Real estate has a reputation for being a stable, long-term investment. Additionally, it can help you diversify a portfolio that might otherwise be heavily invested in stocks and bonds.
However, investing in real estate doesn’t necessarily mean taking out a mortgage. In fact, you can find all the money you need in one unlikely place: your IRA.
There are several strategies that will allow you to invest in real estate using your IRA. These range from owning real estate to buying shares in a company that owns real estate. Here are three options to get you started:
- Open a self-directed IRA.
- Invest in REITs.
- Use an online platform.
Open a self-directed IRA
You can use your retirement funds to buy rental property or other real estate, but you’ll need a self-directed IRA to do so. These accounts provide more flexibility with regard to investment assets.
âYou can invest in anything you want,â says Alina Trigub, head of investor relations at TF Management Group LLC in New York. In addition to real estate, there is the possibility of investing in other alternative assets such as gold, oil or even cryptocurrency.
Self-directed IRAs offer the same tax benefits as regular IRAs, but you’ll need a special custodian to create one. Once it’s in place, the IRA money can be used to buy a property, although Trigub cautions that the IRS has rules on who can rent the property and who can be paid for services that are linked to it. For example, you can’t buy a property and rent it out to yourself.
Another way to invest in real estate with a self-directed IRA – and Trigub’s preferred method – is through real estate syndication. These are groups of investors who pool money to buy larger properties.
With a union, there is no need to worry about finding tenants or maintaining a property. âSomeone else is doing it,â Trigub said. You just decide where you want to invest your money.
However, many unions are limited to qualified investors. To be considered an accredited investor, a person must have earned an annual income of at least $ 200,000 for individuals and $ 300,000 for couples in the past two years. Alternatively, those with a net worth of over $ 1 million may be considered an accredited investor.
Whichever route you take – direct ownership or real estate syndication – it’s best to consult with a financial professional before setting up a self-directed IRA. While they offer more flexibility than a regular IRA, managing them requires more time and expertise, and can also come with more risk.
Invest in REITs
Using a self-directed IRA allows you to buy and own specific properties with your retirement account, but it’s not for everyone. âBoy, that sounds really complicated,â says Peter Zabierek, CEO and portfolio manager at Sugi Capital Management in Philadelphia.
To make it easier to invest in real estate with an IRA, buy REIT stocks on the stock exchange. For real estate investment trusts, REITs are companies that own or finance real estate.
A 1960 law, signed by President Dwight Eisenhower, opened the door to the creation of REIT. They were developed in response to concerns that only large institutions or very wealthy people could invest in commercial buildings. âREITs were created to allow small investors to invest in the same properties,â Zabierek explains.
Zabierek, who has specialized in REITs for over 20 years, says businesses today are moving beyond traditional retail, office and industrial developments. They can also invest money in emerging industries such as data centers, cell towers, student housing, and self-storage.
âIt’s hard to go out with a group of friends and buy a data center,â says Zabierek. But a REIT gives investors exposure to a variety of types of real estate, which can help diversify a portfolio and potentially increase earnings.
An added benefit of owning a REIT within an IRA is that the dividends stay in your retirement fund where they can grow tax-free or tax-free, depending on whether you have a traditional IRA or Roth. According to Zabierek, the average dividend yields for REITs have been around 3.5%.
Buying REIT stocks with an IRA is as easy as selecting a fund and deciding how much money to invest. Purchases are made in the same way as if you were buying stocks or mutual funds. Speak to your financial advisor or custodian for specific information on how the process works for your IRA.
Use an online platform
There are also a number of online platforms and applications that provide innovative ways to invest in real estate.
One example is Plotify, a company specializing in single-family rental properties. It identifies rental properties with lucrative potential, buys them, rents them and then resells them to investors.
âThere really isn’t a good way to invest in renting single family homes today,â says Anish Malhotra, co-founder and CEO of Plotify. One of the challenges for investors is finding homes that will produce positive cash flow, but Plotify believes they have a solution for that. âOur algorithms tell us where to invest,â says Molhotra.
With Plotify, a limited liability company is created for each property and an investor purchases the LLC. After the sale, Plotify continues to maintain and manage the property so that the owner does not have to worry about being an active owner. Thanks to economies of scale, Molhotra says Plotify is able to guarantee property management and other services at a rate much lower than what individuals would pay for themselves.
For those looking to make a purchase with an IRA, Plotify has teamed up with Alto, a self-directed IRA administrator. Those with an Alto IRA can use their funds to make purchases on the Plotify platform.
Crowdfunding is another option for online real estate purchases. Companies such as Fundrise, CrowdStreet, and RealtyMogul allow people to become fractional owners of real estate developments. They are similar to real estate syndicates in that they pool the money of several people for a single property, but you don’t necessarily need to be an accredited investor to participate in crowdfunding.
You can use any self-directed IRA to invest in real estate crowdfunding transactions. However, at least one company – Fundrise – offers the option of opening an IRA directly on its platform.
Real estate can be a good way to diversify a portfolio and benefit from an asset that traditionally appreciates over time. By using your IRA to make these investments, you also get tax benefits. Speak to a financial advisor for more details and to see if this investment strategy is right for you.