Date: September 29, 2022

Should Your IRA Include Real-Estate Investments?

If you have a self-directed IRA, you can hold a variety of different investments, such as stocks, bonds, and mutual funds. In fact, this kind of retirement plan allows investing in all types of real estate, including commercial properties and residential homes. 

However, before you decide to pursue this option, let’s examine some of the pros and cons of utilizing your IRA this way. 

The following topics are discussed below:

  • What is a self-directed IRA (SIDRA)?
  • The differences between SIDRAs and traditional RIAs
  • How a SIDRA can save you money on taxes
  • Why real estate assets can be inflation-resistant


What Is a Self-Directed IRA?

Let’s start with the basics. Self-directed retirement accounts (SDIRAs) come in two flavors: traditional IRAs and Roth IRAs. With either one, you, the account holder, manage yours (though a custodian or trustee handles the administration). That’s why they are referred to as “self-directed.” 

All SDIRAs are tax-advantaged and allow you to diversify your assets in ways you can’t with other kinds of IRAs. The custodian of your account allows you to invest in a variety of assets, such as real estate, private companies, and even gold coins. This alternative-investment-friendly characteristic has made them popular among experienced investors. 

You don’t need to be a Wall Street expert to take advantage of an SDIRA’s opportunities (and there are multiple). However, there are possible downsides. For example, they’re more expensive than traditional or Roth IRAs since they require additional paperwork. SDIRAs don’t have the same protections as traditional retirement accounts do either, so if things go wrong with an investment, you may not have insurance protecting you from losses. None of these are typically huge, but I prefer to be upfront.


Real Estate’s Costs & Rewards

For investors seeking to diversify and balance their portfolio, real estate is sometimes an inflation-resistant asset. Again, however, it’s not a one-size-fits-all approach to asset management. Although it can be very lucrative, it also requires a lot of time and energy to maintain. If you’re going to invest in it, you should understand how it works and what your obligations will be.

To begin with, real estate is an illiquid market. In other words, it usually takes months to sell properties (unless you discount prices to the point of losing money). This can make investing in it riskier than in many other types of investments. Investors also need more capital than those who may put their savings into stocks or bonds. 

You need to do your due diligence on any potential property or properties very carefully before making a purchase. This includes becoming fully aware of zoning regulations and your mortgage obligations to-be with an eye toward your financial goals. Real estate investments can include rental property, condos, office buildings, and retail spaces. 

Each of these assets is generally a long-term proposition. As a result, real estate is not the way to go if you are looking for short-term profits. The old adage, “it takes money to make money,” holds as true for real estate as it does for anything else. You can’t expect to buy anything without having cash on hand. 

As a matter of fact, many real estate agents recommend having at least 20% of the down payment ready for a prospective house purchase. This ensures that you’ll have enough on hand when the time comes to close (usually after around 60 days), as well as avoiding PMI or mortgage insurance. Once you’ve closed, as in any other market, there can be isolated ups and downs, but fluctuations often lead to growth over the long term. 

The usual principles, such as buying low and selling high, dollar cost averaging (or putting equal amounts into stocks regardless of values throughout their lifetime), etc., apply. Your purchases can also be bundled together with other real estate opportunities at times. 

For instance, you might buy into an apartment complex—and get units in three different states as part of the portfolio rather than buying one house or condo outright. The payoff, for the patient, can be a nice boost for your retirement income. 


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Real estate investment trusts (REITs) are another way to get alternative equity. REIT investors buy units of a fund that owns and operates income-producing properties. These professionally-managed funds are administered by a company specialized in this type of investing. As a result, your risk of losing money to an economic downturn or other event affecting your property’s value can be lower.

In addition to diversifying your portfolio, real estate has other unique benefits:

  • It offers stable returns over time. Since real estate’s worth is based on its local property values, not stock market prices, it tends to hold its value. 
  • You can borrow against it. Refinancing can be done without incurring any tax liability. 
  • Returns are not subject to capital gains taxes within an IRA. Put another way, whatever profits you make are yours to keep until withdrawals are made. 

All of these benefits require that you color within the lines. In other words, there are rules real estate investors have to follow:

  1. You can only invest in real estate with a self-directed IRA. You won’t be eligible if your retirement account isn’t an SDIRA. 
  2. Properties must be held for at least one year before you can sell them. They must be held even longer if your real estate is used as a rental or second home.
  3. It’s a long-term commitment. If your goal is making money from real-estate investments, keep in mind that your profits shouldn’t be taken until after five years have passed (from your purchase date).
  4. You can’t personally benefit from any purchase your IRA makes until the account gets dissolved (when you reach retirement age). Put another way, if you buy a rental property with your IRA, you can’t use it yourself until you retire or reach age 59 1/2. 


Invest for Tomorrow With a Plan Today

including real estate in your IRA can be a smart way to diversify your portfolioGetting into real estate with your IRA can be a smart way to diversify your portfolio. It also has the potential to help you grow your retirement savings faster than other investments. This is because it allows you to leverage debt or equity by making an initial investment and then borrowing against that money later. 

Any profits generated by real estate must be pulled out of the IRA account before they are taxed. This means you will need to find another place in which to invest when your retirement comes around. However, with the investing strategies of Heritage Capital in your corner, that should be a simple matter. 

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Paul Schatz, President, Heritage Capital