Self-Directed Retirement Investments and Real Estate – A One-Two Punch for Your Future
Real estate maintains its value long term—in spite of short-term market fluctuations—because it’s finite. As a result, property becomes a valuable investment and when it comes to your retirement portfolio. When done right, it can really pack a punch.
According to Bankrate, 28 percent of investors say real estate is the number one place to invest money they won’t need for the next 10 years. Cash was number two with stocks following in third.
There are several reasons why real estate is attractive to savvy investors:
- Real estate as an investment is an income-producing asset, with trends that do not directly correlate to other asset classes. In other words, real estate markets don’t usually move in sync with stock markets; they perform differently than fixed-income investments when rates increase.
- Real estate provides a hedge against inflation; an investment property owner can raise rental rates as inflation pushes up the prices of goods and services.
- Including real estate in an investment portfolio provides diversification in terms of assets (moving away from stocks and bonds) which helps spread your risk exposure because it is less susceptible to market volatility.
- For self-directed investors, real estate provides an income stream that can help fund one’s retirement.
That said, there are some caveats to keep in mind when including real estate in a self-directed IRA:
Do your homework and understand the property your IRA is buying.
There is such thing as investing in the wrong property. As with any self-directed investment, it is crucial that you understand the particular property’s potential ROI and that you’ve conducted your due diligence regarding the investment. Some questions to ask yourself:
- How much can you make per square foot in rent? How much net income will the property generate?
- What types of repairs and maintenance will the property need (immediately and over time)?
- Is it located in a desirable vacation spot or residential rental area?
- If it is commercial property, is the building well-tenanted or will it be an uphill climb to get good, long-range tenants?
- What are the taxes on the land or building?
- Will a property manager be hired? If so, what is that cost?
- What is the cost of an empty unit or home?
Fund your retirement plan adequately to make the investment.
Remember that with self-directed retirement plans, all income and expenses related to the asset must flow through the retirement account. Will the retirement plan buy the property outright or will there be a mortgage? Are there funds to handle upkeep or upgrades? Can the plan cover the taxes if it is not producing adequate income? You’ll want to make sure you’ve worked out contingencies that may affect the property’s income-producing allure.
Beware of making a prohibited transaction or dealing with disqualified persons.
These can put your investment in jeopardy and cause it to lose its tax-advantaged status.
Read more about including real estate in your retirement plan here.
Our website offers additional insights and tips about real estate as a self-directed investment.
Open a self-directed IRA at Next Generation Trust Company. Our support team and online resources make it easy to open a self-directed retirement plan and get your started making nontraditional investments to build a more diverse retirement portfolio. We provide full transaction support and account administration for your self-directed investments—including education and guidance—and serve as custodian for the assets. Contact Next Generation’s professionals for answers to your questions at Info@NextGenerationTrust.com or 1-888-857-8058.