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IRA investments go back to the land for financial growth

VIVIAN MARINO

Like many other investors, Ray Matteson, an executive at a data-processing company, was caught in the dot-com maelstrom of the late 1990s, except that his losses were on a far grander scale than most - about $3 million by his calculations, and all of it in a retirement account.

But Matteson, 60, who had amassed a fortune through an employee stock ownership plan, says he has managed to recoup most of those losses. About two years ago, he shifted his money from a traditional individual retirement account into a so-called real estate IRA and used money in the account to buy a 105,000-square-foot warehouse in his hometown, Sacramento, Calif.

"I paid $4.3 million for it last year, and if I sold the building today, I could probably get around $5 million to $6 million," said Matteson, adding that he also receives a steady stream of income from his 12 commercial tenants, producing a 9% annual return. While a vast majority of the 45 million households with IRAs are still in stocks and bonds, more investors are focusing on real estate, hoping to cash in on the robust market.

An estimated 2% of IRA money is invested in real estate in one form or another - through self-directed accounts held by a custodian and managed by the account holder - twice the percentage of two years ago, according to industry experts.

Real estate has always been permitted in IRAs, but few people seemed to know or care about this option until the stock market began to decline. Financial institutions had little incentive to recommend something other than stocks, bonds or mutual funds.

There are few restrictions on what investors can hold in these self-directed accounts. Qualifying properties include apartment and office buildings, shopping centers and warehouses, as well as single-family houses. Investors cannot use commercial space owned through their IRAs for their own businesses. Most real estate IRAs now are in residential property, according to account administrators, but they say they are seeing more and more commercial deals.


"People are looking for ways to accelerate their asset values, and they're not getting those returns in the stock market," said Hubert Bromma, chief executive of Entrust Administration, a company in Oakland, Calif., that ecializes in the administration of IRAs for non-traditional investments. The company has $1.5 billion in assets under management, two-thirds of which is in real estate.



Tom W. Anderson, president and chief executive of the Pensco Trust Co., a self-directed IRA custodian with offices in San Francisco, said that he was also seeing more interest in real estate investments.



As of this year, about $604 million of the $1.25 billion in assets Pensco manages was in property or real estate investment trusts, known as REITs, which are publicly traded or private companies with portfolios of commercial property.

Last year, the total was $480 million, and in 1997, $100 million. The company did not provide a breakdown of commercial and residential real estate. Because commercial property is typically more expensive than residential, many account holders are choosing to become part of private investment syndicates, Anderson said.

The biggest obstacle to investing in commercial real estate is expense - for the property as well as the custodial fees, which can vary widely. Investors can take out loans, though financing inside an IRA can be complex. All property expenses, from taxes to repairs to loan payments, must be paid from funds in the IRA, which means investors will need to have plenty of liquid funds in the account.

Matteson, for instance, pays $1,200 a month for the property manager that looks after the building, which generates about $40,000 in monthly revenue for his IRA."You would have to have a prodigious IRA to be able to sink money into a commercial real estate property," said Jonathan Pond, a financial adviser from the Boston area.

Small investors can gain a presence in commercial real estate through REITs or partnerships, but administrators say that most self-directed IRAs should have at least six figures to invest. That is not so uncommon, Bromma said, considering that "there are a lot of people rolling over money from 401(k)s - professionals in high-level positions."

Matteson certainly fits into that category. His retirement account originated from a 401(k) plan awash with stock from his employer, DST Systems of Kansas City, Mo. The money was rolled into an IRA after a merger, he said. After his Internet losses, Matteson pulled out of Wall Street.


"I got tired of going to bed at night wondering how much I was going to lose the next morning," he said.

July 10, 2005, editions of the Milwaukee Journal Sentinel

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