May 7, 2010
Real Estate Is Great, But Remember, It's A Business
Real Estate Is Great, But Remember, It's A Business Cliff Ennico www.creators.com Looking for evidence that the current speculative #147;bubble#148; in real estate is just about ready to burst? Read this week#146;s e-mail: #147;I am buying two properties (condo units) in Florida. Both will be in the same building, which is pre-construction, so I am essentially buying just the contract, no real property. I hope to sell the properties before construction of the building is completed and they close in early 2008. I am buying the first unit 50% from my personal savings and 50% with money from my regular IRA, which I plan to convert to a Roth IRA with the expectation that the profits on that half of the investment will then be tax-free to the Roth IRA. Since I#146;m told only one investor can buy each unit, I plan to set up a limited liability company (LLC) to own the second unit. My Roth IRA would invest in the LLC, which would then purchase the second unit. My question is: will the profits on this second unit be tax-free because they will #145;flow through#146; to my Roth IRA?#148; Wow, did you get all that? Basically, this person is so desperate to cash in on the real estate #147;boom#148; that he or she is tapping an Individual Retirement Account (IRA) to buy two units in an apartment building that hasn#146;t even broken ground yet! The questions raised by this e-mail are extremely technical in nature, and should be answered only by a tax professional who is intimately familiar with the complex rules governing IRAs. If a Roth IRA cannot legally invest in a pre-construction contract like this one, you will be clobbered with taxes, interest and penalties for making a premature #147;distribution#148; from your IRA if you are younger than 59-1/2. But I do have some common sense advice for anyone thinking about making this kind of investment: DON#146;T DO IT! Inspired by a number of best-selling books describing the cash flow benefits of investing in real estate, such as Robert Kiyosaki#146;s #147;Rich Dad, Poor Dad#148; series, a lot of inexperienced suckers #150; er, I mean investors #150; are putting everything they#146;ve got in speculative real estate schemes that make this one look tame. Investing in real estate now is like buying stock in a #147;dot com#148; startup circa 1999. Frankly, I wouldn#146;t buy ANY investment real estate right now, especially real estate that won#146;t be ready to generate income until 2008, and I certainly would not use my retirement money to do so. Wait for the bubble to burst and then, if this builder is still around (I doubt they will be), you can pick up these units at a bargain price, without having to hit your retirement savings, assuming you think the location will still be desirable in three to five years#146; time. What about real estate that is ready to generate income today, such as a two-family home that you can rent out to families just getting started in life? Always remember that when you own a rental property, you are a #147;landlord#148;, just like Snidely Whiplash, complete with top hat and handlebar moustache. Everyone I know who does it says it#146;s a part-time job, and you have to look at it that way. Be prepared to devote at least 20% or 30% of your total available time to managing your #147;investment#148;. After all, when the toilet overflows in one of your apartments at 3 a.m. Sunday morning, whom do you think your tenant will call to fix it, right away? The #147;Rich Dad, Poor Dad#148; books, while generally accurate in their explanation of how #147;the rich get richer and the poor get poorer#148;, don#146;t talk about the joys of dealing with insane tenants who trash your properties, refuse to pay their rent on time, and sue you for discrimination or some other trumped-up legal violation if you try to evict them. If you haven#146;t already, take a professional real estate management course before making any sort of investment in rental properties. Your local community college probably offers one. If it really were as easy as the #147;Rich Dad, Poor Dad#148; books make it sound, everybody would be getting filthy rich investing in real estate. Trust me, it ain#146;t, and they aren#146;t. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

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