Commercial Real Estate in an IRA

Commercial real estate investments often present stability that can offset the ups-and-downs of the stock market. The right property purchased at the right price can offer not only value in producing steady rental income returns, but also through appreciation and capital gain realized if/when the property is sold at a later date.

Stability in a retirement portfolio is essential and can be facilitated by diversifying the investments you choose. Commercial property brings a lot to the table in terms of diversity and is an allowable investment in self-directed IRAs. As an asset owned by a retirement account, all income derived from the property flows directly into that tax-sheltered account and avoids the typical taxation an individual incurs when personally financing an investment.

Many individuals who choose commercial property as investments in their IRAs do so to earn continual and steady income for retirement in terms of rent. Different types of these opportunities include retail and office space, apartments, strip malls, restaurants, grocery stores, industrial warehouses and storage units, and even the corner gas station with a food mart attached. Provided the property is managed efficiently, self-directed account owners can acquire a solid source of income to help them reach their retirement planning goals.

How you can invest your IRA into commercial real estate:

Indirect Investments

Indirect investments are for those individuals who want little or nothing to do with the property other than investing in it. These transactions typically involve the IRA (as opposed to an individual investor) using a fund like a real estate investment trust (REIT) to acquire the asset. The investor (i.e., the IRA owner) has no choice in what properties are acquired for this purpose. Buy-in costs can be minimal here as funds are pooled by many investors to purchase the property, which means assets can be quite large and lucrative. Investors in this realm are not required to bother with management and maintenance of the property, which is a caveat for many. Additionally, investors have the ability to sell their shares in the property should they decide they’ve earned enough (or not) from the investment.

Direct Investments

Direct investments are favored by IRA owners who want to actively participate in choosing and managing their own assets. While the direct approach does require more capital to acquire the asset, the IRA owner can choose his or her own property as well as be involved in the terms of the purchase, subsequent lease, and potential sale of the property. Due diligence is provided by the retirement plan owner, meaning they are responsible for fully vetting the asset to ensure its viability and to avoid fraud. Many investors want to personally research their potential assets, as they prefer more control in these investigations rather than trusting a fund manager, whom they may barely know. Here the IRA gains 100 percent of any income generated by the investment instead of sharing it with a large pool of other investors. Bear in mind that your IRA also has to pay any expenses incurred related to the investment—so keep enough capital in the account to successfully do that.

Partnering Your IRA Funds

When considering direct investments, understand that your IRA is able to partner funds with another person or entity in order to acquire larger, more attractive commercial property. In other words, you don’t have to use a fund like a REIT to do so. Your IRA can partner funds with another IRA, a friend, and even with your personal funds. Income and expenses are divvied up by the percentage of ownership of each party involved. Many commercial real estate investments are acquired in this manner.

Whether you choose to involve your IRA in acquiring indirect or direct commercial real estate investments, you can see the opportunities and methods of doing so are plentiful. As a self-directed retirement plan owner, you get to control your own investing funds and decisions. In other words, you can find what you know best—and invest.

If you have questions about this article or wish to learn more about self-directed real estate IRAs, please contact us.