Investing in the stock market can be a hit or miss thing.

Stock prices can fluctuate wildly, leading some investors to look for alternative places to invest their money. One of those possibilities being discovered by some in La Plata County involves investing in real estate through a self-directed IRA.

So what is a self-directed IRA?

In plain English, an IRA is an individual retirement account that allows investors more control over their investments and how any income is reinvested. Some advisers say real estate investments made through a self-directed IRA can be more stable than the stock market. But like any investment, it’s not for everyone, and strict regulations apply to how they are used.

A self-directed IRA will allow an individual to acquire real estate and qualify for any tax benefits associated with an IRA.

However, any real estate property purchased through the IRA can’t be used by the investor for his or her personal use. He or she cannot live in the home or rent it to a family member. There are serious IRS penalties involved if the person disregards this restriction.

Though less common in this area, self-directed IRAs also can be used to purchase vacant land.

John Ralph, broker-associate with The Wells Group in Durango, is one local investor who has used his IRA to purchase real estate properties.

He first dabbled in it in 2000, he said. After a serious discussion with his accountant, he was advised to stick with what he knew best – real estate. He withdrew his money from his stock investments after suffering a serious loss, he said, moving the money to his IRA.

The property he bought is being used as a commercial rental in Durango. One of the downsides to using his IRA, he said, is that he can’t use any of his own money to pay for expenses and repairs on the property. He also can’t spend any of the rent money he gets for the property because it goes directly into his IRA until he retires, he said.

“What you have in there is what you have to work with,” Ralph said.

An upside to the IRA, he said is that his real estate investment is mortgage free. He also has more time to find an ideal tenant because he isn’t in a crunch to make mortgage payments.

“In a situation like this, you never have to sell,” he said.

Ralph has purchased two more properties through his IRA. For the third home, he requested a mortgage loan, but he only needed 30 percent of the cost, which was fairly easy to obtain, he said.

Ralph said another benefit to buying real estate through an IRA is that the balance builds over time because he can’t withdraw funds. The money also won’t be taxed until you begin to use the account upon retirement.

Depending on the circumstance, money from the account can be withdrawn for personal use, but at a cost.

Investors like Ralph also appreciate that stock prices can change every day, while the price for a house is much more stable.

“My house is still the same size it was yesterday,” he said.

Don Ricedorff, a broker associate with The Wells Group and spokesman for the Colorado Association of Realtors, also has used an IRA to buy real estate. He’s been using self-directed IRAs to purchase real estate for about 17 years, he said.

He sees them as a great opportunity to grow his IRA and acquire assets, he said. The investment also provides him with additional income through the rental payments. Additionally, he said Durango homes remain in high demand and prices will appreciate over the years.

Still, he doesn’t advise first-time homebuyers to invest this way. Typically, investors who buy real estate tend to be business-savvy people with a deep understanding of real estate and a substantial amount of money in their IRA (at least $400,000).

“Most of the time, it’s going to be an investment property” such as a small house or duplex, he said.

“I believe in investment real estate,” Ricedorff said.

Though this type of investment has commonly been used by real estate agents – who have the most knowledge about available inventory – more homebuyers with the means to fund their IRAs are starting to ask about the process at their local banks. More and more business-savvy investors also are learning about the process.

Steve Emrich, vice president and business banking officer for First National Bank of Durango, said his bank has recently started providing loans for people who want to purchase real estate through their self-directed IRAs.

In about a year and half, the bank has provided loans for about 12 customers interested in this type of investment, he said.

These loans, referred to as nonrecourse loans, allow the bank to go after the property but not an individual’s assets if the person is unable to continue payments. For this reason, banks will offer only about 40 percent of the price for a property, Emrich said.

Purchasing real estate in this way is considered to be a long-term investment. If the owner of the IRA decides he wants to live in the home, he must purchase it back from the IRA, he said.

If you are looking to purchase real estate and “flip” the property in hopes of making a substantial profit, a self-directed IRA is not for you, Emrich said.

Also, you need to keep in mind that the bank will not offer you a substantial loan, meaning you need to have funds in your IRA to make the purchase.

First National Bank refers customers to New Direction IRA, a company that manages the taxes and repairs on the property. They been also known to refer clients to First National, Emrich said.

New Direction IRA, a Colorado-based company, handles multiples types of IRAs including real estate, gold, and 401(k).

“It’s a great way to diversify your portfolio,” Emrich said.

vguthrie@durangoherald.com