Self Directed IRAS

What is a self-directed IRA?

Very few Americans realize that they have the option to self direct their IRAs and other retirement plans into real estate and other assets. Most investors believe that their only IRA investment options are bank CDs or the stock market and mutual funds. Investors hold this unfounded belief because they have been given this inaccurate information by their current IRA custodian. The truth is however that investors have the both the power and the ability to self-direct all or part of their IRA into self-directed real estate investments.

Why is a self-directed IRA investment in real estate better than a traditional IRA?

Self-directed IRA investing in real estate combines the best two aspects of investing: leveraged rate of return and tax shelter. First, self-directed IRA investing allows the investor to take advantage of tax deferred profits, or in some cases, tax-free profits. Imagine not having to pay taxes right away, or possibly ever, on your real estate investments. Instead of paying 25%, 30%, or more of your real estate investing profits to the government in taxes, you get to keep it. In this sense, the profits from a self-directed IRA investment in real estate are treated the same as profits gained in a traditional IRA investment in either stocks or bonds.

Second, self-directed IRA investing in real estate allows the investor to take advantage of the powerful principle of leveraged rate of return. The principle of the leveraged rate of return is what truly builds wealth over time. Instead of just beating the rate of inflation by a couple of points, the investor sees true returns over time in the context of real estate investing utilizing the principle of leverage d rate of return.

For example, consider for a moment that at 20 percent appreciation, it takes seven times longer to double net equity (i.e. the investment) using no leverage versus a 10 to 1 ratio. Let’s take this example a step further to compare a traditional 401(k) investment to a real estate investment. If an investor were to leave $50,000 in a 401(k) and the 401(k) were to see an appreciation rate of 20 percent, it would take 42 months to double the investment. Thus, it would take 3 ½ years for the investor to “double the money” in a 401(k). Let’s look at the same investment in the context of a self-directed IRA in real estate assuming the same rate of return. If the same $50,000 were used as a down payment on a $500,000 investment property, it would only take 6 months for the investor to “double the money.” In fact, the $50,000 real estate investment would quadruple in 16 months at a 10 to 1 ratio with 20 percent appreciation. This is why the leveraged rate of return is the key to building wealth through real estate investing.

Moreover, investors have to seriously consider when was the last time they ever saw a 20 percent rate of return on their 401(k) or any other non-real estate investment for that matter. For most, the answer is either “never” or “not lately.” On the other hand, real estate investments have seen 20 percent appreciation for multiple years in the last decade. For example, the year to year appreciation for real estate in San Mateo County according to DataQuick, a premier real estate tracking company, was 20.4 percent in 2004, 17.6 in 2005, and 2.6 in 2006. The picture becomes clearer, however, when one looks at specific localized markets. For instance, according to DataQuick, Menlo Park saw a December 2006 to December 2007 appreciation of 19.95 percent with Redwood City showing a 10.93 percent increase year to year. These are the specific Bay Area markets that Menlo Gate, LLC will target for its real estate investments.

Why haven't I heard of self-directed IRAs for real estate before?

Most IRA custodians do not offer truly self-directed IRAs/real estate IRAs. They will only allow you to invest in their approved list of investment options, not real estate. There is a reason for this, of course. By controlling the investment options, the IRA custodian controls the costs and fees, generally to the benefit of the IRA custodian. IRA investing a t a bank will probably be limited to CDs; at a brokerage firm, to stocks bonds and mutual funds. As discussed herein, however, the investor has the option to invest in real estate through self-directed IRAs and therefore need not remain tied to the traditional role of IRA investing.

Are there any downsides to investing in real estate through a self-directed IRA?

There are no more downsides to investing in real estate through a self-directed IRA than there are to a traditional IRA. No investment (aside from FDIC-insured deposits) is guaranteed. Most successful investors feel, however, that the investment risk in real estate through a self-directed IRA is much less than that associated with investing solely in the stock market. For example, both real estate and stocks/bonds fluctuate in value with the market. Stocks, however, have been known to completely loose all their value. Take the investors who put their hard earned money into Enron, Inc. five years ago. What did they have to show for their investments after Enron, Inc. closed its doors? To the contrary, when was the last time you spoke with anyone who told you that their real estate investment on the Mid-Peninsula in the Bay Area of California had lost all its value? It is for this reason that many investors feel more secure as opposed to less secure when it comes to investing in real estate with Menlo Gate, LLC through self-directed IRAs.

How do I invest in Menlo Gate, LLC using a self-directed IRA contribution?

Investments in Menlo Gate are made through licensed and accredited IRA custodians. Investors must retain the services of an IRA custodian since the IRS does not allow the investor to personally “touch” the self-directed IRA account. The IRA custodian does all the work for the investor. The IRA custodian opens an account for the investor, contacts the existing IRA custodian, transfers the requisite investment funds to the self-directed IRA, and then completes the investment with Menlo Gate. The self-directed IRA custodian charges a fee to complete the transaction. The fee is generally between $350 and $500 depending on the company. Investors generally find that the fee is clearly justified by the increased rate of return of the investment that occurs do to the leveraged rates of return for real estate investments.

With a self directed real estate IRA, the type of investments the investor acquires are the same as presently made in a personal account. The investor controls where, when, and with whom the investments are made. As a passive custodian, the IRA custodian does not sell investment products or give investment advice, so the investor does not have to worry about conflicts of interest or high-pressure sales tactics.

Simply put, it is as easy as a phone call and filling out a few forms. Although Menlo Gate, LLC does not endorse specific IRA custodians, we have had positive feedback from our investors that have retained the services of IRA Services, Inc. IRA Services, Inc. is a locally owned and operated company in San Carlos, CA. Their local offices are open during the week. Our investors have found IRA Services to be professional and responsive. They have also enjoyed the presence of the local office to help facilitate their transactions. You may view their webpage at

As always, we are here to answer any questions that you may have regarding investing in Menlo Gate, LLC through self-directed IRA investments. We look forward to hearing from you.