USING 401(k) FOR INVESTMENT PROPERTY
COULD MAXIMIZE RETURN IN DOWN HOME SALE MARKET

As 2006 winds down, the Dow is at near record highs, and the real estate market is experiencing its first downturn of the century. Conventional wisdom might say that it’s time to get your money out of real estate and back into the seemingly safer stock market. At least one billionaire would disagree.

"When everyone is convinced that one direction is correct, that’s when I go the other way," said Sun Microsystems Chairman and noted contrarian Scott McNealy. McNealy made a fortune bucking conventional wisdom, and if the adage "sell high, buy low," appeals to you, then using some of your 401(k) dollars to invest in luxury homes or other elements of the real estate market might make a lot of sense.

The use of self-directed IRAs and 401(k) s for investing in real estate and mortgages has been well established for more than 25 years. It has been a great investment-diversification tactic for two very simple reasons: Real estate generally appreciates over time, and if bought properly, positive cash flows can be realized right from the start.

In a softening market, a person interested in investing in real estate may consider maintaining a cash position and buying the property on its way down, making it a good deal for a buy-and-hold strategy. In such an instance, the property is held until the market goes back up. Granted, this may take some time, but the investment should generate a positive cash flow or break even over the time the investor holds the property. The investor then sells it for a significant profit. History has proven that real estate is one of the most consistent and enduring investments, so short-term price gyrations do not outweigh the benefits of the asset allocation.

"If you employ this strategy through a Roth IRA, I think you have the best tax and investment deal around for an investor," said Entrust Group CEO Hubert Bromma in Forbes Magazine. “The real estate is bought at a low-cost basis and later, maybe years later, sold at a respectable profit with no tax to pay.

"In short, buying real estate, even in a downward-sloping market, can be an excellent investment opportunity through a tax-free or tax-deferred IRA or 401(k). The upside is great, especially when the cost basis is low, and you may never have to pay tax on the gain," Bromma said.