Purchasing real estate with a self-directed IRA is a good decision?

We all know the good-old IRA — Investment Retirement Account. Individuals employ this account to generally save and invest for their retirement. Traditionally, IRA can be used to invest in certain asset classes. IRA investments can be held in equity products or fixed income schemes. Usually, most investments are done to claim immense tax benefits.

Furthermore, both regular and Roth IRAs do not facilitate investing in real estate. It is 2021 and real estate is a common feature in most contemporary investment strategies. And to their help is the self-directed IRA.

What makes a self-directed IRA different from a traditional IRA?

In a traditional IRA, individuals need a custodian to manage their accounts. From investing to financial reporting, it is taken care of by the appointed custodian. However, the custodian invests in asset classes that it can sell like stocks, mutual funds, bonds, etc. Since most custodians do not own nor deal in real estate, they do not invest in commercial properties.

On the flip side, the individual decides where he/she wants to invest with a self-directed IRA. The custodian is a mere administrator here. They only oversee the transactions. The individual can also invest in the acquisition and disposition of commercial properties. He/she can make a fortune from the tax-free earnings. The individual does not own any of the invested commercial real estate, the IRA does. 

So, using SDIRA, an individual can leverage the boom of commercial real estate in Austin.

Let us now look in to the pros of self-directed IRA

  • Enriches and diversifies one’s investment portfolio

Having commercial real estate in one’s portfolio is always an advantage. Given the historic returns and consistent appreciation, real estate is a must to build a well-rounded portfolio. 

Knowledge of the local real estate market is a bonus for all. And if an informed person puts in enough hands-on effort, he/she can retire without any hassle.

Also, everyone has the option of consulting with commercial property management service providers. Their expertise, coupled with years of experience can help individuals make better decisions. 

Alongside consulting, they can employ these property management companies to manage his/her investments.

  • Tax benefits

All IRAs are loaded with lucrative tax benefits. And if individuals plan for a long-term investment horizon, they receive compounding returns. And for those investing in real estate, any income (rent, lease) is tax-free. These accumulate over time and provide the individual with sky-high revenue.

For the best returns, individuals must not cash in on the short-term earnings. They should ideally wait till they are 59.5 years and then withdraw their fortunes.

Also, one must consider seeking advice from an attorney who has experience in tenant representation. He/she will help the person in tax-sheltering their earnings. 

  • Control

Unlike traditional IRAs, here, the individual is in complete control of his/her investments. In residential houses or commercial real estate, the individual can choose where he/she wants to invest. 

With no restriction, self-directed IRAs allow people to get involved in multiple transactions. If a person wants, he/she can buy, sell, and flip properties regularly. And all these while the funds keep their tax-free status. 

However, this freedom and control come with responsibility. The individual needs to ensure the transactions abide by the necessary regulations. Non-compliance is met with the disqualification of tax benefits.

Cons of self-directed IRA

  • Administrative fees

The custodians act as an administrator to oversee the individual’s transactions. For this, a self-directed custodian charges administration fees. These fees can amount to nearly 300$ per year. Along with this, minor transaction charges are also levied. 

This is a major drawback of investing in real estate via SDIRA. Over time, these costs mount up to substantial amounts, eating into the returns. 

Similar investment platforms like REITs and real estate syndications have fewer maintenance costs.

  • Elaborate regulations

There are umpteen regulations to be followed while setting up and managing an SDIRA. The paperwork is complex and exhausting. If an individual is inexperienced, these regulations turn overwhelming for him/her. 

Also, the chances of SDIRA being disqualified from its tax-free status are high. Any scope of due diligence is in the individual’s hands. Likewise, if there is any non-compliance, taxes are levied and can render the IRA fruitless.

  • Lack of liquidity

Contact any commercial property management service, they shall vouch for this con. Real estate properties are an illiquid investment. Each transaction takes time and effort.

Couple this with the innumerable regulations of an SDIRA, to access these investments is a headache. Also, IRAs require one to take minimum distributions after reaching the age of 70.5 years. This adds to the hassle of offloading the properties. Selling portions of a real estate asset is an unimaginable struggle.

This is where passive investing in real estate helps. Platforms like REITs and syndications help in saving a lot of effort.

Conclusion:

As appealing as investing in real estate with an SDIRA seems, it is a tedious process. From grassroot research to due diligence, the individual needs to put in the time and effort. Keep the aforesaid details in mind while evaluating the risk-reward ratio of SDIRA.  Getting involved with a professional property management company like GW Partners is a great solution. Or try passive investing like ETFs or REITs etc.