There are few ways to build wealth as efficient or even as exciting as real estate. But what is the best way to start investing in real estate? The answer may come in retirement preparation, such as an IRA or Solo 401(K). Many real estate investors refer to Self-Directed IRAs as a Real Estate IRA. Holding real estate within an IRA comes with several advantages—as well as responsibilities—that even seasoned real estate investors should want to learn about. Here are five reasons you might consider a Self-Directed Real Estate IRA as your next vehicle for investing in real estate assets:
Reason #1: Extra Protections via the Tax Code
The tax advantages that come with Self-Directed IRAs are obvious to anyone who has invested through a retirement account before. Long-term growth in a Self-Directed Real Estate IRA can minimize tax burdens over the years, which in turn helps investors save money. Profit collected from rental real estate via a property manager can then enter an account tax-free or tax-deferred.
But in the world of Self-Directed IRAs, it is also important to note these tax advantages will mean some additional regulatory work for your real estate investment. For example, the real estate held within a Self-Directed IRA will not be available for personal use by the account holder or any disqualified person to the account. As such, it should be regarded as a separate investment entity.
Reason #2: A Plethora of Options
Those who invest in real estate regularly are used to having unlimited options available to them. The temptation is to view a Self-Directed Real Estate IRA as a way to restrict these options.
Real Estate IRAs include plenty of options, including the ability to use leverage to make real estate purchases with non-recourse loans, provided by North American Savings Bank, www.iralending.com. These loans give a degree of separation between Self-Directed IRAs and the investor, which in turn helps protect the retirement nest egg. Options such as using a property manager are not only available but may be preferable.
Another option is the ability to use a property manager to handle day-to-day oversight and management of the property and possibly even the rare eviction process. Sure, you may make a punch list of repairs needed at the property, meet potential tenants, and even collect the rent check to drop off or mail to our office, but careful consideration should be made not to enter any activity that could result in sweat equity as this would be prohibited.
Reason #3: Moving Property Without Capital Gains Taxes
Selling property on your own will mean capital gains taxes. Conversely, you sell property within a Self-Directed Real Estate IRA, it is then protected from capital gains taxes. This reason alone is a great motivator for real estate investors; even if they are not excited about the non-personal use limitation. The tax advantages could far outweigh not being able to personally use the asset.
Reason #4: Diversification
By this time, you have probably heard about “diversification” so much the word has lost all meaning. The problem is even the “Experts” think of diversification as owning lots of different types of stock. But what if the stock market enters a bear market? Diversifying your interests across asset classes—such as using non-traditional assets like real estate—gives the protection to continue investing without paying attention to one portion of the stock market.
Reason #5: Financial Security
By utilizing the wealth protections available in Self-Directed IRAs, a real estate investor can compound these gains into something even more substantial for retirement. That means the goal of financial security is even more possible with a well-placed real estate investment within a Self-Directed IRA. That Self-Direction has the potential to unlock financial security, which means peace of mind. Adding all of these advantages up together means real estate can be one of the best ways to build a sizeable nest egg by the time retirement arrives.