Do Realtors Appreciate The Power Of Self-Directed IRA’s/401(k)s For Their Business?

In this current down market, many professional agents are holding their heads above water…….but the treading of the water is becoming more and more difficult. As consumers idle in the “wait and see” mindset, many agents are wondering when this cycle will adjust and how long they will need to wait.

While it is nearly impossible to predict with true certainty (see Steve Heideman blog post, “The “Inevitable” Recession That Never Was,”) when the market will rebound, how it will rebound and how we all will be affected, agents need to explore other avenues to create their sales — and, provide value to their client. In the meantime, however, RE agents should be looking at alternative options, all within their respective field, for their clients and themselves.

Honestly answer this question: Did you know that you can utilize retirement assets (e.g., IRA, 401(k)) for the purchase of non-traditional assets….such as real estate. Did you know that you do not have to invest solely in stocks, bonds and mutual funds…or at all? Did you know that there are over 20 asset classifications that one should consider investing into…including real estate.

Okay, even if this is not new to you, do you see the power of introducing this to your clients (who, for the most part, it will be new to)? Did you just provide a service to your client? Did you just provide value to your client? Did you just educate your client on options for their own decision-making process? Now, IF they are interested in investing in real estate, who do you think they will call first for advice? I know I don’t have to tell you how you benefit from this relationship.

So, how do you do this….I mean you cannot call Merrill Lynch and ask them to just “send you a check” for your real estate investment.

The Power of Self-Direction of IRA/401(k) Assets — Self-direction is merely that…..self-directing one’s retirement assets into permissible investment opportunities. It is a legal avenue for one to consider and it can be established with the assistance of a professional in this field. But, as a realtor, have you shown your clients how they can “tap” otherwise non-accessible funds for investment purposes? You now can potentially assist clients who wanted to invest in real estate but did not believe they had the wherewithal to do it.

You believe in the value of real estate ownership or else many of you would not be in the business. But, some of you might say that you do not feel comfortable advising your clients about investing into real estate. I understand this, but I will also ask you why you should have a problem introducing the tool of self-direction to your clients. Whether they take this action or not will be their choice and so to will be their decision on whether they want to invest in real estate. One last thing — what has happened to the stock market of late? The point? Nothing, including the market, is guaranteed. You are just introducing an option to your client that they may choose to take advantage of.

Let’s break this down some more:

One of the questions I get is: How can you invest in real estate using IRA monies?

Well, currently existing IRAs can be transferred from what are termed “traditional” IRA custodians (e.g., Schwab, Merrill Lynch) into self-directed account status. Once the decision has been made to self-direct, you can choose an option of 1) a custodian which assists in self-directed transactions and holds your assets, 2) an administator dealing with self-directed clients but not holding your assets, or 3) youself. Please note as manager of your retirement account, you are the one making the decision of where you wish to invest your monies on the behalf of your retirement plan. In conducting the transaction, you cannot personally benefit from the transaction and it cannot be entered into with a disqualified individual. As an example, you cannot purchase a vacation home with your self-directed retirement assets and then reside at the property for a couple weeks a year.

Let’s ask that again….did you know that you can be the manager of an LLC retirement account acting on behalf of your retirement interests? Hmm, not a bad little option to consider. Regardless of which path is taken, the assets stay in the account for retirement investment purposes….only. As long as proper investments are made with qualified individuals and no prohibited transactions occur under IRS regulations, there are no tax consequences.

Next….Is it legal? Why am I only hearing about this now for the first time…there must be a change in the tax code?

Yes, it is absolutely legal. It has been legal since 1974 with the establishment of ERISA. Find out for yourself by going to the Internal Revenue Service’s and review Publication 590. On pages 40-41 of this Publication you will see what investments are not allowed (i.e., collectibles, life insurance). Real Estate is NOT mentioned as a disallowed investment just like stocks, bonds, mutual funds are not mentioned as a disallowed investment.

Most people are not aware of this and it is a complete disservice that most haven’t been made aware of this possibility by their trusted financial advisors. In fairness to advisors, most do not know that this is permissible as well. Please note that the IRS only stipulates that you cannot invest in collectibles or insurance contracts. Other than that, anything is pretty much fair game provided investments do not occur with disqualified individuals and prohibited transactions do not occur.

What should be asked by the RE agent is how does this knowledge benefit me?

If you haven’t sensed yet how this benefits you, either I haven’t made it very clear or you need to re-read this blog. Simply stated….right now there are nearly $4 trillion in currently held IRAs that, as has been discussed, can be invested into pratically any investment class, including real estate. Would you like the opportunity to secure a potential commission by introducing this to your client and they purchase real estate with your assistance?

Let’s also consider how many more people that you can prospect to and market your current listings? Further, have you considered how this benefits you as you can purchase real estate at wholesale? The options are astounding. The question is really two fold? Do you want to educate your client on this wonderful opportunity and do you want to possibly secure otherwise non-existent business? The choice is yours.

How can I learn more about investing IRAs in real estate?

First and foremost…..read…and real alot on the topic of self-direction. As mentioned, there are custodians, administrators and facilitators. One question that is critical….do you want true control of your own retirement monies where you don’t have to ask for permission to make an investment with your own monies?

How fun can it be to improve your business AND educate and do something good for your clients. You should be looking at each client in a whole new way. And, for those of you who believe in karma….when you bring something new and of value to your client, the potential rewards for sharing such information may be countless. Look at your clients not just as a way to sell them their home, but in terms of educating them on the possibility of being real estate investors. Remember, if you think your clients/contacts do not have the financial wherewithall to invest in RE through you, think again.

By John Park

John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network.