Real estate investment trusts, or REITs, have been a staple of retirement account investing for many years. These securities have special tax advantages that are designed to maximize income to the shareholder, and have the advantage of being pass-through entities: There’s no requirement for the REIT to pay a 35 percent income tax to the IRS on all net profits before paying dividends to investors. And they are popular investments both in and out of a Real Estate IRA.
But Real Estate IRA investors with a big exposure to retail-space REITs – real estate investment trust companies that focus on building retail shopping malls, strip malls and similar developments – may be looking to pull back. The reason: Amazon.com and other online retailers and a changing consumer are murdering traditional retailers, and leading to a massive retail space glut in many markets. U.S. retail sales fell 0.2 percent in June – the second consecutive decline while long disfavored sectors like manufacturing and mining are showing renewed signs of life.
Retail spending is up only 2.8 percent over the last 12 months. Sales at department stores fell 0.7 percent. But that’s only part of the picture: Brick and mortar retailers are being forced to offer major price concessions to stay competitive with the online retailers. So overall profits are down far more than the raw spending number would suggest.
This creates a giant headwind in front of retail REIT returns nationwide – and that’s not going to go away anytime soon. The Amazon.com phenomenon is just beginning to bite, and the general economy is long overdue for a correction, on top of that. That creates a difficult environment for retail REITs and REIT index funds that include retail REITs as a significant component. As you know, indexers have to take the bad with the good: Retail REITs currently comprise about 19 percent of the MSCI REIT Index. If retail REITS take a dive, that’s a big enough exposure to take the fun out of REIT index investing,
A better solution: Self-directed Real Estate IRA investing. This strategy effectively matches the tax advantages of REITs in taxable accounts (rent payments you receive in a Real Estate IRA or Roth IRA are tax-deferred or tax-free, respectively). You can still maintain your asset allocation to real estate, but self-direction allows you to focus your investment on (hopefully) winners. You can stick to areas that are still experiencing economic expansion, even including retail. You can sidestep the overplayed shopping malls who are still trying to figure out how to survive without Sears available to be an anchor store anymore. And you can ‘power down’ to individual buildings, strip malls and houses that have much better prospects than the retail real estate investment space as a whole.
By opening up a self-directed IRA account with American IRA, it’s very easy to begin to move assets from sluggish or underperforming REITs into more promising investments in individual properties. You will still likely benefit from the diversification aspect against other asset classes like stocks and bonds, though naturally you take on more specific risk with the individual property because your investment becomes much more focused. So due diligence is key with every real estate investment you make in a self-directed IRA.
American IRA founder and CEO Jim Hitt has been personally engaging in self-directed Real Estate IRA investing since the early 80s. A family-owned and operated business, American IRA provides expert third-party administrative services to enable individual investors to invest retirement funds directly in promising individual real estate investments and other alternative asset classes.
Getting started is very easy: Open an account with American IRA, LLC, fund it with new contributions and/or by rolling over funds from another conventional IRA or workplace retirement plan, and direct your account from there.
For more information on how to get started, call us today at 866-7500-IRA(472). Or visit www.americanira.com, where you can read our extensive library of educational articles, brochures, blog posts and e-books.
We look forward to working with you.