Having Real Estate in a Retirement Account Ensures that a Margin Call is Never Received : - With the stock market at record highs, so is the level of margin debt.  Many who buy stocks borrow money from the brokerage house: that is known as "buying on margin."  According to a recent Wall Street Journal article by Alexandra Scaggs and Steven Russolillo,retirement investing margin debt is close to a record high, too.

 In their Journal piece, "investors Rediscovering Margin Debt," Russolillo and Scaggs report that margin debt was at $379.5 billion at the end of March.  That is very close to the record level of $381.4 billion from July 2007.  As Scaggs and Russolillo note in the article about this huge chunk of borrowed money, "The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements."

That is what is known as a "margin call" and it is something no investor, no matter how experienced or successful, ever wants to have happen.  If the margin account cannot be brought up to the needed level through additional cash, assets must be sold.  What makes this so painful is that often times the overall stock market is down so that the prices received are very low.  Making it even worse is that other investors might know of the desperate position of the seller and refuse to buy until the price has been greatly reduced.

Leverage can be a wonderful thing in investing, but not when there is too much debt and not enough equity.

This problem will never be encountered by those owning real estate assets in a retirement account, such as an Individual Retirement Account (IRA).  That is for a simple reason: there cannot be a mortgage for real estate in a retirement account.  That provides for the ultimate protection against losing an asset that has been purchased with borrowed money as there cannot be a loan made to finance the buying of the property.  From that, there is no way that real estate held in a retirement account can be lost through foreclosure.  The law simply does not allow for borrowing to buy real estate that is in a retirement account.

While this may seem to be a tremendous reason for not putting real estate in a retirement account, it is actually quite positive.  

Many very intelligent, very successful, and very experienced investors were wiped out in The Great Recession due to excessive leverage.  Even before The Great Recession, there was an investment firm, Long Term Capital Management, that was staffed with a glittering array of financial talent that collapsed when the market turned against their positions.  Due to the extreme leverage Long Term Capital Management had deployed to buy assets, the company could not continue its operations on its own.  The amount of leverage used was so high that even just a tiny move against the company's holdings could have destroyed the firm, despite all if its intellectual talent.  It was more than just a small shift that did the damage, however.  A book written about this debacle said it all with the title: "When Genius Failed: The Rise and Fall of Long Term Capital Management."

It does not require a genius but it does take savvy financial planning to insert real estate in a retirement account.  The investor is ensuring that no matter what happens to the market, the real estate asset will be protected.  That allows for the investor to profit from the long term gains that real estate can produce.  As real estate investing has produced about 90% of the world's millionaires over the last two centuries, that is a very compelling consideration for protection at all cost.