If you are interested in real estate syndication and becoming a first-time real estate investor, you are not alone. Many people are interested in investing in real estate to diversify their portfolios and to get in on the benefits of real estate ownership.
And if you are like most people, real estate syndication is the best option for you as you likely do not have enough money to buy a major real estate property all on your own. Get to know some of the basics of real estate syndications as well as how to invest in real estate syndications using your IRA.
What Is a Real Estate Syndication?
In basic terms, a real estate syndication involves several people investing in the same property so that each holds a stake or a share of the property and so that they can invest in larger properties and projects than they would be able to otherwise.
A real estate syndication includes a sponsor and a set of investors. The sponsor is the person who scouts out property and manages the property. They will have a financial investment in the property (up to 20% usually). The investors will cover the rest of the property cost.
Investors will also have a preferred return on investment, meaning the amount they “get back” for their investment every year. This generally ranges from 5% to 10%.
How Can You Invest Using Your IRA?
There are several different types of IRAs and other retirement accounts out there on the market. One of these options is known as a self-directed IRA account. Real estate self-directed IRA accounts allow you to legally own property with your retirement account.
You can buy residential or commercial properties with a self-directed real estate IRA, as well as mobile homes, raw land, and more. However, there are rules to this process set out by the IRS.
First and foremost, you can only use the property as an investment opportunity. You cannot live on the property, vacation there, or have any other personal stake in the property. It is a financial business only.
The first step you need to take to make this IRA investing opportunity a possibility for you is to open a self-directed IRA account and invest funds into it.
Then, you will find a real estate syndication that works for you and your investment needs and put some of your self-directed IRA funds into that property. It is important that you do not invest all of your self-directed IRA funds into a single property, though. This will prevent you from being able to diversify your IRA holdings and can cause problems if your returns are lower than anticipated for a specific property.
Are There Any Drawbacks to Investing in Real Estate Using Your IRA?
The process of investing in properties using your self-directed IRA is not necessarily always simple. There are potential tax issues to consider. If you invest in a commercial property like a retail store or the like, you may be subject to UBTI (unrelated business taxable income).
There is also unrelated debt-financed income (UDFI) which applies if there are loans involved in purchasing the real estate property for which you are invested in a real estate syndication. You can get loans through your self-directed IRA investments, for example.
However, in spite of these special tax situations, real estate syndications are a good investment using your self-directed IRA. These tax burdens, though seemingly complicated, are often minimal in their impact on the return on investment. This means that investing in real estate syndications with your self-directed IRA is a positive investment strategy.
If you are ready, open your self-directed IRA right away and find a real estate syndication opportunity that meets your needs as soon as possible.
By Ola Ibiwoye BPHARM, RPH
What are the drawbacks to Investing in Real Estate Using Your IRA?
- There are potential tax issues to consider.
- If you invest in a commercial property like a retail store or the like, you may be subject to UBTI (unrelated business taxable income).
- There is also unrelated debt-financed income (UDFI) and applies if there are loans involved in purchasing the real estate property for which you are invested in a real estate syndication.
