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How Real Estate Syndications Benefit Self-Directed IRA Investors

How Real Estate Syndications Benefit Self-Directed IRA Investors

Although real estate syndications are not new, they are becoming a popular way for individuals to invest in real estate, including those with self-directed IRAs.

Real estate syndication—also called property syndication—is essentially a partnership between people who operate in two roles: the syndicator (or sponsor) and the investor(s). By partnering up, investors combine their resources, capital, and skills to purchase and manage a property or multiple properties that would not have been feasible to purchase on their own.

In short, the syndicate pools funds for greater buying power, enabling all parties, as a group, to access deal flow. You may hear syndication referred to as real estate crowdfunding because it is a way of making investments more accessible to a wider pool of interested parties. Syndicates may invest in office buildings, multifamily properties, warehouses, or a property fund.

Sponsors and investors

The sponsor is the individual responsible for finding, acquiring, and managing the real estate. Ideally, this person has experience in this area and can underwrite and conduct necessary due diligence on the property. He or she may choose not to put up any cash, and may also earn an acquisition fee or a property management fee if a third party is not contracted to handle that. Everyone else—including self-directed IRAs that participate—are the investors, who own a percentage of the real estate. It is passive ownership for them, providing all the benefits of owning real estate in their portfolios without having to do all the work.

Syndicate structures, syndicate profits

Syndicates are usually limited partnerships or limited liability companies; in these cases, the sponsor is the managing member or general partner. These are special purpose entities through which investors purchase the real estate. All members of the syndicate, including the sponsor, earn periodic returns on the initial investments.

A syndicate agreement is drawn up between the parties, with all arrangements agreed upon in advance (such as acquisition fees, returns on net income, ownership percentages, voting rights, the exit strategy, and how to divide profits after the property is sold). When it is sold, the syndicate is complete.

Using a self-directed IRA in real estate syndication

Rather than go all in on your own, you can have your self-directed IRA partner up with a syndicate. This lowers overall investments costs compared to buying real estate directly, since expenses are spread out over multiple investors. Plus, if your IRA is short on the necessary funds to directly invest in commercial property, participating in a syndicate is a great way to include this asset in your self-directed retirement portfolio.

As with all self-directed investments, you, as the investor, are expected to do your full due diligence—in this case, about the syndicate and the property or properties it plans to include in its portfolio. And, like any other asset, all income and expenses related to this investment flow through the self-directed retirement plan, which will earn returns on the investment until the syndicate is complete. Note that when using your self-directed IRA to invest in a syndication, you may NOT also act as a general partner; investments should be limited partnership only.

If you have questions about using syndications to include real estate investments in your retirement plan, or want to better understand how self-direction as a retirement strategy works, you may schedule a complimentary education session with Next Generation. You’ll gain insights into how these and other assets can be included to create a more diverse portfolio. Alternatively, you may contact the Next Generation team directly via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.

Investing in Self-Storage Through a Self-Directed IRA

Did you know you can include self-storage in your retirement portfolio? Real estate is the most popular asset class in self-directed IRAs—including commercial real estate—and self-storage is a growing segment that offers great potential for self-directed investors. In fact, it is a $39.5 billion industry in the U.S., utilized by approximately 10% of all U.S. households (with tremendous growth potential as Generation Z gets older and Generation X starts to downsize). As of this year, the estimated number of self-storage facilities is over 49,200.

The most common avenues for self-directed investments in this asset class are through promissory notes (lending) or private placements—direct investments in a private entity such as a self-storage REIT (real estate investment trust), C-corporation, LLC or fund. The self-directed IRA invests into those entities, with all income and expenses related to the asset flowing in and out of the retirement plan.

Strong asset class with strong ROI

Investing in self-storage through a self-directed IRA

Before taking the steps to invest in self-storage through a self-directed IRA, there are a few things to note. This must be a passive investment to meet IRS investing guidelines. You, as the self-directed IRA owner, cannot be an active partner, director, or managing member of the investing entity (REIT, fund, LLC)—this makes you a disqualified person and creates a prohibited transaction which can cause your investment to lose its tax-advantaged status. Also, beware of investing in a private fund or company that is owned 50% or more by disqualified individuals, as this would constitute a prohibited transaction. Disqualified persons for this purpose are the account owner, his/her spouse, lineal descendants or ascendants; a beneficiary of the IRA; or plan service providers and fiduciaries.

At Next Generation, we take steps to make investing in all types of alternative assets as easy as possible. Our Starter Kits contain all the paperwork needed to open and fund a new self-directed retirement plan. After you do your research and identify the entity into which you wish to invest through your IRA, we’ll provide you with a list of the documentation required to process and execute the private placement (or promissory note, if lending). You will need to provide our Next Generation team with a buy direction letter, private placement instruction letter and advisory notice, transaction payment method, and outgoing ACH or wire instructions.

We will review the transaction for compliance with IRS investing guidelines and complete the transaction; our custodial firm, Next Generation Trust Company, holds the assets for our clients.

Want to know more including self-storage in your self-directed IRA? Watch this on-demand webinar on the topic, or schedule a complimentary educational session with Next Generation. You can always contact us by phone at 888.857.8058 or by email to NewAccounts@NextGenerationTrust.com with your questions.

Investing in Private REITs with a Self-Directed IRA

A  real estate investment trust (REIT) is a company that invests in/owns and usually operates all types of income-producing commercial real estate: multi-family housing/apartment buildings, student housing, retirement and senior communities; warehouse and industrial properties; retail centers, hospitality, and office buildings.

In order to qualify as a (REIT), the company must file with the SEC and meet certain SEC requirements. Although most REITs are publicly traded on stock exchanges (known as public, traded or listed REITs), there are also private REITs; like their stock exchange-traded counterparts, private REITS must register with the SEC and are subject to the same IRS regulations. That includes the requirement to return 90 percent of their taxable income to shareholders annually.

One big difference in public vs. private REITs is that the latter are not as susceptible to demand-driven price volatility as public REITs, whose value fluctuates daily; private REITs are valuated annually.

Why invest in a REIT

Renters are on the rise—and so is rental property popularity

Multi-family housing represents a large portion of real estate investments, thanks to an increase in the renter population, which has been in growth mode for a few years and continues to rise. There are several reasons for this:

Investing in private REITs with a self-directed IRA

As you know, a self-directed IRA can include many different types of nontraditional investments, with real estate being the most popular class of alternative assets within these plans.

When your self-directed IRA invests in a private REIT, all income and expenses related to the asset flow in and out of the retirement plan. However, private REITS are not the only type of real estate investment you can include in a self-directed IRA. Other types of real estate investments might allow you to partner your self-directed IRA with another buyer, transact a “fix & flip” and take the profit on the sale of the property, or buy and hold the asset, so the IRA earns tax-advantaged rental income over time.

After you’ve researched a REIT or any other real estate investment you’d like to include in a self-directed retirement plan, it’s time to open and fund your account. At Next Generation we not only provide comprehensive transaction support, we also provide client education about investing in real estate and other alternative assets through a self-directed retirement plan. Of particular importance is understanding prohibited transactions and disqualified persons as defined by the IRS.

If you have questions regarding this strategy, don’t hesitate to contact Next Generation at NewAccounts@NextGenerationTrust.com or call 888.857.8058. Alternatively, you can schedule a complimentary educational session with one of our knowledgeable representatives.