Buying Commercial Real Estate with Your IRA

Your Individual Retirement Account (IRA) can be used for more than purchasing stocks and bonds.    Section 408 of the IRS Code allows for individuals to purchase investment real estate with funds held in your traditional IRA, Roth IRA or SEP-IRA.    Real estate has always been an investment option for IRA’s but, up until recently, few IRA holders have taken advantage of this alternative.     Now, with the available skilled professionals who can help set up the IRA and purchase a qualifying property, many more investors are choosing this option.

Setting it up.     An IRA which enables you to directly purchase of real estate into your retirement account, is called Self-Directed IRA.  To set one up, you will an independent IRA custodian allowing real estate investments.    If your current stock broker or banker who handles your stocks and bonds does not provide Self-Directed  IRA custodial services, you will need to find one who does.    However, you will not need to sever any relationships.   You can leave your stocks and bonds with your current advisor while you set-up your Self-Directed IRA with a custodial company which specializes in real estate.   Fees vary depending on the scope of services provided by the custodian.

Selecting the Property.    Your Self-Directed IRA custodian will provide their guidelines for the type of real estate you can purchase.   The property you select and purchase will be owned by your IRA account, not by you personally.     If your IRA buys the property with a mortgage, you will not be able to personally guaranty the loan.     Accordingly, you may be limited by the lender to a 60% to 70% loan-to-value mortgage.  For example, on the purchase of the $560,000 office condo in, using a 65% mortgage, you would need to draw approximately $196,000 in cash from your IRA.   This is more equity than in a traditional real estate acquisition, but is allows you and the lender to sleep better at night.

While both residential and commercial real estate generally qualify for the Self-Directed IRA, I prefer the Net-Leased Commercial property for this type of investment, because:

• It is professionally managed, and the tenant is responsible for interior repairs, meaning you will not get the call when the toilet is on the malfunctioning.
• During this time of instability in the housing sector, a commercial property with a long-term lease backed by a credit-worthy tenant, offers safety and stability.
• Commercial real estate with leases indexed to the cost-of-living is an excellent hedge against inflation, and a tool for diversifying your retirement portfolio.

If you are looking to diversify your retirement portfolio beyond stocks and bonds, investing in commercial real estate with your IRA is something you should consider with the help of your real estate and financial advisors.