3 days ago
How Leveraging IRAs May Help Expand Your Real Estate Portfolio
Ryan Barone is cofounder and CEO of RentRedi, a property management software that simplifies the renting process for landlords and renters.
Traditional real estate financing has become increasingly challenging due to high interest rates and lending standards that often require larger down payments. For landlords who may already be fully leveraged or who want to avoid taking on more personal debt, these market conditions create a significant hurdle to expanding a real estate portfolio.
As a property investor and long-time renter, and through my interactions with customers and partners in the real estate space, I'm constantly learning about how investors can leverage alternative funding sources to grow their real estate portfolios and build long-term wealth. Here's what I've learned about using individual retirement accounts (IRAs) as a potential means to invest in real estate.
By tapping into existing retirement funds, investors can often sidestep traditional loan restrictions, avoid personal debt and unlock capital that would otherwise be tied up in the stock market. However, the rules around using retirement funds for real estate can be complex. Therefore, it's important to work with a tax or legal professional to make sure you're compliant and understand the risks.
If you want to directly invest in real estate, a self-directed IRA (SDIRA) is one option to discuss with your advisor. An SDIRA is a type of IRA that can give you more control over your investment choices, as you're able to invest beyond traditional stocks and bonds. The account is managed by a custodian who holds the assets on your behalf and helps make sure everything stays compliant. Using an SDIRA, you may be able to buy a variety of rental properties, from single-family homes and multi-family buildings to land and commercial properties, if they comply with IRS rules.
The IRA must cover maintenance and other ownership-related expenses, and any income from these investments must stay in your IRA. That income may then grow either tax-deferred (with a traditional IRA) or tax-free (with a Roth IRA).
However, there are strict rules you need to follow with an SDIRA. For example, the properties you buy cannot be for personal use, and you can't engage in property transactions with "disqualified persons," such as close family members or certain people related to you within an account. Additionally, all property expenses and income must go through the IRA account, not your personal finances, to keep everything separate.
You don't need a self-directed IRA to add real estate to your retirement strategy. Using traditional or Roth IRAs, you may be able to invest in real estate investment trusts (REITs), real estate mutual funds, exchange-traded funds or publicly traded real estate companies.
If you opt for an SDIRA, you may be able to partner with other investors, which can help you scale your portfolio faster. According to The Entrust Group, which specializes in SDIRAs, you may partner your IRA's funds with those from a business partner, another investor, etc., to acquire larger or more valuable properties that might otherwise be out of reach. This strategy can be useful if you're looking to invest in bigger multi-family properties that require more capital.
However, when partnering with others, it's crucial to have clear agreements in place regarding the ownership structure, responsibilities and how profits or losses will be distributed. Additionally, be sure to consult with legal and financial professionals to comply with IRS regulations.
While IRAs can be a valuable tool for real estate investing, you need to follow the rules carefully to avoid penalties. One important rule I brought up previously is to avoid doing business with family members or people you're closely connected to. If you break this rule, you could lose the tax benefits of your IRA.
It's also crucial that you manage your expenses properly. As mentioned above, property-related expenses must be paid directly from your IRA, and any income must go back into the IRA. Mixing personal funds with IRA funds can lead to penalties and threaten your IRA's tax-advantaged status.
Moreover, as Kiplinger noted, when you own real estate through your IRA, you can't claim the same tax breaks as landlords typically do, and it could complicate minimum distributions if your IRA requires them.
Real estate investing through IRAs is one option investors can consider if they have a long-term vision and understand the basics of property investing. Whether you're buying physical properties through an SDIRA or exploring more indirect real estate investment options, these retirement accounts can provide valuable tax advantages to help grow your wealth. With the right planning and expert guidance, using IRAs for real estate can help you diversify your portfolio and may help position you for a secure financial future.
However, keep in mind that investing in real estate through an IRA involves complex rules and tax implications. You should always consult with a qualified tax advisor or legal professional before making any decisions to ensure you're complying with all IRS regulations and avoiding costly penalties.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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