NEW YORK (TheStreet) Have you identified a real estate hot spot, and do you want to buy property there?
If so, you can probably use an individual retirement account to get the job done.
RealtyTrac, an Irvine, Calif., real estate analytics firm, is out with a report listing the "Top 15" real estate hot spots in the U.S., along with some advice on how to use retirement plan vehicles to buy property in there.
The company ranks six Florida cities in its list of 15 retirement havens, including Dunnellon, Naples, North Fort Myers, Punta Gorda, Sun City, Venice and Orange County.
Arizona and California accounted for two cities each, while Arkansas, Pennsylvania, Oregon, and New York had one city on the list.
"All these popular retirement cities will very likely be an area of growth in the housing market over the next 15 years as baby boomers retire in greater numbers," says Daren Blomquist, vice president at RealtyTrac. "The baby boomer generation started retiring in 2011, a trend that will continue at least through 2029, ensuring plenty of demand for both rentals and owner-occupant purchases in these markets for the foreseeable future."
To get into the action, real estate-wise, RealtyTrac advises using a retirement account to purchase property in these soon-to-be hot spots.
"Given the combination of bottomed-out home prices and a still-tight lending environment, utilizing funds from a retirement account to purchase investment homes with cash, or at least with a large down payment, can give individual buyers a better chance of competing in this tight housing market," Blomquist adds. "Provided the investments are made with thorough research beforehand, this investing strategy also gives consumers a path to more quickly build their nest egg since all proceeds from the real estate investment -- whether that be from rental cash flow or from selling the property -- go directly back into the retirement account."
To use an IRA or other retirement plan to buy that property (or even "properties"), experts advise only certain investors act now mainly younger real estate buyers.
"It depends on the person's age and the type of property," says Sheldon Detrick, chief executive at Prudential Alliance Realty in Oklahoma City, Okla., in comments to RealtyTrac. "Rental property, especially on the lower end, can be a good investment at any age. It's usually profitable and easy to sell. On the other hand, buying land in outlying areas in anticipation of population growth is something only those under 50 should consider."
RealtyTrac also says to spend some preparation time before pulling any triggers. The firm cites Lorraine and Richard Walls, of Midlothian, Va., who leveraged their retirement accounts to buy several Florida investment properties.
But the couple spent a full year studying the southwest Florida market, and how self-directed real estate IRAs actually work. RealtyTrac cites the following "ground rules" the Walls used to make their property investment purchases.
Title: Any property purchased by your IRA is owned by your IRA, not you.
Purchase money: Any money used to buy property with your IRA has to come directly from it, not from you individually, and you can't be reimbursed by your IRA. This includes earnest money and closing.
Rehab and carrying costs: Like with purchase money, and costs associated with rehabbing or carrying the property, these costs need to be paid directly by your IRA. Your IRA custodian can help with this. For example, Equity Trust allows you to make these payments paperlessly, online.
Income: Any income generated from the property has to flow back into your IRA
Prohibited transactions: Purchases made with an IRA need to be for investment, not personal use. Also, your IRA cannot do business with family members of "lineal descent," which includes yourself, spouse, parents, children, grandparents, grandchildren and great-grand-children. In addition, you cannot borrow money from a self-directed IRA or use it as security for a loan.
RealtyTrac has issued a helpful primer on using retirement funds to buy investment real estate property, with a focus on those top retirement markets (find it here.
If making financial hay on a retirement hot spot is on your financial bucket list, it's worth a look and may be worth an investment.
By Brian O'Connell