self directed IRA to purchase raw land as a hedge

[Wild Willie]

Been exploring the possibility of rolling over some of my IRA $$$ to buy some raw land as an inflation hedge through a self directed IRA because I "think" precious metals are in a bubble. Found a custodian that will process the purchase, etc., but looking for info to be able to judge their worthiness and whether or not their fees are competitive. Is there a source that I can check?

Also, any input on my strategy will be appreciated. I know I can buy MF's and ETF's to accommodate this, but I would prefer to have the physical property in my portfolio rather than some paper.

[letsgobobby]

as long as you have a strategy to deal with eventual RMDs.

There are a number of self-directed IRA custodians out there.

Fees range but seem to be in the hundreds of dollars per year for $100k.

[Alan S.]

I guess your only expense would be property taxes, but those must be paid from the self directed IRA, therefore you need some cash in that account. Check your homeowners policy to verify that raw land (not farm land) is automatically covered for no additional premium. Technically, if you had to pay a premium, that portion would also have to come from the SD IRA. Be sure that there will not be other costs such as environmental work required. If something must be done, you have to hire it out, you cannot do the work yourself since that would be a prohibited transaction and could disqualify the IRA.

When you reach RMD age the IRA custodian is responsible for securing a valuation on which your RMD is based. While you can take the RMD from your other IRAs if you have them under the aggregation rules, you still need the annual valuation as of 12/31 each year. It's possible that the custodian will require the IRA to pay for an actual appraisal every so often. That depends on the custodian, the value of the land and the stability of raw land values in your area.

Do some research on prohibited IRA transactions and be sure to avoid them. Any personal use of the land by you or a family member is a prohibited transactions.

[Wild Willie]

Letsgobobby and Alan S. THanks for the comments, didn't think about RMD (which will start in about 4 years), but there will be sufficient $$$ in my other IRA to take care of that, Yep, thought about liability insurance and will need to check into that also. Regarding personal use of the land, that's the only thing that bugs me because if I would purchase raw land, I would love to be able to get huntable land, but I apparently can't even hunt the land if I would purchase wooded land. I understand the rules and can see why this rule is in effect, otherwise peeps could just "launder" transactions without paying the taxes on an obvious distribution of tax deferred $$.

Thanks again. all comments welcome.

[nedsaid]

I think you are making a big mistake.

Who knows if precious metals are in a bubble or not? If they were in a bubble, that bubble could go on for years. Who says that raw land would be a good hedge against a drop in precious metals? Is there any research or anything you can point to that would back up your theory of raw land as a hedge for precious metals? Has anyone established a relationship in the performance of these types of investments?

If you really believed that precious metals are ripe for a drop, wouldn't it be easier to short a Precious Metals ETF in a brokerage account? (Not that I think this is a good idea either).

Too many moving parts. Too many things that could go wrong.

A lot of questions. If there was somebody that got hurt on your land and you got sued, how would the legal fees get paid? My suspicion is out of the IRA. If there was a judgement, from where would the funds be paid? If the IRA paid for the liability insurance, how would the payout from that insurance work within an IRA? Would a settlement from that insurance result to the injured party result in a taxable event to you? I don't know the answer, but it is worth asking.

It would be too easy to make a mistake with this type of investment and perhaps invalidate your IRA. In my memory banks, it seems that all the expenses for the land would have to be paid out of the IRA. Any tax lawyers out there who could address this? One slip up and you would be hit with a huge tax bill.

I think you need some legal and tax advice before you do this. Not sure the trustee would be an objective source of information.

Wouldn't it be better to finance this from another source?

In any case, this just does not sound good. What a can of worms.

[Wild Willie]

Nedsaid: thanks for your comments, but I'm not hedging against precious metals, my intent is to hedge against inflation. Since 70% of my present ira is in bond funds which I know will take a hit on the nav when interest rates begin to rise, I was looking for a way to preserve some of my principal for inheritance purposes.

Yes, I agree that liability is an issue also so I would have to solve that problem if, as has been suggested, my homeowner's doesn't cover that already. I would surely love to be able to hunt on the land, but I know what the rules are. Now, having said that, I'm trying to figure out how the IRS would know that I'm using the land that way short of some type of surveillance or interviews of neighbors, friends, relatives, etc. Must be awful hard to police this type of transaction, especially if there are no utilities in my or a relative's name.

