Savvy buyers use self-directed IRA to buy homes

Carolyn Said, Chronicle Staff Writer

Tuesday, September 1, 2009

(08-31) 18:44 PDT --

Nathan Foran used his self-directed IRA to buy a dilapidated foreclosed house in Richmond for $25,000 cash. Another $25,000 to $35,000 from the retirement account will go toward fixing up the property. He then hopes to rent it out for about $1,000 a month, money that will go straight into his retirement account.

Foran, 40, a San Anselmo real estate broker and investor, sees a lot of advantages in investing in real estate through his individual retirement account.

"The net rental income goes into the IRA, so it's generating money tax deferred," he said. "Once I sell, the money also goes directly into the IRA without capital gains tax. If I hold onto it for five to seven years, it probably will be worth in the low $200,000s, so I'll get a sizable gain. If I find another property I think will appreciate faster, I can sell this and use the funds to invest in that one. The IRA is a good long-term investment tool."

With many properties at bargain-basement prices, more people have been turning to their self-directed IRAs as a ready source of capital to make real estate investments. Companies that manage self-directed IRAs say real estate investments by their clients are up as much as 30 percent over the past year.

But experts caution there are a range of potential issues and gotchas - including ones that could even disqualify the entire IRA.

Self-directed IRAs account for just 2 percent of the $4.2 trillion IRA market, but are among its fastest- growing segments. They allow access to a variety of investment vehicles beyond just stocks and bonds. The IRS closely regulates them, and any real estate investments must be handled by IRA custodian firms that hold the property inside the IRA.

Can't live in property

IRA owners can invest in any kind of real estate - raw land, commercial properties or residential rental properties. They cannot invest in a property they already own or plan to live in, however.

The retirement funds "represent a large amount of untapped capital for investors that they can more actively manage," said Brad Hemstreet, vice president of sales and marketing for Equity Trust Co., a Cleveland company with $8 billion of IRA funds under management.

After the recent stock market downturn, "people are pulling out of Wall Street and want investments they understand and are comfortable with," he said. "Many people look at owning a property as a far better investment than owning a stock or bond."

Mary Kay Foss, a CPA and director of the Danville office for accounting firm Greenstein, Rogoff, Olsen and Co., said using IRAs to buy real estate can negate many tax advantages.

"Real estate is already one of the best investments you can have, tax-wise, because you can deduct all of your expenses, and when you sell it, you pay long-term capital gains (at 15 percent, much lower than income tax)," she said. "But if you have it in an IRA, none of the expenses are deductible. When it's sold, any profit is taxed when you take it out (of the IRA) as ordinary income."

Investing in real estate with a Roth IRA has fewer drawbacks, she said, because distributions are tax-free once the account has been in place for at least five years, although "you still have the downside that you can't deduct any expenses."

Must follow IRS rules

People who invest in real estate through an IRA have to make sure they adhere to IRS rules or they risk disqualifying the account, which carries heavy tax penalties. Neither they nor their relatives can live in the property. They cannot pay any expenses directly; everything from repairs to property taxes must be funded from the IRA. That means they must make sure their IRA has enough liquidity to handle expenses. If they have to add money, they pay a penalty.

"At this price point, I'm able to do the entire transaction with my IRA," Foran said about his $25,000 property. "I wanted to be very safe and make sure I have plenty of buffer in there so I won't have to do a capital contribution to keep that property afloat."

Companies that manage self-directed IRAs said they fully disclose all rules and recommend that investors educate themselves and consult their own accountants.

"Generally people in the real estate IRA business are very savvy about the market and investment properties," said Hugh Bromma, CEO of Oakland's Entrust Group, which has $4 billion in IRA funds under management. "They're picking up selected properties in areas that will be conducive to long-term appreciation."

About 30 percent of Entrust's clients invest in real estate, he said. Foran is among them. Entrust charges $250 a year to manage a single property, plus fees for purchasing the property.

Most IRA real estate investors buy properties with all cash, the simplest approach. If they don't have enough funds to do that, they can partner with other IRA account owners, or even partner with themselves, for instance paying half from their IRA and half from their personal savings.

30% down required

A handful of banks offer mortgages to IRA investors, but they must put down at least 30 percent, and they pay a higher interest rate because the loans must be nonrecourse, meaning the banks cannot go after other assets.

