Invest in multifamily real estate through a self-directed IRA. According to Kiplinger, “Stocks, bonds and mutual funds are the usual way most people invest their IRAs, but there are alternatives. For investors who would rather walk their own path, a self-directed route is one way to go.”
“Self-directed IRAs allow individuals to invest in non-traditional or alternative investments, such as debt instruments, gold and precious metals, businesses, and real estate.”
Real estate is REAL. A “real” asset is tangible, finite and has historically been a multigenerational builder of wealth. Real assets are traditionally a hedge against inflation. An IRA with real estate can be a key vehicle for growing one’s IRA account.
Are There Rules to Follow?
The first rule is to actually follow the rules. If you purchase real estate with an IRA improperly, you can disqualify the IRA, making all the funds taxable. Rules include no self-dealing (selling or buying to or from a related party), no hands-on improvements via “sweat equity,” and no personal benefits such as living in the property yourself or renting to a family member.
The real estate must be for investment purposes only, and normally both the invested money and dividends will flow through, and to, a custodian. When the property sells, the proceeds will also go directly back to the custodian or to the IRA checkbook account and can be reinvested once another opportunity presents itself.
There Are Substantial Benefits
Investing in multifamily real estate with a Self-Directed IRA can provide you with valuable tax advantages. Here are some of them:
- You can eliminate capital gains taxes.
- Within the IRA, you can eliminate income taxes.
- You can eliminate dividend taxes.
- With a Self-Directed Roth IRA, there will never be any taxes to pay on the profits from the investments.
- You can invest your Self-Directed IRAinto multifamily real estate without worrying about withdrawal tax penalties
The Primary Argument Against Using an IRA
- it cannot take advantage of the significant tax shelters provided by real estate, including depreciation and interest write-offs.
- You can’t use the depreciation benefits in an IRA
Why do we recommend investing in multifamily real estate?
With a self-directed IRA (SDIRA), you can invest in real estate ranging from a single or multi-unit residence to an apartment building, co-op, condo, commercial property, franchise or land.
Investing in multifamily real estate can be a powerful tool for growing wealth through rental income and the appreciation of the asset.
There are 4 Reasons to Invest in Multifamily Real Estate Through a Self Directed IRA
- Diversified Tenancy = Reduced Risk – Multifamily real estate properties can have tens or even hundreds of rental agreements with tenants turning over on a rolling basis. This arrangement provides downside-protection by minimizing vacancy exposure during economic downturns. A single-family home rental has an ever-present risk of 100% vacancy.
- Consistent Lease Turnover and Inflation Hedge – As leases roll over the operator can gradually ratchet up average rents in accordance with prevailing market rates and commensurate with the rate of inflation.
Another advantage of lease turnover is that vacancies can provide an opportunity to upgrade interiors of some units while covering costs with the cash flow from occupied units. - Multifamily Real Estate Exhibits Low Volatility –
Multifamily has exhibited less volatility over the past few decades than any other commercial real estate asset class. Multifamily has, also, historically yielded the best risk-adjusted return. markets for industrial, office, and retail more closely align with macro and micro-economic forces. - Market Trends Favor Multifamily Investing – Homeownership rates reached historic highs at 69.2% in 2003 before the financial crisis. Since then homeownership rates have dropped to 64.8% according to Statista.
We are becoming a renter nation. Renting is more affordable than buying a home in the nation’s 18 most populated counties and in 37 of 40 counties with a population of 1 million or more.
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