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Diversify your retirement by adding Real Estate to your IRA

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By : Matthew Rasche    99 or more times read
A lot of people are struggling with how to invest for their retirement. I have had clients come to me and say that their retirement fund has been set back 10 years. They don’t want to work an extra 5 years to re-fund their retirement and are looking for a better way of doing things. I often explain to them how they can use a portion of their retirement funds to invest directly into real estate and bypass Wall Street by using a self directed IRA.

The first concern my clients have is, “I checked with the company that services my IRA and they won’t let me buy real estate. I can only hold stocks, bonds and mutual funds.” Most of your typical brokerages will not let you hold Real Estate. Real Estate is considered an “alternative asset” when it comes to retirement accounts. There is a special “Self Directed IRA” which is designed to hold alternative assets; primarily real estate. Not many brokerages offer these types of accounts because they can’t make commission off of anything which isn’t a typical Wall Street product. There are several very good brokerages which offer Self-Directed IRAs for real estate.

Keep in mind that opening a Self-Directed IRA does not mean you have to close your current IRA. You can transfer as much or as little as you want to your new account. For Example, if you have $500,000 in a traditional IRA at XYZ brokerage and you want to invest $150,000 in real estate, you can just leave the other $350,000 at XYZ brokerage and maintain your current assets. However, if you rolled your entire IRA over to a Self-Directed IRA you can still own all the traditional assets you’d like. A self directed IRA has all of the features of a traditional IRA with the added ability to hold alternative assets.

Everyone knows that the closer you get to retirement the less risk should be in your portfolio. Depending on your current needs, you may be looking for long term appreciation or immediate cash flow from a rental property. Working with a good Real Estate Broker and attorney you can clearly define your objective and find a property that meets your needs. Owning cash-flow property in an IRA offers a great stream of revenue which often times can create better cash flow than an annuity or stock dividends.

Just like a traditional IRA, all appreciation and cash flow are tax deferred. Always work closely with the company servicing your Self Directed IRA to ensure compliance during the transaction. If the transaction does not comply with the self Directed IRA requirements it is possible you will lose the tax deferral as well as incur an early tax liability. Due Diligence is the name of the game.

My clients also will say, “I’d love to invest in real estate through a Self Directed IRA but I don’t have enough money to buy an entire property.” This is another common concern of many of my clients. A great way to take advantage of Real Estate in a self directed IRA is through Fractional Ownership.

Fractional ownership is a type of situation where multiple investors pool together their funds to make one larger purchase. For Example:
Joe and 4 of his friends each invest $50,000 from their self directed IRAs to buy a $250,000 4-flat rental property. Now Joe and his friends each own a 20% interest in a cash flow property. By pooling together funds and buying properties for cash there is no dilution of returns.

Real Estate is a logical addition to many retirement portfolios for 4 key reasons.

  1. It is totally transparent
    Real Estate is a tangible asset and is not subject to the same volatility or vagary many traditional Wall Street products are

  2. It offers strong cash flow
    Many income properties are generating between an 8% and 10% annual cash return

  3. It can be acquired at bargain prices
    With many landlords needing to liquidate properties, today’s market offers great opportunity to acquire real estate at below-market prices

  4. It acts as a hedge against inflation
    With the fear of inflation looming over the economy, real estate has always acted as a hedge and performed well in times of high inflation

In today’s uncertain economic times, having a portion of your retirement invested in Real Estate will give you greater diversification and greater returns.
Matthew R. Rasche is Broker/Principal of Portfolio Real Estate Brokerage, Inc.

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