Investing IRA Funds in Real Estate

Investing IRA funds and similar retirement funds in real estate is an option worth considering, and one most people don’t know about. We’re talking about direct investment in specific properties, not purchase of shares in a real estate investment trust or a limited partnership.

Why invest IRA funds in real estate
Investors should consider real estate for IRA investments for the same reasons they consider real estate for other investment funds. Over time real estate investments have provided attractive returns, and many investors find the stability of real estate returns appealing. The average annual rate of return on unleveraged real estate and on common stocks is widely recognized as being around 10%. When leverage is factored in, which is common with real estate, the totals returns are often well above that level.

Overcoming obstacles
There are several obstacles to deal with when investing IRA funds in real estate. Fortunately, there are solutions to address the unique characteristics of holding direct real estate investments in an IRA.

First, a trustee is required to hold title for your retirement plan and to keep certain records for the IRS. There are several providers of these services we can direct you to. Additionally there are prohibitions on “self-dealing”. For example, you cannot occupy space in a building your IRA plan owns, nor can you sell property you already own to your IRA. In most cases you will be required to engage an independent property manager to manage property owned by your IRA to comply with the prohibition on self-dealing.

Another obstacle can be the amount of funds it takes to purchase real estate. Only retirement plans that have accumulated fairly substantial resources will have adequate funds to pay all cash for properties. Because loans to IRAs must be “non-recourse” loans, many traditional lenders will not lend to an IRA directly, making the financing of IRA owned properties trickier. There are several solutions to this obstacle, including partnering with your own IRA, or partnering with others. In our next newsletter we will describe in detail how some of these techniques be applied.

How to learn more
If you are a candidate for investing IRA funds in real estate, give us a call. We have invested time and effort in understanding this under-utilized investment opportunity, and can share what we’ve learned, and direct you to other resources to help you set up a self-directed plan to allow you to invest IRA funds in real estate.

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