You’ve probably heard by now about the concept of holding real estate within your IRA, Roth IRA, solo 401(k), SEP or other tax-advantaged retirement account. That concept has actually been around for years, and it’s been a successful strategy for thousands of investors.
So successful, in fact, that some entrepreneurs are rolling out a comparatively recent concept: “turn-key” real estate investing.
Here’s how it works: Your IRA or other retirement account would still acquire direct ownership of real estate, just as in a conventional real estate IRA. You would still realize the benefits of exposure to real estate as a distinct asset class, within your IRA, and the tremendous potential benefits of tax deferral of rental and capital gains income.
The difference: With a turn-key program, someone else is doing all the running around.
Essentially, everything is done for you. Your IRA essentially hires and provides capital to a manager, who handles all the day-to-day aspects of property investing. The management company will handle the search for investable properties, fixing and flipping, tenant selection, rental collections, maintenance, management and upkeep, and everything else you can think of. Your role in a turn-key real estate arrangement is more or less as a passive investor – except you would have much greater input into the decision-making process than if you simply owned shares in a REIT or fund. These operations operate on a much smaller scale. You may have direct contact with the managers and rehab team, for example.
This can be a very good arrangement for those who are otherwise diversified, who believe in the long-term benefits of real estate and who want a concentrated position in just a few properties at any given time, where a REIT or REIT fund or ETF may be too broad a play.
It can also be good for experienced real estate investors who feel their own communities may be overvalued. You can select a manager who works in an are that you believe is undervalued and may have more upside potential.
For example: If you live in Manhattan, you can hire a turn-key manager who lives and works in Witchita – a vastly different market than your local area, with a very different set of economic correlations.
What to be aware of
Obviously, this concept is only going to be as good as the management company you hire to handle your investment for you. For this reason, it’s likely that returns between these companies are going to be highly variable and therefore risky. Management companies are likely to beat or fail to match the broad real estate market – and by a wide margin. Some questions to ask before you commit:
- What is the background and expertise of the management team? Do they have a track record of success in both up and down markets? Have they been in operation as professional investors for at least an entire market cycle?
- Are they predominantly rental property-focused, which generally means focused on generating an income stream for you? Or are they fix-and-flippers, which is a strategy more likely to generate uneven capital gains? Does their approach match your individual needs?
- What is the fee structure? Is it reasonable, given the expected returns in the sector? (remember that if they use leverage to boost returns, they also boost interest costs and risk at the same time. Also, remember that income or profits attributable to leverage may be subject to a special tax on unrelated debt-financed income.)
- If this is an income-oriented investment, how does it compare with other available income plays, such as oil and gas pipelines, annuities, utilities, dividend stocks, and other
In our view, the turn-key model can be very successful, but results can vary widely based on individual circumstances.
Want to learn more?
If you’re reading this prior to April 9th, 2014, sign up for an exclusive webinar, sponsored by American IRA, LLC, focusing specifically on the finer points of turn-key real estate investing. We’re pleased to be bringing in Dan Doran, longtime expert on the topic and veteran investor in the challenging South Florida area for over 20 years. In addition to his own real estate investing activities, Dan’s been a sought-after speaker, trainer and mentor to real estate investors for over ten years. The seminar will cover the 12 critical questions you need to ask in doing your due diligence before committing funds to a turn-key real estate manager.