Investing in Real Estate with Your IRA

Real estate has a reputation for being a stable, long-term investment. What’s more, it can help you diversify a portfolio that may otherwise be heavily invested in stocks and bonds.

However, investing in real estate doesn’t necessarily mean taking out a mortgage. In fact, you may find all the cash you need in an unlikely location: your IRA.

There are several strategies that will allow you to invest in real estate using your IRA. These range from owning a property outright to buying shares in a company that owns real estate. Here are three options to get you started:

— Open a self-directed IRA.

— Invest in REITs.

— Use an online platform.

[ Read: A Guide to Your IRA. ]

Open a Self-Directed IRA

You can use your retirement funds to purchase a rental property or other real estate, but you’ll need to have a self-directed IRA to do so. These accounts offer more flexibility when it comes to investment assets.

“You can invest in anything you desire,” says Alina Trigub, head of investor relations at TF Management Group LLC in New York City. In addition to real estate, there is the opportunity to invest in other alternative assets such as gold, oil or even cryptocurrency.

Self-directed IRAs have the same tax benefits as regular IRAs, but you’ll need a special custodian to set one up. Once it is in place, money from the IRA can be used to purchase property, although Trigub cautions that the IRS has rules about who can rent the property and who can be paid for services related to it. For instance, you can’t buy a property and rent it to yourself.

Another way to invest in real estate with a self-directed IRA — and Trigub’s preferred method — is to use a real estate syndication. These are groups of investors who pool together money to purchase larger properties.

With a syndicate, there is no need to worry about finding tenants or maintaining a property. “Someone else does it,” Trigub says. You simply decide where you want to invest your money.

However, many syndicates are limited to accredited investors. To be considered an accredited investor, a person needs to have earned an annual income of at least $200,000 for individuals and $300,000 for couples during the past two years. Alternatively, those with a net worth of more than $1 million can be considered an accredited investor.

Regardless of which route you take — direct ownership or real estate syndication — it’s best to consult with a financial professional before setting up a self-directed IRA. Although they offer more flexibility than a regular IRA, they require more time and expertise to manage and may also come with more risk.

Invest in REITs

Using a self-directed IRA lets you buy and own specific properties with your retirement account, but it’s not for everyone. “Boy, it just looks really complicated,” says Peter Zabierek, CEO and portfolio manager at Sugi Capital Management in Philadelphia.

For an easier way to invest in real estate with an IRA, buy shares in REITs on the stock market. Standing for real estate investment trusts, REITs are companies that own or finance real estate.

A 1960 law, signed by President Dwight Eisenhower, opened the door for the creation of REITs. They were developed in response to concerns that only large institutions or very wealthy people could invest in commercial buildings. “REITs were created as a way for smaller investors to invest in the same properties,” Zabierek explains.

Zabierek, who has specialized in REITs for more than 20 years, says companies today go beyond traditional retail, office and industrial developments. They may also put money into emerging sectors such as data centers, cell towers, student housing and self-storage.

“It’s hard to go out with a group of friends and buy a data center,” Zabierek says. But a REIT gives investors exposure to a variety of real estate types, which can help diversify a portfolio and potentially boost gains.

An added benefit of REIT ownership within an IRA is that dividends stay in your retirement fund where they can grow tax-deferred or tax-free, depending on whether you have a traditional or Roth IRA. Average dividend yields for REITs have been around 3.5%, according to Zabierek.

Buying REIT shares with an IRA is as simple as selecting a fund and deciding how much money to invest. Purchases are made in the same way as if you were buying stocks or mutual funds. Talk to your financial advisor or custodian for specific information on how the process works for your IRA.

[ See: Best REITs to Buy for a Recession. ]

Use an Online Platform

There are also a number of online platforms and apps that make it possible to invest in real estate in innovative ways.

One example is Plotify, a company that specializes in single-family rental properties. It identifies rental properties with money-making potential, purchases them, rents them and then sells them to investors.

“There’s really no great way to invest in single-family rentals today,” says Anish Malhotra, co-founder and CEO of Plotify. One challenge for investors is finding homes that will produce positive cash flow, but Plotify believes it has a solution for that. “Our algorithms tell us where we should be investing,” Malhotra says.

With Plotify, a limited liability company is created for each property, and an investor buys the LLC. After the sale, Plotify continues to maintain and manage the property so the owner doesn’t have to worry about being an active landlord. Thanks to economies of scale, Malhotra says Plotify is able to secure property management and other services at a rate far below what individuals would pay themselves.

For those wishing to make a purchase with an IRA, Plotify has partnered with Alto, an administrator of self-directed IRAs. Those with an Alto IRA can use their funds to make purchases on the Plotify platform.

Crowdfunding is another option for online real estate purchases. Companies such as Fundrise, CrowdStreet and RealtyMogul allow people to become fractional owners in real estate developments. They are similar to real estate syndicates in that they pool together money from multiple people for a single property, but you don’t necessarily have to be an accredited investor to participate in crowdfunding.

You can use any self-directed IRA to invest in real estate crowdfunding deals. However, at least one company — Fundrise — offers the option to open an IRA directly on its platform.

Real estate can be a good way to diversify a portfolio and benefit from an asset that traditionally appreciates over time. By using your IRA to make these investments, you get tax benefits too. Talk to a financial advisor for more details and to see if this investment strategy is right for you.

More from U.S. News

A Guide to Your IRA

New 401(k) Contribution Limits for 2022

7 Best Real Estate Crowdfunding Platforms for Investing in 2021

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