Individual Retirement Accounts (IRA) are a common portfolio option for those stashing away money for retirement. But did you know IRAs can be used as a valuable savings tool to invest in land?
The large majority of account holders are unaware that their IRAs can be invested in assets other than mutual funds, stocks and bonds. Likewise, most people don't have a lot of knowledge pertaining to the complex nature of the stock market, interest rates and inflation. Wouldn't it be more beneficial to invest in something that you closely understand?
If you're a landowner, have an interest in land or simply believe investing in land is a safer bet, then you can use your self-directed IRA to fund your retirement.
How does it work?
Rick Taylor of Mossy Oak Properties Forest Investments in McComb, Mississippi noted land could be a better way to fund your IRA because it is a tangible investment with a limited supply.
"The owner directs how [the IRA] is invested and calls the shots," said Taylor. "Land or real estate is one of many investment choices an investor can make. The investment must still go through a custodian and unfortunately there are not many custodians that are familiar with raw land as an investment, so the first order of business would be to find that person or company."
Because people may not be aware their IRA can be used as an investable resource in land, it's important to find a manager or broker who can help guide you through the process. The key is to find someone who has hands-on experience in the land industry.
"Self-directed IRAs are something that most people are not familiar with, and naturally many stockbrokers and investment managers would like to keep it that way for obvious reasons," Taylor stated. "If you have to educate the custodian on the value of the land as an investment, then [he or she] is probably not the custodian you want to use."
Taylor went on to say that investing land is traditionally one of the more conservative, safe bets you can make, thus there is a steady chance that your IRA returns may be higher.
If you feel confident in your decision to invest in land, then it's crucial you understand a self-directed IRA comes with some explicit stipulations. When dealing with an IRA, you must treat the land differently when compared to making a simple land purchase.
"All IRA investments are 'hands off' types of investments," said Taylor. "For example, you can't buy a rental house and then live in it. This where you need a knowledgeable custodian to give you sound advice."
"Regarding land, you can't buy land in your IRA and then build a camp on it for your own use," Taylor noted. "You can buy land outright for your camp and then buy adjoining property with your IRA, or identify a particular property, buy part of it for your camp or personal use (using personal funds and or traditional financing) and the rest in your IRA with separate deeds. Land is a tangible investment, and there is nothing that would prohibit you from enjoying the beauty of nature or walking through your investment."
Using your IRA sensibly
Regardless of which asset you choose to invest in, your IRA should always have an exit strategy, according to Taylor. The old adage "buy low, sell high" is true in this aspect because you want your initial investment to pay off over the long run as its value increases. When it comes to land, your investment has a historic trend of producing high yields. However, it's still important to factor in all market considerations and to ensure you understand the specific type of property you're investing in.
Taylor suggested you should ask a lot of questions prior to investing, including:
- What is the tract record of the real estate you are purchasing compared to other conventional investments?
- Is ownership of property something you are comfortable with long term or would you prefer to have a money manager simply handle the investment and send you monthly financial statements?
- Are you interested in timberland, farmland, transitional properties, rental properties, etc.?
If you're able to answer these questions right out of the gate, then a land investment could be the way to go. But you'll also have to make it through the actual investment process as well, which could be tedious if you don't have the help of a custodian with experience dealing with land.
"The first step is to find a custodian who handles self-directed IRAs, and discuss the purchase of the land," said Taylor. "You will depend on this individual to walk you through the steps and make sure you are always in compliance. If the custodian is not familiar with buying land in an IRA, then keep looking elsewhere. Next, compare annual fees. There is a charge for this service, and you must make sure that the fees will not adversely affect the investment. [The fees] are not all the same, and some custodians may charge more than the investment will allow."
Working to your advantage
By investing in land through you IRA, you can put your money to work for you not just on paper, but as a tangible product. This makes it much easier to manage and calculate the financial position of your IRA, thus securing your retirement future.
Taylor advised that if you know what you want out of your IRA and feel comfortable with your knowledge of the land industry, then land investment should be a top option to consider. By working with a certified land specialist from Mossy Oak Properties, you can be paired with an expert custodian who knows the ins and outs of maximizing your self-directed IRA.
Contact a MOP representative today for more information on the land industry and how you can benefit from an investment.