Investing in Commercial Property in Your Real Estate IRA
The Real Estate IRA is a tremendously flexible investment vehicle. You aren’t limited to the usual menu of funds, stocks and bonds that you find in most peoples’ retirement accounts.
Instead, you can purchase nearly any asset class you can imagine with just a few exceptions. Among the most popular of the unconventional IRA holdings is direct ownership of real estate. You can own any kind of real estate, of course, but one type of real estate seems to be producing very good returns of late: Commercial property.
According to a recent release from commercial real estate marketplace Auction.com, the total volume of commercial real estate changing hands last quarter reached an all time high of $124.3 billion – up a whopping 47.4 percent from the year-ago period. The market is hopping, with substantial liquidity in some markets, depending on where you look.
An allocation to commercial real estate may be a terrific thing for your Real Estate IRA. You could leverage your IRA to get involved in the following kinds of properties:
- Industrial buildings
- Retail space
- Office buildings
- ‘Mixed-use’ properties
Investors are attracted to commercial properties for a variety of reasons:
Capitalization Rates. Commercial properties have higher cap rates, on average, than those typically available in residential property – though vacancy rates can be much higher, too, if you buy a struggling property.
Triple Net Leases. Under these leases – standard practice in the commercial property world, most expenses are taken care of by your tenants – right down to real estate taxes. Tenants pay for net building insurance, net common area maintenance costs and net taxes (the three ‘nets!) A triple net lease would be at a lower rent rate than a standard lease, but the expenses are lower, too – and so are the headaches for the property owner.
Better protection for the landlord. In many areas, it is very difficult to evict a tenant who doesn’t pay rent. The process can drag on for weeks or months. Commercial tenants have fewer such protections. If a tenant breaks the lease or doesn’t make a lease payment, you can evict much faster than you can evict a tenant in a residential property.
Multi-year leases. Where landlords of residential properties typically lease for a year at a time, multi-year leases are much more common in commercial property. In fact, businesses often jump at the chance to sign a multi-year lease on a good property, since they plan to invest a lot in that location themselves. A multi-year lease can help you lock in income on the property for a longer time.
Before you get involved, here are some things to bear in mind if you are considering investing in commercial real estate within your IRA:
- You aren’t limited to investing in an IRA. If you have sufficient balances in your other accounts, you can use a SEP, SIMPLE or Solo 401(k) balance. You can also elect a Roth IRA or Roth 401(k) for potential tax-free income and growth.
- Commercial property requires different inspection skills than residential property. You could be an excellent residential real estate inspector but not know much about what to look for in a structure designed for auto repair, for example.
- Some industries carry substantial environmental or legislative risk. For example, the Environmental Protection Agency could come out with a new regulation tomorrow that could force owners of gas stations to pull out their existing tanks and replace them with new ones. Be very mindful of these industry-specific risks – and keep close tabs with state and federal agencies responsible for regulating these types of properties.
American IRA works with thousands of successful Real Estate IRA investors. Getting started is very easy. Call us today at 866-7500-IRA(472) for more details. Or visit us online at www.americanira.com.