“Buy land, they’re not making it anymore” -Mark Twain
If you are like most Americans, you are probably relying on financial advisors and/or stock brokers to help plan (and hopefully pay for) your future retirement. Though it is wise to defer to the expertise of such individuals, it is also important to keep in mind that they are biased when it comes to how and what they will advise you to invest in. If you really want to diversify and maximize your retirement portfolio, there is a little known caveat you might want to research.
One of the best investments anyone can make is that of raw or only slightly improved land. As we know, though improvements to your land will increase the value, they are by definition temporary, and also cause greater outlays of maintenance related and tax related costs. This is why, unless you plan on something as high-touch as using homes to generate rental income, your best bet is to find some land, in the path of future development, and buy and hold it for several to many years. This has been a favorite method for wealth generation and preservation for hundreds of years, utilized by America’s wealthiest individuals.
The only problem with this factoring into your retirement investment planning, is that as far as your financial advisor or stock broker is concerned, it doesn’t factor in at all. The truth is, these people (though essential for navigating complex financial markets) are really interested in one thing: making money. And who can blame them? The best scenario we can hope for is that their interests are aligned with that of their clients, and they only make money when they earn income or growth for the accounts they manage. None of this approaches your ability to use your IRA to invest in land.
Enter “Self-Directed Retirement Plans”.
Not too long ago, the IRS made it possible for those of us with IRAs and 401k Plans to make investments on our own behalf and still benefit from the tax-deferred or tax-free environments of our existing retirement plans. So why then haven’t you heard about this game changing opportunity to enhance and diversify your portfolio? Because only real estate professionals may gain from the sale of land or any real estate transaction for that matter.
Herein lies the conflict of interest, which is that your financial advisor cannot benefit (and as he/she sees it will actually be harmed) if you use your own, hard earned money to make an investment in land. The fact that commissions can only be earned by licensed real estate professionals, translates into “administrative burdens” for the financial institutions who control your financial destiny.
As stated directly on the IRS website “…because of “administrative burdens”, many IRA trustees do not allow IRA owners to invest IRA funds in Real Estate. [However,] IRA law does not prohibit investing in Real Estate but trustees are not required to offer Real Estate as an option.”
In order to overcome these unfortunate obstacles, you can either speak frankly with your current financial institution about your ability to own land through your existing IRA, or (if they won’t play ball) you can start of shift funds into a “Self-Directed IRA” which will allow you to invest on behalf of yourself.
It is likely that the best approach to this conflict is to choose to do both. As stated above, land is a great asset and possibly the best long term investment on Earth when it is purchased intelligently at the right time. Also, the options provided by your current financial institution offer benefits that owning land alone will not. For this reason, continuing with your existing managed account make sense when you pull some funds into a Self-Directed IRA for diversification into real estate. As the adage goes, it is best not to keep your eggs in one basket.
To get slightly more specific, the types of retirement plans that can be converted into Self-Directed IRAs includes: Traditional IRAs, SEP IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA) a.k.a. Educational IRAs, Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans, Keoghs are qualified plans that can be converted into “Self-directed Retirement Plans”. For more detailed information on these plans, it’s best to visit the IRS’s website. Also, look into Publication 590. If you make your way to pages 40-41, you will see which types of investments are not allowed. Land is not included and therefore qualifies as does other types of real estate investments.
As a general rule when going this route, be careful in selecting the custodian of your account. Most of the financial professionals who will be your primary options make up an industry which controls and pays for its own media coverage and ruthlessly self-promotes away from outside type investments such as real estate. The best thing you can look for is a firm that simply charges an administration fee and believes in Land Investments as part of a balanced portfolio.
One of the reasons Land IS such a great investment, is that you can leverage your purchase of land with as little as 10% or 15% down and amortize over a period of 20+ years! This means your actual cash outlay is quite small in comparison to the projected value of land that is purchased in the right area at the right time and price.
Most importantly when it comes to your decision regarding this option, it is crucially important that you do some research and become well educated from a number of sources on the ins, outs, risks and rewards associated with this (or any type of) investment strategy. This article is simply meant to be a stepping stone and point you in the right direction. Good luck and happy hunting.