRAs (say with Wells, Schwab, TD, etc) you can transfer the money into the self-directed IRA to fund the repairs and then, once you have recovered the costs through rent, etc, transfer the money back to your brokerage acccount. As a financial planner, I'm sure you would never advise your clients to be 100% invested in "stuff" (stocks, bonds, MFs, real estate, etc) regardless of their age. It always makes sense to have "some" level of liquidity -and this is just one more thing to consider in your overall financial plan when going the self-directed IRA route. Just like choosing a property manager, custodian, etc.


Where you are not 100% correct:
1. You may not personally mange the IRA. Actually, you can. You can't be the custodian but you can certainly manage the investments in it just like you can research, buy, and sell stock, mutual fund, bonds, etc. Although it would be better to do it using an IRA-LLC (since it removes the gray area that the IRS COULD operate in) you could (although I would not recommed it) do it yourself.

2. The property the IRA purchases must be managed by the custodian or some 3rd party they choose. Not quite accurate. The custodian typically will only do custodian duties, namely, send you a disbursement when you request it, and make all the necessary State and Federal filings on your behalf. The custodian is there to keep the separation between you and the money and to do all of your filings. They do not manage the investments nor can they force you to do anything you don't want to do. If they try or have a policy like that then I would suggest finding a different custodian.

3. What will this cost me? Like anything, shop around. We used to pay for trades at TD until Wells started offering us 100 free trades a year. We transferred money from TD to Wells and told TD we would transfer more money out of our accounts unless we got some free trades and at the end of the day we worked out a satisfactory deal with TD. And it's not like we have a ton of money with them either. But, like anything in life, nothing is free. The custodian is performing a service for you and should be paid, so I have no problem paying them an annual fee....but you better believe we shopped around.

4. You can not use it as loan security. Not quite accurate. You can leverage the funds in your IRA account by getting a non-recourse loan. For example, you want to buy a rental property for $100k but only have $70k sitting in your IRA and want to keep $10k aside for maintenance/repairs. You can purchase the property with $60k from your IRA and obtain a $40k non-recourse loan. A lender would have to be extremely conservative to not lend against a property that had 60% equity in it right out of the gate. Would it be more expensive than traditional financing? Probably. But in the housing market we're in now it may very well make sense since you can buy the right property at a deep discount because of all of the fear in the market (and overly-stringent lending policies to some degree).

5. You can't pick renters. Sure you can -even if you go with a property management company you can pick the renters. Any PM company worth its weight will allow you final say on whether or not you accept a tenant. Ours does. And if you set up an IRA-LLC you don't even need a PM company (although for the hassle-factor, I personally can't see not using one).

6. The IRA must pay all closing costs to purchase the property. The right custodian will not charge any closing costs -shop around, we did and are happy with the company we finally selected.

One thing else to consider. You said that"If RE is what you wish to invest in, stick with exchange traded REITs." I would have to somewhat (not strongly, but somewhat) disagree. The advantage of the "little" investor is that he/she can move quickly and knows his/her local market better than some big firm managing billions of dollars. We can act faster, do a more thorough assessment on tangibles and intangibles (the feel of a neighborhood for example) which potentially can lead to a better ROI -and a steady stream of income in your retirement years. Further, I want to be able to invest in my community -make it stronger- rather than in someone else's community (unless it's a heck of a deal!) and with a REIT I just don't have that level of say.

At any rate, I bring these points up for your consideration. I think that once you look into it you'll find that the Self-directed IRA, while not for everyone, is a really great concept and could greatly benefit your clients. I wish someone had told me about this years ago -instead of overhearing the concept at a party last summer.

Best Regards,
canuck104
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