Question: I have not seen any discussion on using self-directed IRA's to own real estate directly as a retirement investment vehicle. A custodian for about $200 a year will establish a self directed IRA and as part of that will set-up an LLC owned by the self-directed IRA which will directly own investment real estate. The concept seems particularly attractive as a Roth IRA. Any thoughts, caveats, or other ideas on this concept?

Answer: Thank you for asking. I have little experience in this instance, so I can make only a few comments and bring up some of the questions I would ask.

Real estate is a difficult investment. I would first question whether you want to do it at all. The tax aspects are not as important as the basic decision to make that kind of investment. Most people are better off with REITS, preferably in a Roth IRA. I don't like real estate partnerships because you have no control unless you are the general partner. Real estate is a bookkeeping headache as an investment. It's not a liquid investment and very difficult to handle in settling an estate.

If that’s your major retirement resource, you’d be in trouble. You would not have sufficient diversification, and the lack of liquidity would hurt later in retirement.

The tax laws are quite favorable for directly owned real estate. They could be even more favorable in a Roth IRA, but I’d check with the IRS to see if that’s allowable. I know that you can’t put your own home in one. If you put real estate in a regular IRA, you will lose the capital gains, depreciation and 1031 benefits, however some of these benefits may go away in the future. Everything that goes into a regular IRA has ordinary tax rates when it comes out. When you get to 70 1/2 you will start required minimum distributions which will require cash within the IRA. That may well hurt your ability to make repairs or improvements.

Then there's the matter of investment costs. I seriously question that you can get the IRA and LLC set up for only $200. I'd get another accountant's view and check out your source very carefully. Also, you should consider what the ongoing fees will be for the IRA. A 1% fee hurts. A 3% fee would be devastating..

I'd also check to see if there are any limitations on getting a mortgage in this situation.

But I have a bias that my father taught me--that's served me well when I obeyed and hurt badly most of the time when I ventured beyond his advice. Dad said, "Don't invest in anything that eats or takes maintenance." You may well do better.

Bud