While most people probably think of securities like stocks, bonds, and mutual funds when considering an IRA, you can also use them to invest in other assets like real estate. Though there are quite a few legal hurdles to consider and a specific type of IRA you must use.
First of all, your IRA has to be self-directed. The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian, the financial institution, or the company responsible for record-keeping and Internal Revenue Service (IRS) reporting requirements. A self-directed IRA is independent of any brokerage, bank, or investment company that would make decisions for you.
With today’s fierce competition in the commercial real estate world, it’s important to find a way to distinguish oneself as a professional. Having specialized knowledge of inventory possibilities and ideas for creatively funding investment projects can set you apart as a broker, financial planner, or lender.
The inconsistent performance of the stock market in recent years has made commercial real estate a prime target for investors. This shift in investment focus has helped fuel the commercial real estate market. In addition, the ability to use retirement funds, which might otherwise be sitting idly or making marginal returns on stocks and bonds, gives real estate investors the ability to diversify and makes congregating money considerably easier for financiers and builders.
Flexibility is one of the main reasons investors use self-directed IRAs for real estate transactions. A property can be acquired quickly, with the required fees and costs directly paid from the IRA. Several other ways investors can benefit from using IRAs to purchase commercial real estate are listed below.
KINDS OF COMMERCIAL REAL ESTATE PROPERTIES TO BUY USING YOUR IRA
All types of commercial properties can be held within individual retirement accounts if the transactions are structured according to Internal Revenue Service guidelines. When it comes to commercial real estate, investment options using your IRA include;
- Multi-family homes
- Rental Properties
- Office Buildings
- Warehouses
- Industrial buildings
The commercial property encompasses strip malls, restaurants, retail, and office space as well as multifamily properties like condos and townhouses. Income comes from rent payments, dividends from an investment partnership, or proceeds from the sale of the property.
Your self-directed IRA can invest on its own or partner funds with yours, another IRA, or a person. Your IRA can also invest inside an LLC or LP where a percentage of the property is purchased and income and expenses are paid based on that percentage of ownership. You do not need to cash out your IRA and pay taxes because real estate is an allowed investment in IRAs.
Rental property in a self-directed IRA includes residential homes, condos, townhomes, commercial buildings, and even foreign real estate. Rentals can provide steady, monthly income as well as the potential for property appreciation over the years. Your IRA owns the property and all income is deposited into the account on a tax-sheltered basis, which is the goal when investing for retirement.
You can partner your IRA’s funds with other individuals (or their IRAs) to invest in rentals. Income and expenses are determined based on the percentage of ownership of each party. This works well if you have limited funds to invest or when investing in more lucrative assets with a group of investors.
TIPS FOR INVESTING WITH YOUR IRA
- Do your research – Inspect the property, and review the property’s sales history, past owners, tenants, and current renters.
- Hiring a property manager makes it easy to oversee multiple units, receive rent, pay expenses, and screen tenants.
- Make sure your IRA retains enough funds after purchase to cover the expenses of the asset.
- Perform due diligence by researching property history and verifying the people you’re working with to invest are on the up-and-up.
- You and disqualified persons are unable to rent or vacation in the property.
- If you are investing in foreign real estate, have a clear understanding of that country’s rules and regulations.
- Your IRA can use a non-recourse loan to leverage investment buying power. These are more involved than conventional loans. Consult an appropriate professional to help you navigate the requirements.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
