When you think of individual retirement accounts (IRAs) the usual suspects of financial assets that come to mind are stocks, bonds and mutual funds. Real estate on the other hand helps diversify a retirement portfolio, often moving counter to financial markets. Real estate has historically appreciated over time, ideal for a long-term investment horizon.
Investing in real estate is easy to understand. You purchase a property, manage the upkeep and resell it for a higher value. Owning the tangible asset puts you in control of your investment rather than buying slivers of ownership in companies through shares of stocks.
Real estate investments also can serve as a hedge against inflation. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation.
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago.
Although not as easy as buying stocks, bonds and mutual funds; did you know that you can hold real estate investments in your IRA? Real estate can provide a steady income stream from rents, and any rental income you collect grows tax-deferred or tax-free within the IRA.
It does not stop at a rental property. It can be a commercial property, hotel, office complex, raw land, trust deed investment, private Real Estate Investment Trust (REIT), or even acquiring a foreclosed property at auction, just to name a few. If you identify a real estate transaction, it is likely something that can be purchased with the buying power of your self-directed IRA.
It does however require that the IRA be held with a self-directed custodian. A self-directed custodian, such as Preferred Trust specializes in the custody of alternative assets in an IRA. It is a transfer from one qualified account type (IRA) to another qualified account type (self-directed IRA). This transition does not cause a tax implication – but rather expands your ability to diversify your retirement portfolio through alternative investments such as real estate.
Once your self-directed IRA is established, making the investment in real estate does require some rules of the road to follow.
- Your real estate investment must purely be an investment. The property cannot be used as your primary residence, vacation home, a place for your kids to live, a second home or an office for your business.
- The balance of your self-directed IRA must cover all costs associated with the real estate investment. Real estate investing does come in many shapes and sizes – from $1,000 to millions, so chances are something will fit the bill.
- Income and appreciation from the sale of the real estate investment must be sent to the self-directed IRA to maintain the tax-sheltered advantages associated with the IRA account type.
- You cannot act in capacity of property manager, or physically work on the property. However, you are responsible for selecting the property manager, hiring contractors when and if needed and authorizing payments from the IRA for expenses such as repair work.
Now, that we have that out of the way, you are ready to identify the real estate investment type that is right for you.
Let’s face it, owning rental properties isn’t for everyone. So, if it’s not for you, consider real estate options that don’t require a large amount of responsibility for you as the IRA account owner. Consider investing in Trust Deeds. Trust Deeds are turn-key real estate investments backed by residential or commercial properties. Your IRA acts in the capacity of a bank, loaning funds to homebuilders and developers at an agreed upon interest rate for a specific period. That interest is deposited back into your IRA. A real estate investment option with less direct elbow grease but potentially high returns.
Investing in real estate through a self-directed IRA can be a game changer when it comes to earning passive income. The investment possibilities as it pertains to real estate are vast and there are a variety of options and a multitude of companies that can help you begin your real estate investing journey. Real estate investments can provide the diversity you need to provide you with financial security in your golden years.
Want to learn more? Schedule a FREE consultation with Preferred Trust by clicking here, texting the word “trust” to 702.707.6537 or by calling 888.990.7892 option 2.
Members of the editorial and news staff of the Las Vegas Review-Journal were not involved in the creation of this content.