Purchasing Real Estate with Your IRA

Now that the stock market has regained much of the ground it lost since the melt-down, this is a time to consider diversifying your portfolio with the addition of 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 great 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 to locate an independent IRA administrator 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 administrator which specializes in real estate.   Fees vary depending on the scope of services provided by the administrator.

 

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 Self-Directed IRA administrator’s guidelines, it is important that you select a property is consistent with the goals of your retirement portfolio.    Any mortgage against the property will need to be non-recourse, meaning the mortgage holder will not have access to any of the IRA holders personal assets should property not be able to service its debt.

 

One property option I particularly like for a Self-Directed IRA is a Single-Tenant, NNN leased property.    The classic Single-Tenant NNN property is a Walgreens.    In this type of property, the Walgreen Company signs a long-term (20 years or more) lease and the property is sold to an investor.     Walgreens maintains the facility and grounds while, you, the investor gets a hassle-free income-stream.    Walgreens start at $3MM, and assuming 50% debt, you will need $1.5MM to purchase one.

 

You don’t have an extra $1.5MM in your IRA to invest in real estate?    There are other options.     One is a fractional interest in a net-leased kidney dialysis center leased to Fresenius Medical Care, one of the world’s largest provider of dialysis services.     This type of fractional interest begins $50,000, and because it is debt free, you don’t have to worry about qualifying for a mortgage.

 

In conclusion, a Self-Directed IRA allows you to diversify your retirement portfolio beyond stocks and bonds, through direct investment in real estate.     In the same way you use a stock broker/advisor to purchase stocks and bonds, you utilize real estate professionals to find, analyze and secure real property.     If you are considering a commercial real estate purchase for your IRA, you should talk with a Commercial Realtor® who has demonstrated experience in Net-Leased properties and Self-Directed IRA’s.