Top Tips for Using an IRA to Invest in Real Estate

Investing , finance , money

Individual retirement accounts (IRAs) are known for holding stocks, bonds, mutual funds, and other traded investment assets. But that’s not all they can do. It’s possible to diversify your retirement portfolio and use specific retirement accounts to invest in real estate and other alternative investments. 

Self-directed IRAs (SDIRAs) is a type of traditional or Roth IRA. It allows investors to save for retirement on a tax-advantaged basis, and it has the same contribution limits as other IRAs. The most significant difference is its ability to allow investors to invest in real estate, precious metals, promissory notes, private equity, tax lien certificates, and many more investment asset options. 

But just because investing in real estate is possible with an after-tax retirement account like an SDIRA, it doesn’t mean it’s the best investment for everyone. 

Why use an IRA to invest in real estate? 

The two primary reasons investors take on the additional risks of directing investments on their own through an SDIRA are the potential for higher returns and greater portfolio diversification.  

But there are other good reasons to consider investing in real estate using an after-tax retirement account. 

Increased potential for growth 

An SDIRA account gives the freedom to invest in many different types of assets to the individual investor. Investors can match investment assets, risk, and potential returns to their personal preferences. 

An SDIRA is ideal for investors looking for a custom investment solution that requires more attention and education than traditional professionally-directed retirement plans. 

Increased control over your financial future 

Individual investors may have a depth of knowledge in one particular real estate asset area. 

Using an SDIRA to fund a real estate investment allows the investor to use their education and experience in a particular area to increase their potential returns and grow their retirement savings.  

Protection against economic fluctuations and market volatility 

Investing in real estate using an SDIRA adds diversification to an investment portfolio. 

Alternative assets such as multifamily REITs can act as a buffer against market fluctuations.  Depending on the portfolio composition of the REIT, investments are further protected against risk. If one property in the portfolio assets doesn’t provide returns at the expected rate, other properties can help buffer any impact. 

A wide variety of investment asset options 

There are many different options when looking to make a real estate investment funded by an SDIRA.  

Some real estate options include: 

  • Multifamily workforce housing (apartments) 
  • Condominiums 
  • Building Bonds 
  • Commercial Paper 
  • Commercial Property 
  • Foreclosures 
  • Land (improved and unimproved 

There are also non-property related real estate assets that qualify for funding by an SDIRA, including: 

  • Joint Ventures 
  • Leases 
  • Limited Liability Companies (LLCs) 
  • Limited Partnerships 
  • Tangible Asset Deeds 
  • Tax Lien Certificates 
  • Trust Deeds 
  • Mortgage Notes 

Tax-advantaged savings growth  

Investors entering retirement may have to pay taxes on other traditional types of investments, but investing in real estate with an SDIRA allows for tax-deferred or tax-free growth that can increase significantly over time—making it especially attractive to add to a diversified retirement portfolio. 

Investment security 

SDIRA rules generally protect your retirement savings from debt collectors or bankruptcy.  Roth IRAs are protected by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 for up to $1 million from collection efforts. State laws may vary but generally offer some level of protection for your savings.  

SDIRA rules also allow investors to leave their savings to their heirs or non-spouse designated beneficiaries.  

Easy to open and fund an SDIRA 

There are three primary ways to open and fund an SDIRA: 

  1. Transfer from an existing account. It’s relatively easy to transfer from one type of account to the same kind of account with a different custodian. 
  2. Rollover.  A rollover occurs when an investor moves funds from one type of tax-qualified account into a different account type. There are additional rules to follow with rollovers, and it’s wise to contact a financial advisor before rolling over any existing account. 
  3. Open a new SDIRA account. Open an account and make regular, annual contributions to the account. 

SDIRAs can be a flexible and rewarding way to build wealth, but because of the flexibility, these types of investments offer, it’s wise for investors to do their homework and ask questions to make the smartest investment for their unique situation. 

About Upside Avenue

For decades, the ultra-wealthy and financial institutions have been putting their money to work in real estate—now with Upside Avenue, you can too. We provide access to a professionally managed, diversified portfolio of income-producing multifamily real estate for as little as $2,000. Learn more about the Upside Avenue Multifamily REIT with targeted returns of 10-15% IRR.