Why Investing in Real Estate with a Self-Directed IRA Makes Sense
Real estate investing is a promising opportunity for wealth creation. In a way, an investor purchases an income stream by investing in a real estate property. When we club real estate investing with retirement planning, it offers a constant retirement income stream to the investor. In this post, we’re going to discuss the benefits of investing in real estate for retirement and how you can add real estate to your retirement portfolio.
Why Adding Real Estate to Your Retirement Portfolio is a Smart Move
- Consistent Cash Flow: One of the most important benefits of investing in real estate is its consistent rental income. As an investor looking for passive income during retirement, real estate offers multiple options for creating dependable income through physical real estate and mortgage note investments. In fact, you can achieve financial freedom by adding cash-flowing rental properties to your portfolio.
- Build Equity for future: Investors purchasing real estate with their retirement funds or other sources of financing can build equity over time. Equity can help grow your net worth, and you can even leverage it to add more rental properties to your portfolio. Additionally, it is critical to consider that property will always be worth something unlike traditional assets such as stocks.
- Portfolio Diversification: Real estate allows investors to mitigate or at least reduce the overall risk exposure of their retirement portfolio. Real estate will help you offset risks or volatility involved in other asset classes such as stocks or digital assets. Its value doesn’t swing like other market-based assets. Furthermore, real estate offers multiple investment options including residential/commercial real estate, mortgage notes, tax liens, or tax deeds, allowing you to diversify your retirement portfolio.
- Real Control over Retirement: By choosing a rental property with positive cash flow, you are essentially taking control over your retirement. You no longer rely on stock markets, fund managers, or the government to help you grow your portfolio. Additionally, you can choose different real estate assets to practice more control over your retirement account. It is entirely up to the retirement plan holder to find the best-value deals in the market and reap higher returns over the next several years.
- Hedge Against Inflation: The historical returns of real estate prove it to be a hedge against inflation, both in terms of property value and income. Adding real estate to your portfolio will ensure that your hard asset grows proportionally with inflation; thereby, maintaining your net worth. As a retirement investment, the net income from your investment property will always grow parallel to inflation.
- Capital Gains/Appreciation: If you purchase the right property, at the right location and price, the property will appreciate over time, and its mortgage financing will reduce proportionally. Your retirement fund will end up with more equity and hence, wealth. If you have the financial means to add commercial real estate in your portfolio, you could accelerate wealth accumulation, benefit from aggressive growth in rental incomes, and get longer leases for the property. The U.S. real estate industry has remained a popular choice for foreign investors seeking commercial real estate.
- Use Leverage to Grow Wealth: Unlike traditional asset classes such as stocks or mutual funds, real estate can be bought through financing of up to 90% of the property value and that too at very attractive interest rates. When you use secondary financing to improve the investment returns of an asset, it is called positive leverage, and real estate is the ideal candidate for this investing strategy.
How to invest in real estate with Self-Directed IRA or 401k
- Open self-directed account: Choose a self-directed retirement plan that suits your financial requirements. Both self-directed IRAs and self-directed Solo 401k plans allow alternative investments such as real estate, note investing, precious metals, tax liens, tax deeds, private lending, digital assets, and similar asset classes.
- Fund with Qualified Rollovers: There are two ways to fund your self-directed retirement account: annual contributions and qualified rollovers. In order to start investing, rollover funds from your existing retirement plans such as defined benefits plans, traditional IRAs, SEP IRA, Keogh plans, SIMPLE IRA, thrift saving plans, 401k, 403(b), and 457 plans.
- Find Suitable Real Estate Investment: It is the most crucial aspect of adding real estate to your retirement portfolio. Make sure that the property is in a good neighborhood, offers positive cash flow, and holds potential for appreciation.
- Seek Non-Recourse Financing: In some cases, you might require additional financing to fund the deal, and the IRS allows funding through non-recourse loans. Because non-recourse loans present higher risk to the lender (there is no personal guarantee, property is the only collateral for the loan) they do require larger down payment (typically 30-50%) and the interest rate might be higher than conventional loans.
- Title the Property: The investment property should be titled in the name of your retirement plan. Make sure to seek custodian consent before purchasing real estate with a self-directed IRA. Solo 401k plans do not require custodian consent.
- Pay for Maintenance From The Retirement Plan: It is critical to choose a property with positive cash flow because any expenses associated with the maintenance of the property must come from your retirement plan only. You are not allowed to use personal funds to pay for repairs or other associated costs.
- Enjoy tax-deferred or tax-free growth: In case of a self-directed IRA or Solo 401k plan, your rental income enjoys tax-deferred gains. You have to pay taxes only at the time of distribution. On the other hand with a Roth SD IRA or Roth Solo 401k plan, all income and gains generated by the property are is tax-free.
Investing in real estate for retirement offers many benefits including consistent rental income, capital appreciation, and long-term wealth creation. As an investor seeking low-risk asset classes, real estate makes perfect sense in your retirement portfolio.