When discussing individual retirement accounts (IRAs), the types of assets that make up your portfolio can typically include mutual funds, stocks, bonds, REITs, annuities and other exchange-traded investments (ETFs).
Did you know that with a “Self-Directed IRA,” you can invest directly in private equity real estate (PERE) funds to add to your portfolio? However, there are a few rules and stipulations to follow to avoid legal fallout from U.S. tax codes.
Continue reading to learn more about this relatively unknown topic.
If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
What is a Self-Directed IRA?
You’re not going to be able to find a self-directed IRA option within your typical brokerage accounts such as Fidelity, Schwab, Robinhood or TD Ameritrade. These accounts do not allow you to buy PERE funds through them.
To have this option available with your IRA, you’re going to need to find a specialized firm that offers self-directed IRA accounts.
Aside from PERE, these accounts typically let you invest in other alternative assets including:
- Cryptocurrencies
- Precious metals
- Tax lien certificates
- LLC certificates and more
Once open with the intent to invest, you can pick-and-choose between pretty much any private fund offering across the U.S. For example, you could focus on real estate funds that build growth or fixed-income funds for a potential avenue of continuous income. Typically, these funds oversee various asset classes including undeveloped land, single-family, multi-family, hospitality and commercial properties to name a few.
What Type of Self-Directed IRA Accounts are Eligible to Invest in Real Estate?
You can choose to use a self-directed traditional or Roth IRA account. It really depends on your tax preferences, as well as your plans for rolling over assets.
Some small business owners are potentially eligible to open a self-directed SEP-IRA, SIMPLE IRA or a 401k. The annual contribution limits on these accounts are typically higher than other Roth and traditional account types.
Types of Real Estate that can be Invested in Using a Self-Directed IRA
There are many different fund types you can choose from when investing in PERE. They may hold a single-asset type or contain multiple types. Here’s a quick list of property types that can make up these funds:
- Undeveloped land
- Single and multi-family residential
- Commercial
- Industrial
- Hospitality
- Healthcare
- Office
Follow These 4 Rules When Using a Self-Directed IRA to Invest in PERE
When investing in real estate, there are numerous laws and regulations you need to abide by when investing through a self-directed IRA.
They include:
- Any real estate owned in your IRA must only be used for investment purposes.
- Every expense made to improve the property must be paid through your IRA, you can’t use other capital to improve it.
- The income generated from your real estate investments needs to be paid back to your self-directed IRA account until the investment is paid off, you can’t pay yourself the dividends.
- You can’t use any money from your self-directed IRA to purchase property from yourself or a family member. Self-dealing is not allowed.
What are the Benefits of Buying Real Estate with a Self-Directed IRA
Like most IRAs, the income that goes into your self-directed IRA is not taxed until you take withdrawals. On the flip side, if it’s a Roth IRA, you’ll pay the tax on any income generated, but not have to worry about paying those taxes again upon withdrawal. Additionally, any gains made will grow tax-free.
Some other benefits of buying PERE with your IRA include:
- You can buy, sell, or flip your assets without losing the tax-deferred status of your self-directed IRA
- If you have multiple asset funds in one account, you can move funds from one project to another
- Real estate investing can potentially offer lower yields, better returns and greater diversification to your portfolio
What are the Risks of Buying Real Estate with a Self-Directed IRA
If you’re buying real estate with a self-directed IRA, you must ensure there’s enough cash flow to cover all potential improvement or repair costs on your property, without the need to add cash from other sources to it.
If you’re new to buying/maintaining compliance on your IRA, you may be more susceptible to making riskier decisions. Additionally, you will need to find an IRA manager who stays up-to-date on financial laws that may affect both your IRA and your investment(s).
Some other risks to buying real estate with a self-directed IRA may or may not include:
- If you lack diversification in your IRA, you may not have enough cash to own/maintain properties
- Liquidity is another risk: if you need access to money fast, the funds you have in your IRA can be hard to access. Obtaining any needed distributions can be a time-consuming process
- If you don’t follow government guidelines and laws, your IRA could be at risk to be disqualified, which could result in an immediate taxable event
- The real estate you own in your IRA may not be eligible for some of the tax breaks most investors receive if the property operators are at a loss
- You can’t claim depreciation benefits on IRA-owned real estate
- You can’t use IRA funds for personal use or use for your family
When it comes to buying real estate with your IRA, there are many benefits and risks to think about. It’s best to consult with a professional if you’re considering using a self-directed IRA to invest in PERE funds.
About Caliber
As the Wealth Development Company, we are a leading U.S. sponsor with approximately $500 million in assets under development and management. These investments are comprised of alternative investments, which include private funds and syndications, externally managed real estate investment trusts (REITs) as well as public funds. We conduct substantially all business through our Sponsor, CaliberCos Inc., a vertically integrated platform that is strengthened by more than 70 professionals with decades of institutional experience in commercial real estate, capital markets, alternative investments, and mergers and acquisitions.
We allocate our alternative investment strategies and align them with investors’ investment objectives, risk profiles and liquidity preferences to offer an optimal balance of risk-adjusted returns and attractive investment performance. It is because of this thoughtful, intentional approach, and our unwavering pursuit of performance, that we have been deemed The Wealth Development Company.
We strive to build wealth for investors by offering a diverse host of investment solutions that fit our investors’ needs. With a primary focus on key middle-market growth areas, such as Arizona, Colorado, Nevada, Texas, Utah and Alaska, we evaluate other U.S. markets that possess the same attractive demographics and macroeconomic trends as our targeted markets, such as highly skilled labor, emerging population and job growth. In addition, we utilize our institutional full-service operating platform to generate operating efficiencies while enhancing the value of our investments through dedicated asset management strategies.
We create value through a combination of internal and external growth channels. Bringing together the benefits of real estate, deep asset-class, and capital markets expertise across public and private investments. We seed, develop, and manage a broad range of liquid and illiquid alternative strategies for a diverse group of investors who comprise approximately a $4 trillion alternative investment market, which includes high net worth, accredited and qualified investors, as well as family offices and smaller institutions. This strategy allows us to opportunistically compete in an evolving middle-market arena for alternative investments that range between $5 million and $50 million.
Click here to see Caliber’s current property portfolio.
If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.