Buy Local: Real Estate for Income

While the overall real estate market has cooled a great deal in the past year, there are still many opportunities for investors, Bromma contends.

Bromma finds that certain groups of people–like airline pilots and real estate professionals–are not only keen on investing in real estate but as private contractors can set up their own 401(k), as opposed to a large employer plan that doesn't allow broad diversification and limits investments to the traditional mutual funds, stocks, and bonds.

"Real estate has many different facets to it," he says. For example, since average rentals increased 16% from 2004 to 2005, according to the National Association of Realtors, the investor can harness monthly cash flow into the IRA. Also, an investor can create some opportunity with houses that aren't selling or buying out mortgages from owners who may be holding adjustable rate mortgages and now find themselves in dire straits, he notes. Foreclosures are also an opportunity for investment, according to Bromma, and industry information suggests they are on the rise.

If one doesn't want to plunge into the market alone, a good place to start investing is in groups with other like-minded investors, Bromma says. "Real estate investment clubs are very, very good and a good source of clients for financial planners. The National Real Estate Investors Association (www.nationalreia.com) and state real estate associations also have some excellent classes," he notes. Some states that are more active in real estate investing through retirement plans include Florida, California, Arizona, and Ohio.

But planner Cook points out another drawback to real estate: if there is a problem with vacancies on a rental home or tenants who are not paying their rents, "you had better be sure there is enough money in your retirement account because you can't go outside the IRA or 401(k) to fund it," Cook warns. You must also pay for such real estate costs as new roofs, plumbing repairs, and the like–not to mention covering the mortgage payments.

Also, the administrative expense is going to be a lot higher than a typical brokerage IRA or 401(k) because a client will need to find custodians willing to allow real estate in those IRAs and plans, Cook says.

As for self-dealing, the IRS prohibits setting up an IRA as a vehicle to run a business, and you'll have to pay taxes on any income over $1,000, Cook points out.