Real Estate IRAs

Wary of Stocks? Property Is an I.R.A. Option

Vivian Marino

Like many other investors, Ray Matteson, an executive at a data-processing company, was caught in the dot-com maelstrom of the late 1990's, except that his losses were on a far grander scale than most - about $3 million by his calculations and all of it in a retirement account. But Mr. Matteson, 60, who had amassed a fortune through an employee stock ownership plan, says he has managed to recoup most of those losses.

About two years ago, he shifted his money from a traditional individual retirement account into a so-called real estate I.R.A., and he used money in the account to buy a 105,000-square-foot warehouse in his hometown, Sacramento. "I paid $4.3 million for it last year, and if I sold the building today, I could probably get around $5 million to $6 million," said Mr. Matteson, adding that he also receives a steady stream of income from his 12 commercial tenants, producing a 9 percent annual return.

While a vast majority of the 45 million households with I.R.A.'s are still in stocks and bonds, more investors are focusing on real estate, hoping to cash in on the robust market. An estimated 2 percent of IR.A. money is now invested in real estate in one form or another - through self-directed accounts held by a custodian and managed by the accountholder - twice the percentage of two years ago, according to industry experts.

Real estate has always been permitted in I.R.A.'s, but few people seemed to know about this option - or even care - until the stock market began to decline. Financial institutions, meanwhile, had little incentive to recommend something other than stocks, bonds or mutual funds.

There are few restrictions on what investors can hold in these self-directed accounts. Qualifying properties include apartment and office buildings, shopping centers and warehouses as well as single-family houses. Investors cannot use commercial space owned through their I.R.A.'s for their own businesses.

Most real estate I.R.A.'s now are in residential property, according to account administrators, but they say they are seeing more and more commercial deals. Typically, these involve high-net-worth clients with substantial assets in their retirement accounts.

"People are looking for ways to accelerate their asset values, and they're not getting those returns in the stock market," said Hubert Bromma, chief executive of Entrust Administration, a company in Oakland, CA, that specializes in the administration of I.R.A.'s for nontraditional investments. The company has $1.5 billion in assets under management; two-thirds is in real estate.

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