There is also the problem with illiquidity should I end up needed to "cash out" of the land such as needing the $$$ for health reasons. Lot's of issues, just exploring the possiblities and thanks to those who responded.

[stan1]

What percentage of your investable assets are we talking about?

Sounds like you are early into retirement (70.5 - 4 years) so the uncertainty about whether you are investing for you and your spouses health expenses or your heirs is understandable. I think it comes down to whether you are talking about 1) $200K out of a $3M portfolio, 2) $100K out of a $500K portfolio, or 3) $50K out of a $500K portfolio. 1 seems doable if you really feel inclined (and in the end probably won't make much of a difference) but I'd be cautious if you are in situation 2 or even 3 because of liquidity.

[Joe S.]

If you want to hedge against inflation, why don't you consider something like 20 year TIPS? Or maybe a TIPS ladder. They may perform slightly worse than inflation, but your raw land will probably perform slightly less than inflation after you pay taxes. Raw land is a less perfect inflation hedge, since land can be more volatile than the consumer price index.

[Watty]

I know I can buy MF's and ETF's to accommodate this, but I would prefer to have the physical property in my portfolio rather than some paper.

You would be pretty much just be creating a private REIT.

When this has come up before, usually with houses or apartments, one of the big pitfalls that has come up is that the fees for managing the IRA are only a small part of the expenses. The IRA custodian will likely hire a property management company to do the actual property management. The IRA custodian has no real incentive to keep the property management costs low so they may select an expensive property management company just because they will be easier to deal with and less likely to do something that will get the IRA custodian in trouble.

Another problem is that if there is a lot of inflation and the prices go up a lot then all the increases will be treated as ordinary income if this is not a Roth account. By owning this in an IRA you would also lose all the tax advantages of owning investment property.

When the IRA goes to your estate then all the land may need to be sold to split the IRA for several heirs or if they need to use the money for something else. Even in a decent market selling raw law can be very expensive and take a long time and it can take several years to find a decent buyer. If they need to sell it in a hurry it may cost them a lot.

[Wild Willie]

All good points. Probably prophetic as to what decision I will eventually make, I noticed that there were zero respondents who thought my idea was a possible wise decision. I expect that I will still play around with the idea for awhile longer before I give in to the consensus and agree that this is not a good idea.

As info: Joe S.-----Since I am presently 100% in VTINX (Target Retirement Income), I have 20% in tips already. Stan S.---I would fall right between your examples of #1 and #3. Watty---raw land is my objective so there shouldn't be any management fees, but your point about raw land being hard to market is well taken.

Thanks to all, love this forum.

[Watty]

raw land is my objective so there shouldn't be any management fees

It would be good to look into this some more. I would think at the very least it would require that someone visits the land a couple of times a year to check for hazards that need to be addressed, needed brush or weed cutting, check that any "no trespassing" signs are still property posted, illegal dumping, or a neighbor using the land in way that would give them an adverse possession claim on it.

On one of the boards I follow someone had posted about going to their land only to find out that a neighbor had clear cut their land and had gone several hundred yards over the property line into their property. This not only caused a modest loss of the value of the low quality timber but more importantly it made their land a lot less desirable for building on. They found out about this less than a year after it happened so it was easy to prove what had happened but if had been five or ten years later then they might not have had much recourse.

[ourbrooks]

The ideal purchase would be farmland which you could lease out and get some real return in addition to the speculative return; unfortunately, farmland is probably in at least as big a bubble as precious metals.

How are you determining that the value of the land will go up at least at the rate of inflation? Land that is in the path of future development may have already appreciated excessively; land which is not in the path of development may not go up very much at all.

What's going to be your liquidation strategy? Land prices tend to follow the overall economy so you probably won't want to liquidate during a downturn. Similarly, you'll probably need to withdraw faster during periods of high inflation but that'd be the worst time to withdraw from an asset class intended to protect you from inflation.

Another possibility to consider is purchasing an interest in drilling an oil well. There are companies which will sell you an interest in form in which it can be included in an IRA. Unlike land, an interest in a well does generate a steady stream of income which will increase during inflationary periods. Keep in mind that even the best companies drill dry wells and when that happens, you lose your investment.