“A penny saved is a penny earned.” That old maxim about saving may be true, but when it comes to maximizing your retirement pennies, it always helps to pay attention to what kinds of returns you get for your investments. Although many investors rely on the stock and bond markets for their returns, there’s an alternative available to anyone who uses a Self-Directed IRA: real estate. But how does real estate provide a more attractive investment for people who are looking to retire? And how might ordinary investors use something like a Self-Directed Real Estate IRA to generate long-term value in a portfolio? Let’s look at the answers:
Defining the Self-Directed Real Estate IRA
It’s tempting for investors to hear a term like “Self-Directed Real Estate IRA” and assume that it refers to a special type of account. In actuality, this is a Self-Directed IRA that you establish for the purposes of purchasing real estate.
This might be something as simple as a Traditional IRA, for example. But because of the way you establish this account, you will be able to Self-Directed it and utilize resources like non-recourse loans to ensure that you can invest in real estate that generates long-term value within your portfolio.
How Investors Use Real Estate to Create Wealth
Many investors the world over recognize the wealth-creating value of real estate. A well-placed real estate investment, for example, can generate rental income that provides immediate returns on investment. This kind of passive income is not always available in the stock market through dividends.
Real estate also has another advantage: hedging against inflation. Real estate value will tend to go up—as measured in dollars—if the dollar weakens. This provides some extra security for someone who wants a balanced, diversified portfolio that does not rely solely on a domestic stock market.
Here are some other ways that real estate investors think about wealth creation:
- The unique opportunity to use leverage to buy real estate provides instant returns for someone who otherwise would not have access to that kind of cash flow. Within an IRA, that comes in the form of non-recourse loans. A non-recourse loan is a loan in which the bank will not come after your personal property in the event that you—or in this case, your IRA—defaults. That means that there’s more security for you on a personal basis, while you can still employ leverage to ensure that you make the investments in your IRA that help you build wealth.
- Historical returns. Historically, owning a piece of real estate is a highly stable investment. For example, owning a home in a fashionable neighborhood means that the home’s value will only accelerate the more demand there is for homes like that.
- Cash flow. Cash flow is one of the most important aspects of real estate. Owning real estate within a Roth IRA, for example, your property manager will collect rental income and this income will be tax-free, provided that the real estate itself has been paid for with Roth IRA funds.
- There is no one way to invest in real estate. You can sell a home, or you can rent it out. You can look at raw land or you can look at multi-family homes. There’s a wide array of options here, which gives real estate investors plenty of flexibility to find opportunities where other investors do not see them.