Once IRA account holders reach age 70 1/2, they must start taking minimum required distributions from their account. What if they have a house held in the account and can't sell it? "You can take a portion of it and transfer it to yourself," said Kathy Holcomb, business development officer at Pensco Trust Corp., a San Francisco IRA management company.

Suzanne Gregg, an agent with Paragon Real Estate Group in San Francisco, has bought and flipped a couple of properties through her IRA and said she tripled her money.

"It's not like you just buy a stock online and forget about it; it's a little more hands on," she said. "It's a tangible asset you can see and manage."

E-mail Carolyn Said at csaid@sfchronicle.com.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/01/BUQI19FAVM.DTL

This article appeared on page DC - 1 of the San Francisco Chronicle

Economy likely grew faster in 4Q, but fears remain

Economy likely grew faster in 4th quarter, but concerns linger about recovery's staying power

• Companies:

  • Ak Steel Holding Corp.

By Jeannine Aversa, AP Economics Writer , On Friday January 29, 2010, 7:18 am EST

WASHINGTON (AP) -- At the end of last year, the economy likely grew for the second straight quarter -- possibly at the fastest pace in nearly four years.

So the recession has ended, right? Yes, say most economists. But a panel of academics who officially decide such matters has offered a different response: silence.

That's despite signs that the economy, juiced by government aid, has begun to hum rather than sputter. On Friday, the government is likely to go further: it's expected to say growth accelerated from October through December.

The housing market, the collapse of which triggered the recession, is creeping back. Industrial production is up. Layoffs have slowed, though companies remain reluctant to hire.

Analysts surveyed by Thomson Reuters estimate the economy grew 4.5 percent in the final three months of 2009. If so, it would mark the best quarterly performance since 2006. Some predict even more dynamic growth -- possibly hitting 6 percent, a level not reached since 2003.

But many analysts worry that growth could slow or even stop in coming months. They point to temporary factors that propped up the economy in the fourth quarter but will eventually fade.

Much of the fourth-quarter expansion was due to government stimulus and to companies boosting output to restock supplies depleted by the recession. Such inventory restocking boosts production not only at manufacturers but also at their suppliers. That ripple effect can help boost an entire chain of related industries.

Economists estimate two-thirds to three-quarters of the fourth quarter's growth came from the inventory cycle, as companies shifted from sharply cutting stockpiles to rebuilding them or only slightly reducing them.

An increase in inventories, or even just a much slower rate of decline, means companies are producing more goods to fill orders and not shrinking their existing stockpiles.

But government stimulus will eventually be withdrawn. Inventory replacement, too, ends, unless demand picks up. And when it ends, so will the production gains that companies and their suppliers enjoy.

For now, the swing is benefiting companies large and small, up and down the supply chain. AK Steel Holding Corp. said this week that greater demand for steel from automakers and other customers drove a better-than-expected fourth quarter profit.

That's why few think the expansion seen in the fourth quarter can last. Some even fear the recovery might collapse into a "double-dip" recession.

In the meantime, the National Bureau of Economic Research, the group based in Cambridge, Mass., that determines the start and end of recessions, has said nothing about the latest one having ended.

Many economists predict growth will slow to a pace of around 2.5 percent in the current quarter. High unemployment is likely to make consumers cautious, leading to subdued spending in the months ahead.

"The all-important consumer is expected to take a pause," predicts Tom Porcelli, economist at RBC Capital Markets Corp.

Tuesday, January 26, 2010, 2:21pm MST

Denver again led metro area in home resales in 2009, but sales declined

Denver Business Journal

Denver County continued to have more sales than other metro-area counties of existing single-family homes in 2009, according to data from Metrolist Inc. The county had 7,482 closed sales of such homes last year, down from 9,399 the prior year.

Existing sales, also called resales, are those of homes that have sold at least once before.

The largest number of homes sold in Denver County — 2,581 — were in the affordable, $100,000-$200,000 price range often attractive to first-time buyers, followed by 1,580 home sold in the $200,000-$300,000 “move-up” range.

Independent Littleton broker and Metrolist analyst Gary Bauer broke down the data by county. Metrolist is metro Denver’s Multiple Listing Service (MLS), providing home-sale data to residential real estate brokers and agents.

“First-time homebuyer closings, via tax-credit assistance, took over the market for the majority of the year,” Bauer said in his report. “First-time homebuyer transactions are estimated to be 40-plus percent of all [home sale] closings.”

The federal government’s first-time homebuyer credit provides as much as $8,000 to such buyers. The credit was renewed in November of last year through April 30, 2010, for home sales that will close in June.

