The Benefits of Owning Real Estate in Your IRA
Real estate can be a fantastic investment and when you combine that with the power of either tax-deferred or tax-free growth in a self-directed IRA, there are even more benefits. I often hear clients ask the question “why is real estate such a popular investment for self-directed accounts?†Here are some of the reasons:
Security
There are many reasons to buy real estate with your IRA. There is added security in real estate that you don’t typically see in the stock market. Unlike a stock, a piece of real estate can never totally lose its value. It won’t simply disappear, and you can drive by and see it every day!
Sure, values rise and fall, but property values rise and fall at a snail’s pace in comparison to the stock market. You’ll have ample time to buy and sell if need be. You can buy your property as values are going up, and sell when they’re near the top.
Income
This brings to mind another reason why real estate is a great investment inside and IRA. Whether you buy a rental house, apartment building, parking lot, or mobile home, you can generate a nice stream of income on which to build your IRA wealth and to live on during your retirement years. You’ll have that nest egg stashed away for retirement. Holding real estate can be a very passive investment that provides returns much higher than could be obtained through other passive investments (ie. stock, bonds, mutual funds, etc.). With the ability to outsource property management, accounting, etc., investors can still make good returns while playing a very hands-off role in the investment.
Appreciation
Of course, another potential benefit of investing into real estate using your IRA is – appreciation. Just think, if you can find a rental property with an annual investment return of 6-8% from rental income (after expenses), appreciation is just a bonus (a potentially very large bonus)! Despite the recent real estate downturn when you look at real estate over the long haul, it’s accurate to assume some level of appreciation in your real estate holdings. Yes, there are market cycles where values rise or fall, but by and large, real estate is an asset class that appreciates. In addition to this, investors have the ability to research market dynamics and make fairly knowledgeable decisions based on a particular market before adding real estate to their portfolio. This is the idea that many of my clients employ every day. As an investor myself, I personally believe buying and holding real estate for the long term is one of the most effective wealth building strategies available to the general population.
Hedge Against Inflation
Real estate is also an incredible hedge against inflation. Inflation is a constant threat to our assets and many analysts believe increased inflation is coming (if not already here). Owning real estate is a great way to hedge against coming inflation. If prices rise, so will the cost of housing, hence owning an asset that rises with the tide is a great way to protect your wealth.
Rent Increases
Rent increases are another added benefit. Few would speculate that housing rents will decrease over time. Most analysts have already stated that rents are expected to increase over the coming years. Owning real estate not only allows you to lock up an asset that appreciates in value, it also provides you with the an opportunity to increase future cash flows by increasing rent thus increasing your ROI in future years. In most markets a 1-5% rent increase per year, which helps you keep up with inflation, is not unheard of.
Retirement income
For those investors that look at real estate investing as a very long term proposition, the potential to create retirement income using rental income is very real. I know many investors that have owned real estate for multiple decades in their IRAs as a retirement strategy and ended up very wealthy as a result. Over a 20-30 year period of time, investors can own numerous properties outright and create a net worth well into the millions. Additionally, the cash-flow that can be generated from properties can be a very nice supplement to social security.
Multiple Exit Strategies
One of the best characteristics of real estate investing is the plethora of strategies that can be employed when selling a property. Real estate is nice because it doesn’t have to be a permanent proposition. You can own a property for 1 year or 50 years, it’s completely up to you. You can buy it and fix it up, then sell it, rent it, or sell it on a rent to own basis for maximum profits, the choice is yours. When it comes time to sell a property, investors can use any number of different strategies to maximize profits all while doing it in in a tax-deferred or tax-free environment.
Written by Matthew A. Tillack