There are advantages to using your Self-Directed IRA to purchase commercial real estate. First and foremost is tax-deferred growth. If you buy property outside your IRA and later sell it for a profit, those gains would be subject to federal, and perhaps state, income tax. If purchased through your Self-Directed IRA, however, the appreciation is typically tax-deferred.
Another plus is being able to add an alternative investment to your retirement portfolio to give it greater diversification. Commercial property within your Self-Directed IRA is a hard asset that you can see and understand more thoroughly than many of your financial assets, and it can be a way to add a stream of income to your IRA when it’s done correctly.
Here are some considerations to get you started:
Minimize risk by doing the research
Commercial property can be a complicated investment. So, it’s essential you perform due diligence and learn as much as you can about the property you are considering. Make sure you understand the costs that are involved, have checked out the location, and have inspected the park itself for potential big-ticket repairs.
Set up a team of professionals to direct you
There are always risks involved with any type of investment. If you aren’t careful or experienced, you run the risk of losing money. Before you buy a commercial property with your Self-Directed IRA, find a real estate agent who specializes in commercial properties. The agent should be able to recommend a reputable lender, title company, and even an attorney who is experienced in commercial properties. If possible, also seek the advice of a property manager. By surrounding yourself with professionals, you increase your chances for success substantially.
Become familiar with the rules
Even though you might have a team of professionals supporting you, you should be aware of the rules that govern real estate investments using your Self-Directed IRA.
- Neither you nor any disqualified person is allowed to use the property
- Your Self-Directed IRA is the owner of the property, so any legal documents must be vested in the name of your IRA.
- You may not purchase the property from yourself or any disqualified person
- You may not manage, repair, or service the property yourself
- All investments you make with your Self-Directed IRA must be for the benefit of the IRA
- Neither you nor any disqualified person is allowed to receive current benefit from the account
Make sure your Self-Directed IRA can afford the property
Traditional investments like stocks, bonds, and mutual funds usually do not involve ongoing costs, while real estate, including commercial properties, almost always do. That’s why it’s crucial that you keep about 10 percent of the value of the property for expenses such as repairs, taxes, and emergencies.
Custodian or checkbook control?
Most banks and financial institutions do not allow their retirement clients to buy alternative assets such as real estate with their IRA. Fortunately, there are Self-Directed IRA custodians throughout the country that assist their clients in making these type of investments—commercial real estate, for instance—using their retirement funds.
When you buy real estate using your Self-Directed IRA, you typically have two options:
- A custodian controlled Self-Directed IRA
- A checkbook control Self-Directed IRA
With the former, the IRA account holder directs the IRA custodian to invest the retirement funds into traditional and alternative asset investments that could include real estate. This option is generally used when there are going to be fewer transactions, as with an investment fund or raw land.
Checkbook control comes from establishing a limited liability company (LLC) that is owned by the IRA and managed by the account holder. Using the LLC allows the IRA holder to act quickly whenever an opportunity presents itself, and it’s favored in cases where there are frequent transactions, such as with rental properties and fixer-uppers.
Are you interested in learning more about using a Self-Directed IRA to buy a commercial property?