Real estate investment trusts, or REITs, have long been a popular alternative for investors, both in and out of a Real Estate IRA. The absence of double taxation that normally applies to C corporation dividends and the relatively high dividends that REITs generate compared to stocks have drawn many investors to them.
But REITs aren’t generally the most efficient way to generate cash flow from a hands-off rental property. In many cases, our clients are finding they can get much healthier returns using a concept called “turnkey real estate investing” with a Real Estate IRA.
Here’s how it works:
- A real estate company buys a property at a good discount and sells it to you, the Real Estate IRA The purchase price is generally low enough for both parties that rents in the area are more than enough to cover the mortgage payments and other costs of ownership.
- You, the Real Estate IRA owner, then hire a local property manager to run the property for you, usually in exchange for a percentage of the rent collected.
- In the turnkey concept, your direct involvement with running the property is minimal. The property manager takes care of everything, accounts for the money you put in in the form of reserves and maintenance allowances, and manages your property according to your wishes.
- You, or your Real Estate IRA, receive all the income the rental property generates. It’s taxable as ordinary income, unless you hold it within a Real Estate IRA or other retirement account, in which case it’s either tax deferred, or tax free if you use a Roth IRA or Roth 401(k) to hold the property.
- You also get the benefit of any capital appreciation when you sell. Capital appreciation that occurs within a traditional IRA is ultimately taxed as income (but not until you choose to take distributions, or until you begin taking RMDs). Capital appreciation that occurs in a real estate Roth IRA is not taxed (provided you have held the asset for at least five years). Capital appreciation that occurs in a turnkey real estate investment outside of a retirement account receives capital gains tax rates. However, if you do a lot of property flips, you may fall under special IRS rules for dealers. Speak with your tax expert for individualized tax advice.
- You may borrow money to purchase a turnkey investment property. If you plan to hold the property within a Real Estate IRA, you must borrow money on a non-recourse That is, the loan must be secured entirely by assets within the IRA.
- If your property has a mortgage and is in an IRA, a portion of the income and later capital gains attributable to that mortgage may be subject to a special tax called unrelated debt-financed income tax. Again, speak with your tax expert for individualized advice about how that tax may affect you.
Turnkey real estate investing allows you to buy cash flow properties without necessarily having to live nearby. Because the strategy is relatively hands-off for the investor, you can live in an area where it is difficult to find properties that rent more than the costs of ownership and generate a positive monthly cash flow. You can instead focus your Real Estate IRA portfolio in areas with a better return on assets for you while you enjoy living wherever you like.
With offices in Asheville and Charlotte, North Carolina, American IRA, LLC works with investors from all over the country who are successfully using turnkey real estate strategies within their own retirement accounts.
For more information, call us today at 866-7500-IRA (472) or visit us on the Web at www.americanira.com.
We look forword to working with you.