There’s been much talk lately about the pros and cons of real estate purchased through your IRA. I suppose I’ll start off with the fact that my husband is a real estate professional who specializes in IRA real estate purchases. Why? Because real estate is an excellent investment to hold within an IRA.
Let me give you five reasons why.
1. Create Leverage
Your IRA can absolutely borrow money! National American Savings Bank (nasb.com) is one lender that does non-recourse loans to IRA holders. They usually require 30 percent to 40 percent down and want to see positive cash flow in any deal, but you can create leverage with an IRA. By the way, you could also borrow money from another IRA holder since lending money is also allowed by law.
2. Tax-Free Cash Flow
A successful real estate investment can provide monthly cash flow to help grow your retirement along with any appreciation earned in the property itself. Since the asset is held within a tax-free environment, there are no taxes to worry about. Any profit withdrawn from the IRA is income based on your tax rate upon withdrawal. And since you’re in retirement, your taxed at a lower tax rate based on the limited income you make. And if you own the asset in a Roth IRA, the monthly cash flow and capital gain are tax free.
Want to improve the value of your investment? Add a new roof. Put in carpet. Do landscaping. Add new fixtures. All of these improvements can increase monthly cash flow and ultimately improve the value of your asset. These costs do get paid out of your IRA, but name another investment class that you can improve with your own free will. If you own mutual funds, CDs, or stocks, you’re along for the ride and your return is completely independent of your effort. Not so with real estate.
4. Inexpensive Custodian Fees
Self-directed IRA custodians get paid based on the size of your account, usually forty basis points or less. So if you have a $100,000 account, your annual fee is in the $450 range. But that’s it. Other banks and brokerage houses don’t charge you a fee because they make their money from the limited investment products they offer. Own mutual funds? Their fees can include management fees, redemption fees, exchange fees, account fees, purchase fees, distribution fees and operating expenses to name a few. Usually these fees are twice as much as what a self-directed custodian will charge.
Real estate offers a great way to diversify your portfolio. How many people had all of their retirement portfolio in the stock market? Nearly 70 percent. Use real estate as a way to generate leverage, produce monthly cash-flow, and long-term appreciation. But also use it to balance your retirement portfolio, along with other asset classes, so retirement doesn’t get postponed due to a bear or down market.
We estimate that if you find ten people who advise against real estate in your retirement account you’ll probably find ten people that lose money when their clients shift assets to a self-directed account and out of their control.