The least number of homes sold in the county last year — 114 — were in the $1 million-plus category.

But even with that relatively low number of high-end home sales compared to overall sales, Denver County had the highest number of $1 million plus home sales, according to Metrolist data. Boulder County was a close second with 111 sales in that price range.

Other home sales, by county, with 2009 and 2008 sales totals given:

• Arapahoe — 5,969 (2009)/7,327 (2008). Most homes last year — 2,255 — sold in the $100,000-$200,000 price range.

• Adams — 5,795/7,590. Most ’09 sales — 2,873 — were in the $100,000-$200,000 category.

• Jefferson — 5,277/6,144. Most houses — 2,107 — sold in the $200,000-$300,000 range last year.

• Douglas — 4,039/4,939. Most homes — 1,574 — sold in the $200,000-$300,000 category in ’09.

• Boulder — 2,975/4,272. Most houses — 1,096 — sold last year were in the $300,000-$500,000 price range.

• Broomfield — 854/1,058. Most homes — 312 — sold in ’09 were in the $200,000-$300,000 range, but 306 homes sold were in the $300,000-$500,000 range.

• Elbert — 314/376. Most homes sold last year — 111 — were in the $300,000-$500,000 range.

According to Metrolist, metro Denver’s seven counties plus Elbert County had a total of 32,705 closed existing single-family home sales last year, down 20 percent from 41,105 such sales in 2008. The largest number of those sales were in the $100,000-$200,000 price range.

Last year, 44,546 single-family homes were put under contract for sale, down 12 percent from 50,517 in ’08.

Total volume of single-family home sales marketwide was $8.7 billion last year, down $1.5 billion year over year.

Denver County also had the highest number of closed sales for condominiums in ’09, at 2,528, followed by Arapahoe County with 2,261 condo sales. Most of those sales in both areas — 899 for Denver County and 1,028 for Arapahoe County — were in the $100,000-$200,000 price range.

— Paula Moore

10 Cities Where It's Smarter to Buy

10 Cities Where It's Smarter to Buy
For people who want to own a home, the premium to buy—the spread between what they’d spend to rent and what they’d pay for a mortgage—is much lower than the 15-year average in many cities.

To determine what cities are smart buys, Forbes magazine computed the premium and also identified locales where economists predict home prices will go up the most over the next five years.

Here are the top 10 cities the magazine chose as the best places to buy right now.

1. Boston-Cambridge-Quincy, Mass.
2. Charlotte-Gastonia-Concord, N.C.-S.C.
3. Chicago-Naperville-Joliet, Ill.-Ind.-Wis.
4. Cincinnati-Middletown, Ohio-Ky.-Ind.
5. Denver-Aurora-Broomfield, Colo
6. Minneapolis-St. Paul-Bloomington, Minn.-Wis.
7. Philadelphia-Camden-Wilmington, Pa.-N.J.-Del.-Md.
8. Portland-Vancouver-Beaverton, Ore.-Wash.
9. San Francisco-Oakland-Fremont, Calif.
10. Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.V.

Source: Forbes, Francesca Levy (01/21/2010)

Monday, January 25, 2010, 3:58pm MST

Denver improves as apartment market, says report

Denver Business Journal

Metro Denver’s ranking increased to No. 21 this year from 27th in 2009 in Marcus & Millichap’s “2010 National Apartment Report” index of U.S. apartment markets, the brokerage firm said Monday.

The ranking of 44 U.S. cities’ apartment markets is based on average scores for indicators such as expected marketwide employment change, apartment vacancies, new-apartment construction and rents.

Washington, D.C., was the index’s top market again for 2010, as it was for ’09, and Jacksonville, Fla., traded places with Las Vegas for the 44th position this year.

Metro Denver rose on the index because its fundamentals started to firm up late last year, especially in downtown Denver and the western suburbs, “setting the stage for fairly healthy operating conditions throughout much of the metro [area] this year,” the report said.

Forecast job growth this year was another major factor in metro Denver’s improvement on the index. Denver-area employers are expected to add 13,000 jobs in 2010, improving the employment rate by 1.1 percent, the report said.

From an investment standpoint, large private buyers, syndicates and institutions started purchasing local apartment properties in late ’09. Selling prices have remained fairly stable in the Denver area over the last five years, “a trend that will likely accelerate transaction velocity this year,” the report said.

