For many people, investing in real estate within a retirement portfolio is a great way to build up money toward retirement. Having real estate means you have the potential to generate rental income, which in turn provides you with passive income in your later years. However, not many people are familiar with how investing in real estate within a Self-Directed IRA works. To answer that question, we decided to take a look at two styles of real estate investing common in Self-Directed IRAs.
Investing in Real Estate Directly Through a Self-Directed IRA
As pointed out at a recent article at WTOP News, it’s possible to use a Self-Directed IRA to direct a custodian to make a direct investment in real estate on behalf of the Self-Directed IRA. This is known as the direct ownership route of real estate investing.
For many investors, putting money in real estate can seem like a risky prospect. However, with the added tax protections of a Self-Directed IRA, investors have even more incentive and cushion for enjoying the returns of real estate. However, it’s worth noting that an investor has to keep those returns within the account until reaching retirement age to avoid fees and penalties.
Overall, directly investing in real estate through a Self-Directed IRA can be the simplest way to go about it. However, it’s worth noting that you’ll work through a Self-Directed IRA custodian, directing them to make the purchase on behalf of the account. Once you understand how it works, you’ll realize that it’s not as complicated as it sounds; there are just a few extra steps involved and you’ll have to stick to the rules of retirement investing.
Investing in REITs Through a Self-Directed IRA
Another way of investing in real estate is to invest in real estate investment trusts. Anyone with a brokerage account probably knows that this is a way of investing in a “trust” of real estate property that acts a little bit like owning a piece of stock. The price of these trusts can go up and down, much like a stock. However, the property underlying the real estate investment trust is real estate, which gives you that exposure to the real estate investment class. And because it’s possible to use a brokerage account within a Self-Directed IRA, it can be easier to invest in real estate with a Self-Directed IRA than you might imagine. You don’t always need a huge down payment on standby to invest in real estate!
Understanding How a Self-Directed IRA Works
When you understand that a Self-Directed IRA isn’t as complicated as it sounds, you’ll realize that there are plenty of options for making a portfolio of your own design. In fact, you can pretty much explore your own portfolio designs as you want, with a few rare exceptions in terms of what you can and can’t invest in. An investor can’t put retirement money into art or collectibles, for example. However, an investor has plenty of freedom for exploring a variety of assets within a portfolio.
The key? Making sure that you understand the rules. Once you understand the rules and know what you can and can’t invest in, you’ll be that much closer to building a retirement portfolio on your own terms. That means enjoying the retirement benefits that come with these accounts.