Buying Rental Property with a 72t

L1: Buying Rental Property with a 72tI have been talking with a Financial Advisor and he has introduced me to the 72t. I know nothing about this. He is suggesting that he help me find a rental home, buy it and use the 72t to fund the monthly note. Should the house rent, it would rent more than the note thus creating cash flow. Should it not rent or stay vacant for a while, the note would not cut into my “regular” cash. Because this is new to me, I was looking for outside advice. I want to trust this person, but it never hurts to get a second opinion. My information may be too vague for a good answer, but if someone could start me in the right direction to the pro’s and con’s of this idea it would be appreciated.2004-02-25 12:23, By: cadkins, IP: [66.0.24.10]
L2: Buying Rental Property with a 72tCertainly, purchasing real estate inside of an IRA is permissible and happens every day. However, the real estate encumbered or beleveraged; e.g. encumbered by debt as that effectively causes the IRA assets to be pledged as collateral — pledging IRA assets is certainly doable, but undesirable as it becomes a “deemed distributiion” ; very bad and very taxable.

Conversely, if you are simply looking a launching a SEPP porgram from an IRA to provide monthly cashflow; and then you happen to use that cash flow to pay the mortgage on some real propertry; that’s perfectly acceptable — there are no rules associated with SEPP plan distributions as to how the funds are used.

TheBadger
wjstecker@wispertel.net

2004-02-25 12:36, By: TheBadger, IP: [38.116.134.130]

L2: Buying Rental Property with a 72tAs I read your description of the proposal your FA has put to you, I just get a funny feeling. Have you ever dealt with rental property? If not, what is the driving force for the recommendation? Ifyour FA in the real estate selling business too?
I too am a Financial Advisor, and I have never found an occassion to recommend buying ‘hands-on’ real estate with retirement dollars. Buying a REIT or other type real estate investment might make better sense than owning the property yourself. I have owned rental property and it was not a good experience. Others are very successful in the RE market.
From what you have said, there’s not enough information to give any good opinion, except be sure you know what you are doing with rental property. Another question would be why begin a SEPP at this time? Remember, your IRA / Qualified plans are designed to provide income during your retirement years.
Good luck.
Jim2004-02-25 12:59, By: Jim, IP: [68.1.147.61]

L2: Buying Rental Property with a 72tThanks for the replies. The idea is to create additional cash flow. I know that I am probably playing out of my league considering the amount of cash I have, however, I am looking at this as not only a long term investment but cash flow for now. What concens me it getting back out of it. Sure I may be able to sell in the future, but what about the money coming from the 72t at that point? Once in am I always in? Meaning will I have to continue to be in this type of market until I retire or what will I be able to do with the money if I can not stop it? Do you see people my age looking at this type of thing?

Chris2004-02-25 15:00, By: cadkins, IP: [66.0.24.10]

L2: Buying Rental Property with a 72tI will comment (my opinion only) that per 100 people I talk to who start SEPP programs:
(1) 80% to 90% are genuine early retirees & want or need the SEPP distributions for normal and ordinary living costs.
(2) 10% to at most 20% are not retired or otherwise do not need the money regularly. Instead this group launches SEPP programs for very specific “investment” like purposes:
(a) they have a great investment opportunity that is not purchasable in an IRA; or shouldn”t be purchased in an IRA.
(b) tax bracket managment; e.g. they are in a lower bracket for the near term and know that they will be in materially higher brackets later.
(c) they are using the SEPP stream to capitalize a business.
In my opinion all these reasons a good reasons but do require careful thinking. However, for every good reason, there are at least 10 bad ones that all boil down to “borrowing from one”s future”.
TheBadgerwjstecker@wispertel.net
2004-02-25 15:20, By: TheBadger, IP: [12.221.34.192]

L2: Buying Rental Property with a 72tChris:
As to your last question, ‘Do you see people my age looking at this type of thing?’ it’s hard to answer since I don’t see where you have told us your age.
You stated that you are new to this stuff (SEPP), and from the wording in some of your questions I feel the need to reviewsome basic concepts:
1) When you start a SEPP it must run for 5 full years, andyou have to keep it going until after you turn 59 1/2 years old. So if yourage is 58, then you have to keep it going until after age 63. If you are 45, it’s about 14.5 years till you can make a change. Use the calculator at the beginning of the web site for your start andearliest end date.
2) When you get the SEPP going, unless you use one of the distribution methods allowing recalculation, you get the same amount each year and you can’t change it. That’s why the separate IRA is so important.
3)When you get the SEPP going, you can’t add or withdraw extra funds to the designated accounts.
I’m still not sure of your experience in Real Estate investing. My experience was in a condo at Hilton Head Island, SC, where the tourists abound … in certain times of the year. I was told to expect very positive cash flow, but it turned into an ‘aligator’ that cost me over $10,000 per year in real dollarsfor four years. My message here is to be sure about what you are doing. Your deal may be great and I wish you the best.
Jim2004-02-25 15:52, By: Jim, IP: [68.1.147.61]

L2: Buying Rental Property with a 72tI’m not a 72t expert but I know a thing or two about investments. I think the 72texperts here are being too kind in their replies.

Pros and cons, you ask?

The only pro I can see is that you now know your “financial advisor” is an idiot, so you can fire him before he does too much damage to your savings.

Unless your IRA is way overfunded, depleting, and paying tax, on your retirement account to buyspeculative real estate that may or may be profitable makes no sense. He seems to be saying “don’t worry if it doesn’t rent, it’s only your retirement savings that would bebleeding away every month, not your beer money”.

If you want more real estate exposure, buy a publicly-traded reit WITHIN your IRA and let the dividends compound tax-deferred.

mod2004-02-25 18:19, By: mod, IP: [68.198.190.31]

L2: Buying Rental Property with a 72tIt sounds like you are not too sure about this “investment”. If that is the case, don’t do it. My opinion, I can not think of anything I would least want to do in “retirement” than own a rental unit. Most people who have had rental properties, sell them so they could retire. They don’t get involved in retirement
2004-02-25 20:37, By: Gary, IP: [24.145.242.199]

L2: Buying Rental Property with a 72tOk, I seem to be getting a census that this may not be the thing to do for me in my situation. Sorry I left off my age, I am 35. 59 1/2 is a LONG time away. I want to thank all of you for your opinions. The more I have thought about this, and thankfully I have had time to do that, things just keep coming up that are leading me away from this option. Again, thank you for your opinions. Take care and God Bless you.
Chris 2004-02-26 08:37, By: cadkins, IP: [66.0.24.10]

L2: Buying Rental Property with a 72tMod:
Thanks for being the ‘sword catcher’ of the group of respondents and ‘cutting right to the chase’ about Chris’s FA. Well said.
Chris:
I haven’t run the numbers, but at age 35 I suspect you would have to have a humongus (that’s Southern for ‘really big’) IRA to provide enough distribution dollars to fund yourbuying real estate. Mod is right … fire your FA! Then consider systematically converting your IRA into a Roth IRA, if your income allows it. If you can’t use the Roth, then look for some investments outside qualified plans that will generate tax-favored income in the future. The tax rates are historically low now so funding Non-qualified plans is to your advantage.
Jim2004-02-26 09:16, By: Jim, IP: [68.1.147.61]