Other significant points in the Marcus & Millichap outlook for metro Denver’s apartment market in 2010:

• Completions of new apartment units are expected to slow to roughly 2,000 units this year, following the delivery of some 2,550 units in ’09.

• Asking apartment rent is expected to dip 1.2 percent this year to an average of $843 per month. In ’09, average asking rent dropped 3.8 percent.

• Few distressed properties will come on the market this year, but some deeply discounted complexes may come up for sale in northern Aurora because vacancies there are well above the metro-area average.

Marcus & Millichap Real Estate Investment Services Inc., based in Encino, Calif., is a real estate brokerage firm specializing in investment sales. The company has offices nationwide, including in Denver and Fort Collins.

— Paula Moore

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Ritter Rejects Tax Amnesty For Land Credits

TheDenverChannel.com

Ritter Rejects Tax Amnesty For Land Credits

Disputed Credits Total $100 Million

POSTED: 8:45 am MST January 23, 2010

UPDATED: 11:39 am MST January 23, 2010

DENVER -- Gov. Bill Ritter will oppose any legislation to grant amnesty to hundreds of Coloradans whose tax credits for conservation easements are being challenged by federal and state authorities. Ritter's chief counsel, Trey Rogers, said the disputed credits total $100 million -- money the state needs with a $1.5 billion budget deficit. Instead, the administration wants to settle each case individually.

Conservation easements guarantee that land will not be developed. They allow struggling farmers and ranchers to keep land in agricultural production. Property owners can write off easements as charitable contributions, and they keep title to the land. State tax credits under the program jumped from $2.3 million in 2001 to $98 million in 2008, fueled in part by a change in 2003 that allowed the credits to be transferred and sold.

A report last year by legislative analysts put total credits from 2000 to 2007 at $274 million. The Colorado Department of Revenue has notified 295 landowners and easement credit buyers that their credits were being disallowed because the easements were overvalued by state-licensed appraisers. It ordered them to pay the credits along with penalties and interest.

The Internal Revenue Service reported last year that it had audited people, including buyers of easements, who claimed credits to which they weren't entitled. Rep. Wes McKinley, D-Walsh, said he plans to introduce a bill to grant amnesty for landowners with disputed credits, which he estimates at $300 million, including penalties and interest. "The state made a deal. It was a bad deal, but we need to honor the deals that we make," McKinley said. But Rogers said the best way to serve state government and landholders is to settle each case individually.

Nearly 300 landowners who face state action say they based their credit claims on land appraisals by unscrupulous brokers who offered to develop the land, in violation of state law. Landowners who sell credits to investors are stuck with indemnity clauses that require landowners to cover any losses -- including demands for back taxes. The state sent about 1,200 letters to people who bought tax credits notifying them their deductions were disallowed because the state disagreed with their land appraisals.

Erin Toll, director of Colorado's Division of Real Estate, told lawmakers in April that a grand jury was looking into $24 million that may have been fraudulently claimed for overvalued land. Attorney General John Suthers has refused to say if a grand jury is investigating. The state contends landowners should have known their property values -- which the credits are based on -- were inflated.

John Swartout, executive director of the Colorado Coalition of Land Trusts, says he understands the naivete of some landowners. "They were used to farm subsidy programs that sometimes are too good to be true," Swartout said. J.D. Wright, president of Land Owners United, represents 80 landowners fighting the state. He says mediation can only get landowners in trouble with the IRS, and he has asked Ritter to cease all audits and reevaluate the state tax program. "Any other measure or lack of action will ultimately destroy hundreds of good, honest Colorado citizens," said Wright, a landowner north of Fowler whose one-time $50,000 conservation easement tax credit is in dispute.

Wright said farmers who spent money saved by tax credits on farm equipment and other expenses could be forced into bankruptcy. The impact could ripple through small communities across the state because most easements are in rural areas, he said. Southeast Colorado farmers who filed credits are particularly vulnerable because they are recovering from drought, Wright said. "The number of individuals who are on the brink of foreclosure, as well as troubled banks, is mounting daily," he said. "The state is not going to get its money back. The only way to fix this is grandfather them in."

Conservation groups say the dispute could provide ammunition to kill the program. Ritter wants to cut $13 million from the $52 million program over the first half of this year, and another $13 million for the fiscal year that begins in July. "It's an incredibly effective tool to preserve Colorado's ranch lands from unnecessary development," said Pete Maysmith, executive director of Colorado Conservation Voters, a nonprofit advocacy group.

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