Great article in the SF Chronicle

The SF Gate ran a great piece on real estate investing through self-directed IRAs. Check it out here. But the article did overlook a critical player in the self-directed space...that of the adviser or consultant. Here's the follow-up email I sent to the reporter.

Carolyn, this is a great article. Feels like the PR machines for Entrust, Equity Trust and Pensco helped to provide info on this piece. Your article does a great job of highlighting the benefits of investing in real estate through self-directed IRAs, as well as pointing out some of the potholes to avoid. But it overlooks another player in the space that is helping to make this type of investing the fastest growing segment of the IRA market....the self-directed adviser or consultant.

For most, investing in real estate through self-directed IRAs is a first on two levels. They've never invested through a self-directed IRA, nor have they ever made a real estate investment. That is a daunting challenge, but one that is easy to overcome. More and more real estate professionals are specializing in self-directed IRA investing. But some, like our firm www.FreedomGrowth.com, are also specializing in the creation of the self-directed account. What type of self-directed IRA you choose, as well as which custodian you select, can impact the bottom line of your investment. And once you own the property, a good adviser will continue to provide advice on what you can, and more importantly can't do, to keep your IRA in the good graces of the IRS.

The custodians are allowed to tell you what is and isn't legal within your self-directed IRA, but they are prevented by law from telling you whether a particular investment makes sense. That's why a professional that specializes in a certain type of investment is a necessary partner for most investors. With real estate, being advised as to whether a particular property...or tax lien, trust deed, real estate note, etc....makes sense is critical information that most ordinary investors find extremely valuable.

So for those new to this type of investing, and to those reporting on it, make sure you know that quality help is out there. The cost to have an adviser on your team is minimal, even free to most real estate investors. Why wouldn't you help to stack the deck in your favor?

Again, great article. Thanks for helping to spread the word.

Social Security is in the Red

Are you sure you really want to count on social security? For the first time in it's history, social security is paying out more than it's taking in. No need to immediately panic. There's still a $1.2 trillion reserve to pay retirees, but how long will that last? The Fed is projecting a $19 Billion deficit over the next 2 years. Check out the gritty details in this MSN article.

Historically, most Americans have supplemented their Wall Street based IRA/401(k)/Pension savings with social security checks. The long term viability of that strategy is in jeopardy, even if it hasn't infiltrated "conventional" wisdom. Alternative strategies exists and individuals are rebuilding their retirement portfolios right now using a wide range of "non-traditional" investments.

If you think you don't have time to look at alternative strategies, you're mistaken. Find a professional that specializes in self-directed investing and let them do the heavy lifting. It's a small investment in time that will pay huge dividends when you retire...and do have time.

A Revitalized Retirement Plan Can Reduce Business Costs AND Improve Participation

Here’s a dilemma every small business owner is facing these days. How do you reduce current costs without sacrificing your growth potential? Here’s one QuickBooks line item to consider…your retirement plan. A revitalized retirement plan can help reduce your administration costs while improving employee attraction, retention and participation.

Most small business owners establish their 401(k) early in their life cycle. Because of the small size, the broker establishing the new plan modifies an existing “off-the-shelf” plan for the business owner. These plans are usually chocked with unnecessary fees to help offset the relatively small amount to be invested. And the investment choices are usually limited to a few staid mutual funds. While the plan provides all with some nice tax deductions, it’s overpriced and not helping participants save for their retirement.

But now that the business, and its plan, has grown, it's a great time look at other options. While it will require a small investment in time, a revitalized plan will save money, help increase participation levels and provide you with a competitive advantage when attracting, retaining and MOTIVATING key employees.

With trust in Wall Street waning, the fastest growing segment of the retirement market is self-direction. The law allows retirement investments beyond stocks and mutual funds. Investments in real estate, commodities and private placements are just as viable as buying stock in Google. Your inability to purchase gold or rental properties with your 401(k) is not due to IRS regulations, but the rules of you current, overpriced plan. Modifying your plan to include a broader range of investment choices will allow for portfolio diversification that will help increase participation, including that of the business owner!

To get started, find a consultant that either specializes in self-directed plans or isn’t beholden to one particular Wall Street custodian. With a little information, they can prepare options for your review that will dramatically improve your retirement plan and lower your monthly administrative costs. No small feat in today’s challenging business environment.

