The REIT vs. the Real Estate IRA

If you’ve considered a Real Estate IRA and other real estate investment vehicles, you’ve probably heard of a REIT: a Real Estate Investment Trust. But what are REITs, and do they really have advantages over a Real Estate IRA? Let’s take a look:

Defining the Real Estate IRA

First, a Real Estate IRA is a Self-Directed IRA wherein you invest in direct ownership of real estate. It’s that simple. You can invest in a number of different types of real estate within an IRA, including townhouses, raw land, single family homes, duplexes, apartment buildings, and many types of commercial property. This allows for a great amount of freedom and flexibility for real estate investing, and allows retirement investors to own tangible, income-generating assets as part of their retirement portfolio.

Defining the REIT

Investopedia defines the Real Estate Investment Trust as “a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock.” You might think of it as a “stock for real estate.” It’s an interesting way for people to invest in real estate the same way that they might invest in stocks…but when it comes to full ownership of tangible real estate assets, you have more direct control over the asset than when you have a 3rd party REIT involved. Many times the ownership of tangible real estate out performs a REIT.

Benefits of Investing in a Real Estate IRA

If you want to include real estate in your investments, then a Real Estate IRA offers you a number of options and protections. First, it allows you to leverage real estate (the secret to increasing yields) using a non-recourse loan, in which a lender can only come after the full value of the property in question should you default on the loan. This adds a layer of protection for your overall net assets even in the case of default. Even for investors who don’t have to worry about default, this is often seen as a great “peace of mind” option.

There is also a tremendous amount of freedom in investing with a Real Estate IRA, including the aforementioned ability to invest in a whole range of different real estate types. For many people, this is a great way to diversify their assets across a broader range of classes.

If you’re more of a “buy and hold” investor, then a Real Estate IRA is more in your wheelhouse, as REITs are known for their higher degree of liquidity. If you want to generate a long-term income and focus on building wealth over the long-term for retirement, a Real Estate IRA might be just what you need.

Benefits of REITs

That isn’t to say that REITs are without their advantages. They’re highly liquid and typically offer high dividend yields. What’s more, they offer investors a way to diversify out of stock equities and give them a broad range of investments in their portfolio.

Think of REITs as mutual funds for real estate. They come with diversification and this can be important for anyone who wants to diversify their portfolio. But you won’t own 100% of a tangible real estate asset by owning part of a REIT, since your shares are only part of the trust. A solid Real Estate IRA investment has potential to yield a truly life-changing retirement income.

What next?

REITs and Self-Directed IRAs really aren’t in the same wheelhouse even though they’re both in the world of real estate investment. It’s a bit like comparing owning a stock to owning a private company. That’s why investors should consider all options when they formulate a retirement strategy. If you’re interested in learning more about a Real Estate IRA and what it can do for you, contact us at 828-257-4949.

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