The northwest side of Milwaukee has been a hotbed of real estate activity in recent months. Investors have been purchasing foreclosed homes and turning many into rental properties. WUWM’s LaToya Dennis found that some of the entrepreneurs are using their retirement accounts.
At age 36, Michael Baron has a bit of time before hitting retirement age, but he’s thinking about it.
“I tell my wife that I want to retire when I’m 45 and she laughs at me because I can’t sit still. I work seven days a week,” Baron says.
Baron may be a workaholic, but he’s spending some of that energy building his nest egg. He is not investing in typical stocks and bonds; rather, he’s betting on real estate.
“I would say that right now, 90 percent of my retirement account is in real estate,” Baron says.
Baron is part owner of Cornerstone Properties. It buys foreclosures, converts them into rentals, and then either sells the property to other investors or keeps it. Baron says quite a few investors are gambling on real estate, because they don’t perceive it as risky. Last year, the U.S. stock market ended exactly where it started. Baron says the rate of return on his investments has been between 10 and 35 percent, and he predicts it’s only a matter of time before housing prices rebound.
“So in four or five years, when the market’s good, then the investor will not have only captured the cash flow over those five or six years, but now they’re going to have a property with lot more equity in it,” Baron says.
Now, in order to invest his retirement savings in real estate, Baron is taking advantage of something called a Self Directed IRA. It allows people to invest their retirement dollars in things besides the stock market.
Adam Bergman is an attorney with IRA Financial Group based in New York. The company helps people set up their self-directed accounts. While self-directed accounts comprise less than 5 percent of the retirement account market, Bergman says their use is growing rapidly.
“People want to diversify and they want to make sure that they’re well positioned and that when they retire that they have a well balanced portfolio. And that means moving some of their money out of the stock market and into real estate, where there’s a perceived value based on pricing and a bet against inflation,” Bergman says.
Bergman says people can invest their Self Directed IRAs in a number of things, but real estate is the most common.
Brian Jacobsen is chief portfolio strategist at Wells Fargo Advantage fund. He says Self Directed IRAs are not for the novice.
“A person should probably be comfortable enough and familiar enough with the various investment alternatives that are out there in order to make a real prudent decision. They should at least know what a mutual fund is, how the stock market operates. They should at least be conversant in what those things are,” Jacobsen says.
Jacobsen advises anyone thinking about opening a Self-Directed IRA, to watch out for the fees companies charge. He says be mindful of the old adage: if it sounds too good to be true, it probably is.
Back at the house investor Michael Baron just purchased on Milwaukee’s northwest side, he’s excited about the prospects. He already owns about 20 homes and will soon close on seven more.
“I wish I had more money to put in real estate,” Baron says. However, Baron cautions anyone interested in following his example, to do their homework.