Three Different Real Estate Markets

The current California real estate market is really three different markets...and all are performing differently based on lending dynamics. In the under $500,000, the market is white hot, between $500,000 and $1,000,000, the market is warm, and above $1,000,000, the market is still stalled.

Financing is affecting the three markets because of our good friends Fannie Mae and Freddie Mac. Conforming loan amounts have been increased from $417,000 to $729,750 in populous CA counties, but interest rates are higher, and qualifying is more difficult for loans between $417,700 and $729,750. Just ask anyone trying to get a loan right now in this price point. The qualifying is even more strict and rates are even higher for jumbo loans above $729,750. Don't bother asking these borrowers since their reaction will probably be negative.

Fannie Mae and Freddie Mac only buy conforming loans; therefore, less money is being made available for jumbo loans. And since there is no buyer on the secondary market for these loans, banks are VERY hesitant to loan on these properties. It is not clear, however, why conforming loans between $417,000 and $729,750 pay higher interest rates and have tougher qualifying guidelines than loans made below the $417,000 amount.

In the past, all conforming loans had the same interest rates and qualifying guidelines. Unless Fannie Mae and Freddie Mac start treating all conforming loans equally, and the government intervenes on jumbo loans, as it has with conforming loans, we may continue to experience the tale of three markets. If these changes do not occur, then the upper-end market will likely see
prices depreciate even more before this market strengthens.

Before even thinking of buying a primary residence or investment property, make sure you have a solid mortgage professional on your side. Opportunities exist, but you'll need someone working hard for you to expose all that is possible.

The Seven Habits

One of my old advertising bosses materialized a few weeks ago. He's living in Orlando and got a little uppity after the Magic won A game in the NBA championships against my Lakers. He emailed to see how I was doing and to strike up a little competitive banter. Perhaps a wager or two was placed on the series.

Besides being thankful for his generous donation to the Coe college fund, I was reminded of a piece of paper that he gave me when I first started working for him in Atlanta. It's titled "The Seven Habits" and is a summary of the seven habits of highly effective people, a book written by Stephen Covey. I still have that same piece of paper, yellowed and ripped, taped to my desk today.

Here are the 7 habits:

1) Be pro-active. You are responsible for your life. Decide what you should do and get on with it.
2) Begin with the end in mind. Think of how you want to be remembered at your funeral. Use this as a basis for your everyday behavior.
3) Put first things first. Devote more time to what's important but not necessarily urgent.
4) Think win-win. Have an abundance mentality. Seek solutions that benefit all parties.
5) Seek first to understand, then to be understood. Don't dive into a conversation. Listen until you truly understand the other person.
6) Synergize. Find ways to cooperate with everyone. Value the differences between people.
7. Sharpen the saw. Continually exercise and renew four elements of your self: physical, mental, emotional-social and spiritual.

Thanks Jack for sharing these habits with me and for all of the other lessons I learned from you. To everyone else, go back and re-read these 7 tips again. I hope they have an impact on both your professional and personal life.

The Next 18 Months Could Make Your Retirement

For those with serious plans to retire self-sufficiently, retire early or, dare I say, both, a very unique investment strategy is possible in the next 18 months. There are two provisions in the IRS tax code that if implemented strategically will allow you to drastically improve your retirement outlook. But you need to take action before December 31, 2010.

The Gulf Opportunity Zone Act of 2005, or "Go Zone" is a provision in the tax code created to encourage private investment into the regions devastated by Hurricanes Katrina, Rita and Wilma. The most useful section of the code allows for a single, one-time write-off of 50% of the depreciable basis of the property. For example, if you purchase a property in the Go Zone area of Mississippi for $150,000 and the depreciable portion is $120,000, you could receive a tax deduction of $60,000 in the year the property is put into service. Obtaining this deduction is part one of the strategy.

Part two involves the Tax Increase Prevention and Reconciliation Act (TIRPA) passed on May 17, 2006. TIRPA allows for an individual to convert a traditional IRA to a Roth IRA in 2010 regardless of your income level. For those who have always wondered, traditional IRA contributions are not taxed in the year the contribution is made but are taxed when the funds are withdrawn during retirement. Roth IRA contributions are taxed in the year they're contributed, but can be withdrawn 100% tax-free during retirement. Roths are a very powerful way to save for retirement when you factor compounded annual growth rates into the size of your retirement portfolio. But Roths are limited to those households that make less than $160K per year, preventing most wealthy Americans from utilizing them.

