One lure for IRA: real estate pools for the 'little guy'
Boston — Buy the ground you stand on. That old-wives' tale, reflecting American faith in real estate as a secure investment, is being told - and sold - again with a new twist.
The nation's huge private pension funds - growing at an astonishing rate of about $3 million an hour - have lately shifted up to 10 percent of their money into real estate ''pools.'' Why not have the little guy jump into these financial pots of property?
For pension fund managers, the starting entry into real estate syndication is usually at least a hefty $250,000 or so. Such high minimums could shut out the small investor who might want to stake all or part of a retirement savings on real estate, other than an individual home.
But the opening up of individual retirement accounts (IRAs) to almost every American worker starting in 1982 has spurred renewed interest among investment firms to offer comingled real estate plans for the estimated 30 million to 60 million new IRAs expected.
The IRAs, now available to almost all workers under the Economic Recovery Tax Act of 1981, allow a person to place $2,000 in an investment, reducing yearly taxable gross income by the same amount. The investment can be withdrawn at age 591/2 with no penalty except normal taxes.
The most common real estate investment for such small sums is a limited partnership. Amounts as little as $500 can go into buying millions of dollars of commercial and residential real estate. Syndication managers buy a number of diversified properties around the country, hunting down assumable mortgages or taking advantage of slumped markets.
''Real estate for the last few years has had spectacular gains. The pools will be popular for people who do not want to invest in stocks or bonds,'' says Gary Strum, E. F. Hutton's IRA expert. Sometimes frenetic demand for commercial space in cities is expected to continue as the US moves more and more to a service economy.
Another option for IRAs is real estate investment trusts, known as REITs. These saw a boom in the 1960s, only to have many go bust in 1974. They offer shares like stock, and are treated as tax shelters for nontaxable investors. Financial planners are still wary of REITs, even though they show some new popularity.
But IRAs are already a tax shelter and buying into real estate does not mean the individual can use the interest payments as a tax deduction on income. Real estate's value as a protection against inflation over the next few decades may be its main attraction.
One disadvantage is the reduced liquidity of money put into real estate pools. The investment may be locked up for eight or more years before a return is given.
Withdrawing from a real estate syndication early is almost impossible or brings steep penalties. Also, such pools can require high fees to get in, since management of real estate can be expensive.
In November, Paine, Webber began selling limited partnerships for a real estate pool, which will ''close'' when it reaches $20 million. Minimum investment is $2,000 (depending on state laws). Instead of directly buying property and being vulnerable to business taxes, the fund will finance first mortgages of both commercial and residential real estate. Merrill Lynch offers partnerships in its MLH Income Realty fund with a minimum $3,000 for IRAs and other pension money. The plan will close in January after purchasing three properties near Denver, Tampa, and Dallas. Another partnership will be offered next year. E.F. Hutton offered eight plans this years, ranging from multifamily units to leased corporate offices. One plan sold out in four days.
Many financial analysts predict that real-estate values in the 1980s will increase more than they did in the 1970s.
Brokers report a strong demand for property syndications. But they warn that IRA investments should eventually be diversified. When contributions over several years begin to add up - to about $12,000 or so - the individual can begin to place the money in different investments than real estate.