Commercial Real Estate as Inflation Hedge
| Read comments | Add comment / Rate this Article | Article by: Mark Casey |
This is a time to consider investment in commercial real estate as a hedge against inflation. From 1993 to 2006 inflation was tame, averaging 2.55% per year in the U.S. All that has changed, significantly. Over the last nine months annualized inflation ran 6.7%, and during the first six months of 2008 it leaped to at 8.5%. One of the best ways to protect yourself against inflationary loss of purchasing power, is to diversify your retirement portfolio, so that it includes commercial real estate.
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 commercial real estate, non-owner occupied residential property, and raw land with funds held in your traditional IRA, Roth IRA or SEP-IRA. This is very good news for someone who would like to diversify beyond the stock market, and build real estate wealth with her/his retirement account.
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 need 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, we can help you find this type of IRA custodian. 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. The fees I seen quoted for setting up and administering your Self-Directed IRA are very reasonable.
Selecting the Property. The property you select and purchase will be owned by your IRA account, not by you personally. Your Self-Directed IRA custodian will provide their guidelines for the type of real estate you can purchase. Regardless of the custodian’s guidelines, it is important that you select a property is consistent with the goals of your retirement portfolio. Accordingly, we recommend you focus on stabilized properties with moderate to no debt.
One property option I particularly like is a debt-free tenant-in-common (TIC) interest. A TIC property is a deeded, fractional interest in a larger property, such as the medical office building or retail building. While the total property value is in the millions, a fractional interest can be purchased for as little as $50,000. I like medical office buildings as an investment sector, because as the baby boomer generation continues to age, well-located, well-designed medical facilities will be in great demand.
Advantages. This type of debt-free TIC has three advantages:
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It is professionally managed, meaning neither you nor your IRA custodian will be called if the roof is leaking or the toilet is not working.
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Because property is not mortgaged, your IRA is not exposed to interest rate risk, or the risk of losing the property in the event cash flow is interrupted due to vacancies.
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TIC properties are generally new or newer properties with long-term leases and rental rates indexed to inflation.
During times of escalating prices such as now, this is a good time to consider how your retirement portfolio stands up well in the face of inflation. Diversifying your portfolio through a Self-Directed IRA to include a high quality commercial real estate, such as medical office TIC, is an excellent way to protect your against inflation.
This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
