Self-Directed Real Estate IRA investing can be one of the best paths to long-term wealth, especially for retirement. That’s why so many people turn to a Self-Directed IRA to hold real estate investments. Not only does real estate generate that monthly cash flow that helps you prepare for retirement, but real estate can add to your net worth in a hurry.
But what don’t they tell you about real estate investing? Here are a few tips:
Real Estate is Not Guaranteed to Go Up
This fact sounds intuitive, but you would be surprised at how often people trot out the idea that real estate has only one place to go: up. But individual real estate investments can go all over the place. And the idea that “they are not making any new land” may be true, but it does not mean that prices cannot go down.
Sometimes, these are due to economic factors out of your control. For instance, the infamous 2008 real estate crash saw prices dip 29% at their lowest. Of course, those who held faith in real estate would have eventually recouped these prices—but it still required a lot of patience and the financial freedom to withstand a longer amount of time paying property taxes and other expenses.
The good news is you can tip the real estate price balance in your favor by being careful to make the right investments at the right times.
You are Buying More than the Purchase Price
When you are running the numbers on a real estate purchase, it’s important to leave about a 2-5% cushion in advance. This accounts for closing costs and the associated fees that come with real estate investing—and it’s not something you will hear about until you take on a real investment yourself.
Sure, homeowners might tell you to expect additional costs. But they often do not tell you the numbers you might expect. And for a Self-Directed Real Estate IRA investor, understanding your “all-in” costs at the beginning is crucial to calculating whether or not you are going to turn a profit or generate an appropriate amount of cash flow out of this property.
Retirement Accounts are Not a Shortcut for Owning Homes; They are for Investing
Before you go all-in on the idea that you can use a Self-Directed Real Estate IRA to own your home, remember that the IRS is very clear on what these retirement accounts are for investments. The U.S. government makes these retirement accounts available so long as they remain separate from your personal finances. That’s the case with real estate as well.
That means you should approach real estate purchases from a pure investing standpoint as early in the process as possible. Dismiss any idea of having your relatives live in these properties, as that’s not allowed within an IRA. Instead, consider each property from the standpoint of having it set up as a traditional investing perspective, using a property manager to serve as the go-between.
You Can Invest with Self-Directed IRA Money
Using a Self-Directed IRA should not be limited to the idea that you can only buy stocks and bonds. The U.S. government allows for a lot more than that. All that’s required is that you set up an IRA for self-direction. That usually means going to a Self-Directed IRA administration firm like American IRA and setting it up, and then properly funding it using the available methods.