The TIPRA exemption presents a big opportunity...here's how. When you convert your traditional IRA to a Roth, the total amount converted is considered a taxable distribution, taxed at your current rate. But the 10% early withdrawal penalty is waived. So if a $200K IRA was converted and you're in the 30% tax bracket, you would have $60K to pay in taxes. That's not cheap, but consider the long-term tax advantages.

That same $200K invested for 15 years earning 10% annually would be worth $835K in 2025. Assuming your tax bracket in 2025 is 20%, you would pay $167K in taxes upon withdrawal. By paying the $60K in taxes now, you can earn $107K in tax savings to use or invest when you retire! Of course, if you have a larger IRA to convert, longer to invest or if you achieve a higher annual return, the tax savings will be even more dramatic.

So here's the strategy in its simplest form. You purchase a Go Zone property in the next 18 months to not only obtain a cash-flowing investment property in one of the fastest growing real estate markets in the country, but you also receive a huge tax deduction. Then next year you convert your traditional IRA to a Roth. You can then use the Go Zone tax deduction to OFFSET the additional taxes from the Roth conversion and avoid "paying" any taxes!

So, using the numbers from the examples above, you purchase a $150K Go Zone property and receive the $60K tax deduction. You then convert your $200K traditional IRA to a Roth triggering the $60K tax bill. You offset the $60K bill with your $60K deduction. You're left with a cash flowing investment property AND a $200K Roth IRA that will continue to appreciate tax free until you retire. I challenge anyone to find a better opportunity.

Of course there are a lot of stipulations in the tax code that require very precise implementation of this strategy. Your financial planner, CPA, or real estate agent may not be versed with the nuances of each program, but Freedom Growth and our partners are. We know how to implement this investment strategy allowing you to take full advantage of this once-in-YOUR-lifetime gift from the IRS!.

Don't let this opportunity pass you by. Contact us to learn more about this strategy and to see how it makes sense for your retirement and long term financial health.

Retirement Dreams Disappear With 401(k)s

As more and more people have their lives devastated by their diminishing 401(k)s, more and more reports like this 60 Minutes piece will be produced. The havoc that Wall Street has wrought in the name of profit is beyond scandalous and borderline criminal. It's only a matter of time until the current retirement sytsem is radically altered to do what it was initially designed to do....help people save for retirement! Do yourself a favor and watch this 10 minute segment on CBS's website. You could also read the transcript here.

An entire generation's retirement dreams have been wrecked due to their blind faith in the stock market. And why wouldn't they? Brilliant marketing campaigns convinced them equities were the best way to grow their retirement accounts. Then the retirement accounts themselves (IRA's and 401k's) were structured so stocks and mutual funds were the ONLY investments allowed. Starting in the '80s, TRILLIONS of post-pension dollars were pumped into the market via mutual funds and IPO, tech-stock mania. The market responded with the best 15 year run in it's history averaging 17% year-over-year growth. A generation was hooked, line and sinker.

But then the tech bubble emphatically popped losing 35% in early 1999. That was followed 8 years later by last year's 43% clubbing. Will the market recover? Probably, but to what extent?

What if the next generation learns from their parent's and peer's financial decisions and become more savvy to the pitfalls of stock market investing? What if they start building diversified retirement plans that aren't predominantly invested in the market? What if trillions of dollars are permanently moved out of the market and invested in commodities, real estate, cash or other investments? Warren Buffet predicts the growth that happened towards the end of the 20th century was the heyday of Wall Street and the chances of a repeat performance are slim.

I believe our current unregulated, falsely reported, hedged and ponzi schemed system has permanently soiled Wall Street's reputation for an entire generation. I'm sure one on them. Without the mass capital, hidden fees and blind faith necessary to build their financial house of cards, Wall Street will have a tough time reproducing last century's results.

Do yourself a favor NOW and begin building a better retirement portfolio. Don't rely on the stock market to be the sole provider of your retirement dreams. True diversification is possible through self directed retirement accounts that allow you to spread your risk over multiple investment classes. And more importantly, they can prevent your retirement from being wiped out or delayed by an unexpected bear.