Where some see devastation and loss, others see opportunity. At least that is the situation for investors using little-known, self-directed individual retirement savings accounts to invest in the battered real estate market. And for some savvy investors, it has been a windfall.

Take Stacy Dieckman, a 40-year-old Indianapolis investor who managed to turn a measly $10 bet on a house into a $175,000 profit in a 30-day period. Undaunted by a deteriorating housing market, he spotted a block of discounted homes in a downtown housing development in 2006.

“I was blinded by optimism,” Mr. Dieckman said. “They looked like they were in the path of the [future] upswing.”

So he took $10 out of his self-directed IRA account and purchased an option to buy one of the homes for $350,000 from a developer who needed cash. The option gave Mr. Dieckman the right to buy the home within a 30-day period.

But he managed to find a buyer willing to pay $525,000, allowing him to contract the home to the new buyer and pocket a $175,000 profit without ever taking ownership of the property.

“It was the biggest return I had ever gotten — by a long shot — and may ever have,” Mr. Dieckman said.

He hasn’t looked back. In fact, Mr. Dieckman has even recruited several relatives — two brothers and a sister — to set up IRAs to invest in real estate.

He isn’t alone.

Over the past year, there has been a surge in investors’ using self-directed IRAs to scour the battered housing market for bargains.

Different from traditional IRAs, which limit investors to stocks, bonds and mutual funds, self-directed IRAs allow investors to park their cash in all kinds of investments — ranging from real estate to Off Broadway theater productions to nudist colonies in the Bahamas.

The only caveat is that account holders can’t personally benefit from the investment until they make withdrawals at retirement time. In the case of real estate, this means that investors can’t live in a home they purchased using a self-directed IRA, or even rent that home to relatives.

CAUTION NEEDED

Using a self-directed IRA to invest in real estate isn’t without risk, according to one financial adviser.

It is crucial investors do plenty of due diligence before taking the plunge in today’s tumultuous housing market to prevent pouring their retirement savings into a money-burning, problem-ridden property, said David Mendels, an investment adviser at Creative Financial Concepts LLC in New York.

“Don’t do it,” he said. “This is the single biggest trap for the unwary in the world of IRAs.”

Not only does an IRA investor not qualify for depreciation deductions and other benefits that a conventional real estate investor does each year, but the investor also faces risks associated with unforeseen expenses, such as emergency property repairs or tenant defaults, that could put the IRA investment in jeopardy if the IRA doesn’t have the cash to cover them, Mr. Mendels said.

Also, it is critical that investors follow the IRA’s arm’s-length restrictions carefully or they could find themselves slapped with a hefty tax bill and additional penalties.

That said, using a self-directed IRA to invest in real estate can be potentially more lucrative than traditional real estate investing, proponents say.

Indeed, self-directed IRAs allow investors to buy real-estate-related assets, sell them and then reinvest the money in new properties — without triggering a tax event until retirement.

At the same time, IRA investors have the luxury of being able to hold on to a property until a market rebounds, giving them the full appreciation on the property without paying taxes along the way.

“It makes sense to use IRA funds if possible,” said Bob Finn, a San Francisco bond broker who has been using a self-directed IRA to invest in real estate for about five years. “You’ll pay taxes one day, but you don’t have to pay them until the government forces you to withdraw money from the IRA when you turn 701/2 years old.”

Outside the IRA, profits would be taxed to the point where “you’d have 50% less money” to invest.

Mr. Finn sees opportunity in the battered housing market and ballooning credit crisis.

“It’s in times of chaos where ultimate opportunities are presented to you,” he said. “If you want to buy something to hold it, you’ll be able to get it cheaper in times of economic chaos than you would be in times of economic plenty.”

Mr. Finn estimates his assets have increased about 400% over a five-year period, and he continues to seek out investments today.

Jaime Raskulinecz, chief executive of Entrust Northeast LLC, a franchise of Entrust Group, a Verona, N.J., firm that administers self-directed retirement accounts, said investments in self-directed IRAs at her firm more than doubled over the past year, to $54.9 million this month from $22.7 million a year ago.

Interest in real-estate-related investments has been particularly strong, with investments in mortgages spiking 444%, to $5.9 million, and investments in real estate jumping 76%, to $6.2 million, over the past year, she said.

Also, attendance at her firm’s semi-monthly real estate seminars is at an all-time high, Ms. Raskulinecz said.

“Attendance has almost doubled at some [seminars],” she said. “Investors that frequently have tried to invest at the bottom of the market are already starting to do that.”

There hasn’t been this much opportunity for cheap real estate since the S&L crisis of the late 1980s and early 1990s, Ms. Raskulinecz said.

The market for self-directed IRAs remains largely untapped, said Tom Anderson, chief executive and founder of Pensco Trust Co., a San Francisco firm that sets up and ad-ministers self-directed IRAs.

Of the $4.6 trillion invested in IRAs today, only about $50 billion is allotted to self-directed IRAs, though the sector is growing at about 25% a year, he said.

At Pensco, self-directed IRA assets under administration have jumped to $3.2 billion, from $1.5 billion at the end of 2006 and $700 million at the end of 2003, Mr. Anderson said.

“Right now in the United States, the opportunities to buy real estate at a discount are probably not going to be seen like this for the next 10 years,” he added.

Some investors are buying deep-ly discounted homes, raw land and foreclosed houses while others are offering loans to distressed homeowners who are struggling to make monthly mortgage payments due to a rate reset, job loss or other issue.

And because IRA investors aren’t in a rush to sell, they can easily hang onto a property until prices rebound.

“As long as you’re not in any urgent need to sell the property, you buy it low and you hold it until it comes back — and certainly it will come back,” Mr. Anderson said.

To learn more about starting your own self directed ira account, go to www.selfdirectediracorp.com