Why I Don't Like The Thought of Using HedgeFunds For Investing

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Recently in a forum post, somebody asked whether or not to use their 401k to invest in real estate. You can do this through what is called a hedgeloan, or something like investing in the real estate directly through self directed IRA's.



On that note, I don't like the thought of even doing something like HedgeFunds because your loosing what the retirement accounts do best - compound.



Now granted, you could compound on real estate if you did enough deals, but pretty soon deals will become larger, and harder to get your money out of the investment.



Stocks, Mutual Funds on the other hand are very liquid, and the compounding of that money is a good thought to have. Some people like the thought of having their retirement money in Real Estate.



I don't mind either but when it comes to liquidity, and compounding, why not just invest in a Real Estate Index ETF instead and not have to worry about being the owner.



Two ETF's that I know of are: ICF, and IYR. At the current time, these Indexes are down, so I would give thought to investing at the current time of this writing.



But back to my original point - when doing something like a Hedgeloan, you are giving up something that is very liquid for something that is not. From the bankers point of view, they love this, they don't have to go through the process of Foreclosure in order to redeem their collateral, they just take your stock/mutual funds and sell them.



Simply because of this liquidity and bankers advantage over you, I would make sure that IF you do them, that the rates and closing costs are very worth your while.



Agree Or Disagree?? Feel free to post your comment on this article below.

Comments(5)

  • ypochris31st March, 2007

    Joel,



    You talk about the compounding of stock or mutual funds like it is something that is certain to occur. But in my eyes it is akin to gambling. If you have information that makes it a "sure bet" that is called insider trading and is illegal.



    Similarly counting on appreciation in real easte is a gamble. Although over the very long term, both stocks in general and real estae in general have appreciated, over the short term or in specific cases it is always a gamble.



    Investing in income properties in a market you know, with a fixed rate mortgage, on the other hand, is a matter of doing the numbers. You know the monthly mortgage payment, what percentage of the value the taxes will be (they only increase if the property appreciates, generally), what your insurance premium will be. You can know through experience and knowledge of the particular property what the cost of mantainance and repairs will average. You can even calculate the chance of severe damage by a bad tenant, or insure against it. You take all these expenses and balance them against your knowledge of what rent you can get, minus the vacancy you can expect. This gives you an annual income you can COUNT on, not a hope that stock prices will improve or the property will appreciate.



    Of course you can hope for appreciation too, or rent increases. But this is a bonus- you are not gambling your future on it. And you can COUNT on depreciation of the dollar, so the value of what you owe becomes less. And you can COUNT on the tax benefits you will enjoy. Although there is in fact some uncertainty regarding vacancies or repairs, in a market you know, choosing tenants yourself, you develop a very good idea of the actual numbers, and having multiple properties averages out these expenses towards a norm.



    I'm not addressing liquidity, because real estate is about as illiquid as it gets, but stocks and mutual funds are a GAMBLE while income property is a CALCULATION. There is a world of difference between the two to me.



    Chris Rathbun

    (ypochris)

    • joel1st April, 2007 Reply

      Here is a fact, if you don't have your investments (long term) into something that appreciates more than 3-5%, you risk being overcome by inflation.



      Real Estate Bubbles do pop, and stocks do go down.



      That is certain to occur, not an if.



      But, take a look at these two ETF's and see what you think. Both of these are proven track records that go back 50+ years.

      S&P on average increased 13% over past 50 years.



      Instead of having money in stocks/mutual funds that try to out perform the market, you can invest in what everybody is trying to beat - the market.



      This is the S&P 500

      http://finance.google.com/finance?q=SPY



      This is the Europe 350 (beats our market hands down)

      http://finance.google.com/finance?q=IEV

  • JohnMerchant19th June, 2007

    I've done a number of real estate investments inside IRAs for myself and clients and investors.



    One of the strongest points in favor of acquiring RE using a SDIRA is that with RE, the investor probably can learn and know the local market and its appreciation possibilities much better than he/she might know and understand any other IRA investment.



    How many laymen (or pros !) really know and understand the daily gyrations of the stock or bond market and all the things that might affect it?



    And how many of us even know what a hedge fund or "hedge loan" is?



    Heck, I've been Series 7 (and about a half dozen more sec. ratings) licensed and managed an office for a major brand securities firm...yet I can barely even discuss hedge funds intelligently.



    But I sure do know what a 3 BR rental can be bought for, locally, and its appreciation possibilities and chances are you do too.


    • joel19th June, 2007 Reply

      Yeah, I have messed with the self directed IRA in the past, and the issue I have with that is that you tie your money up in one deal.



      For me it has to be a great deal in order to lose compounding.



      I haven't done the "partnering with my IRA" on any deals yet. But will in the future.



      If any body knows of a SELF directed IRA that has low commissions for stocks as well, let me know.



      In between real estate deals, it is wise to keep the money invested.

  • ddaily28th March, 2008

    Well, let's see. the stock market was at 11600 in 2000 and it is at about 12300 now. So that is a 700 point gain in the last 10 years. So that is 6% increase in 8 years. Divide 6% by 8 is a whopping .075 gain per year accross the market. WOW. I am going to go put all my money in now! NOT

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