Self-directed IRA: Alternative Investment Options
By Lisa Scontras
Karen Robertshaw used her self-directed IRA to buy a 2-bedroom leasehold townhome for $98,000
cash in 2003. She later purchased the fee interest, also with funds from her IRA, for a price of
$57,000. For five years, she collected nearly $1,400 in rent every month, which went straight
back into the IRA account — tax free — before she sold the unit for $310,000.
“And because the IRA owned the property, the gain on the sale was not taxed either,” says Robertshaw,
a Realtor and partner at Locations LLC. “Sweet.”
Robertshaw is part of a growing movement of people who believe that using 401k or IRA funds
to buy real estate is a great way to diversify their retirement strategy.
“My goal for the next 10-year stretch is to do a bit more than double what is in my retirement
fund with real estate,” says Robertshaw. “It’s possible. My latest thoughts are to buy fee
Self-directed IRAs are one of the fastest growing segments of the retirement funds market
providing a diversification strategy to those seeking options beyond investing everything
in Wall Street. It also appeals to investors who may not understand “small cap” and “mid cap”
but do understand that real estate in Hawaii is a good solid long-term investment.
“Many people are unaware of the fact that their IRA can invest in alternative assets like real
estate because most IRA custodians do not offer real estate as an option,” says Dan Falardeau,
owner of Entrust Hawaii, a self-directed IRA service provider in Hawaii. “The fact is most IRA
custodians are brokerage companies or banks and they only allow their clients to invest in
products that they sell and can earn a commission on.”
Falardeau spends most of his time educating people on what their IRA and 401k options are
and how self-directed retirement plans work.
“The options as to what you can buy with you self-directed fund are almost unlimited,” says
Falardeau. “There are only two restrictions to things you cannot buy, and that is life
insurance and collectibles.”
According to Falardeau, most of his clients use their self-directed IRA for diversification
purposes and that the majority are moving a portion of their retirement savings into a
self-directed account specifically to invest in something other than securities.
“Last year’s stock market volatility actually drove more people to explore alternative investment
options,” he says. “The most common assets that we see are real estate, private placement,
precious metals and notes.”
So how does it work?
Essentially, Falardeau breaks the process into three steps.
1. Ask your 401k custodian or the company that holds your IRA if you have a self-directed
option. Many do not, in which case you can opt to set up a new IRA with a self-directed IRA
company such as Entrust Hawaii.
2. Next you need to fund that new account with either an IRA transfer, a direct rollover or
with regular contributions.
3. Decide what you would like to buy with the IRA and instruct the company managing your
account to facilitate that investment on behalf of your fund.
“There are many benefits to buying real estate with IRA funds,” says Michael Koyama, partner
at Locations LLC. “But if I had to choose one it would be the fact that it can be
difficult to allocate funds for investment especially during these challenging economic
times, but using your IRA allows you to invest in real estate without having to come out
of pocket for the down payment.”
Realtor Bonnie Coen recently represented a buyer in transaction where Entrust Hawaii was
assisting the seller.
“I thought the process was seamless for my buyer,” says Coen, a partner at Locations LLC.
“No unusual process or paperwork was necessary.”
There is a specific process and strict IRS rules to adhere to, some of which can be complicated,
which is why working with experts is essential. But Falardeau contends that business is booming.
“We’ve found that now that the securities markets have rebounded a bit, more and more people are
taking that opportunity to move some of their retirement funds out of the stock market and into
alternative assets like real estate,” says Falardeau. “Couple that with the fact that the real
estate market is a bit of a ‘buyers’ market and it seems to be a good time to self direct.”
Those who have done bought and sold properties successfully through an IRA, like Robertshaw,
are sold on the investment option.
“Will I use my IRA to purchase real estate again?” Robertshaw says. “Absolutely.”