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Real Estate for Retirement Accounts

An all-female company capitalizes on a hot investment trendVERONA – As investing in real estate becomes increasingly popular with individuals seeking to diversify their nest eggs, firms that specialize in setting up so-called self-directed IRAs—retirement accounts that allow people to invest in real estate and other nontraditional assets—are reaping the benefits. One such self-directed IRA custodian is Entrust Northeast, an all-female start-up company in Verona.

After two years in business, Entrust holds $23 million in assets for investors, the majority of which is kept in 200 active accounts. CEO Jaime Raskulinecz says the company turned a profit last year after seeing 50 percent growth in asset value, and expects a similar rate of growth this year. Raskulinecz says IRA investing in real estate, which includes houses, commercial buildings and land, has gained favor over traditional investments like stocks and bonds in recent years.

“You really couldn’t make big gains in the stock market like you did in the past,” says Raskulinecz. “That’s when you saw all of these big gains in the real estate market. Investors were really following those trends and chasing after the returns.”

Raskulinecz, who also runs a property-management firm called Rainbow Property Management that has been in business for 13 years, started Entrust in 2004 after speaking with franchiser Hugh Bromma, the founder of Oakland, Calif.-based Entrust Group, at a real estate conference in Arizona. Raskulinecz wanted to learn more about real estate investing through IRAs and Bromma was looking for someone to open a franchise office in the tri-state area.

Investing in real estate through retirement accounts was largely unheard of at the time, says Raskulinecz. “It seemed to me like a tremendous opportunity,” she says.

As the Entrust franchise started to take off, she scaled back on the property management business. She now spends about 90 percent of her time on the custodial firm. Her main focus is to bring in new accounts, which she does by giving presentations about self-directed IRAs at least once or twice a month to real estate agents and brokers, certified financial planners, certified public accountants and other professionals. She plans to expand Entrust’s current staff of three this year by adding new hires to work on business development.

Tom Anderson, president and CEO of Pensco Trust Co., a self-directed IRA custodian in San Francisco, notes that “real estate has been the primary alternative asset of favor in the last few years. The real estate market, unlike the stock market, doesn’t move as fast,” he says, “so you can take your time to analyze an area.”

Anderson says self-directed IRAs are the fastest growing segment of the $3.7 trillion IRA market. While the overall IRA market is growing at a rate of approximately 8 percent a year, self-directed IRAs are growing 25 to 40 percent annually, he says. He estimates that there are currently about 15 to 20 self-directed IRA custodians in the United States.

Beverly DeVeny, an IRA consultant in Rockville Centre, N.Y., says many investors use self-directed IRAs to invest in real estate because they wouldn’t have the funds to buy properties otherwise. “That’s the only place where [investors] have any money,” she says. “They don’t have the outside assets to buy the piece of property, so they want to use the IRA assets.”

However, she says, investors face many drawbacks and pitfalls when purchasing real estate through a retirement account. For example, she says, investors are not eligible for depreciation deductions or for business-expense deductions for the cost of maintaining the property, as they would be for property purchased directly.

Moreover, the property can’t be used for personal purposes, says DeVeny, even if only to store unused possessions. She adds that investors cannot do their own repairs or maintenance work on a property, but must hire someone to do the work instead. And just as all rents and other income from the property must go into the IRA, all expenses—including taxes and insurance—must be paid out of the IRA. “So in addition to buying the property in the IRA, you have to have to enough cash in the IRA to pay those expenses,” she says.

She adds that violating any of these restrictions, which are called prohibited transactions under the IRS, can result in the forced withdrawal of all funds from an IRA, with the money subject to taxes.

Raskulinecz says self-directed IRAs let investors decide which properties to acquire. This contrasts with real estate investment trusts, where the portfolios are determined by others.

She points out the IRA, not the investor, is the actual owner of the property, much like a traditional IRA would be the actual owner of stocks and bonds that are part of a mutual fund. Entrust Northeast facilitates the purchases by dealing with attorneys and other parties and making sure the deals conform to IRS guidelines.

Raskulinecz says many of her clients have two IRA administrators. “Most folks are going to keep accounts at their regular Smith Barney, Charles Schwab, Merrill Lynch, and they’re going to move some of that money over to [a self-directed IRA] to do the nontraditional investments.”

She says Entrust tries to help clients to better understand IRS regulations, and many customers are already seasoned investors. “These are all people who have some experience in investing,” she says.

At Entrust, investors can open a new account by making an initial deposit or by transferring funds from existing IRA or 401(k) accounts. Clients pay $50 to open an account and annual record-keeping fees ranging from $125 to $1,850 a year. Additional fees include a $95 charge to purchase, sell or exchange an asset.

Raskulinecz says investors can choose from a broad range of assets but are prohibited from putting money into collectibles such as wine and antiques, life insurance policies and shares in S corporations. She says 55 to 65 percent of Entrust Northeast’s total assets are invested in real estate, either directly or through entities like limited liability corporations and partnerships. Most of the remaining assets are invested in small businesses looking to raise capital as well as mortgages and loans.

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