Most individual Self-Directed Real Estate IRA investors focus residential properties – single-family homes, quads, duplexes, condos and apartment buildings. And it is easy to see why: These properties provide the security of rental income (tax-deferred or tax-free within Self-Directed Real Estate IRAs), and we all understand how these properties work.
But competition is keen among buyers who are constantly bidding against each other to acquire the most desirable properties. And managing residential properties can take a lot of work and effort, with relatively high transaction costs.
This is why many successful real estate investors prefer to concentrate on undeveloped land.
First, since there’s often no rental income component, or it is often fairly minor, it is a good match for investors who do not need a lot of immediate income. This is often perfect for the Self-Directed Real Estate IRA market, especially if you have a number of years left before reaching retirement age.
Meanwhile, raw undeveloped or minimally-developed land still allows you to do all the things you can do with residential properties in a Self-Directed Real Estate IRA:
o Assign contracts
o Assume mortgages
o Seller financing
Seller financing within Self-Directed Real Estate IRAs.
This last point is important: Many people assume that without a building or farmland, you cannot generate an income from raw land. But you can, if you finance the sale.
That is, you buy a plot of land for $1 million. You would like to sell it for $1.3 million, for a tidy 30 percent profit margin. But there are not too many cash buyers at that price. But if you advertise that you will finance, you open yourself up to a world of buyers who cannot be as picky as the cash buyers. So, you agree to take $250,000 and finance the rest at a reasonable interest rate, for as long as you and the buyer agree to. You can even work in a balloon payment after a certain number of years, to guarantee that you will have either a large cash infusion as the buyer repays the loan just before you enter retirement, or you will be able to foreclose on the property and sell it all over again.
Either way, you win.
Generating an income stream from land within Self-Directed Real Estate IRAs.
Alternatively, you may be able to realize some income from selling billboard/advertising space, mineral or timber rights, grazing rights, water and access rights, camping/RV space and/or fishing and hunting access.
Here are a few things you do not have to worry about with land investments in Self-Directed Real Estate IRAs:
o Pulling permits
o Dealing with contractors
o Liability for underinsured/uninsured subcontractor injuries
o Big outlays for remodeling/renovation/repair costs
o Plumbing and wiring issues
o Radon mitigation
o Foundation problems
o Dealing with flaky tenants
o Dodd-Frank restrictions on seller financing arrangements.