Using Retirement Funds for Investing in Real Estate
| Read comments | Add comment / Rate this Article | Article by: Mark Casey |
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.
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.
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.
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.
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.
We remain in the midst of an extraordinary Buyer's Market. For the investor with cash and borrowing capacity, 2010 presents great opporunities. Interest rates are at historic lows and commercial real estate prices are the lowest they have been in years. If you are looking to buy, lock in your purchase and loan rates sooner rather than later, because once the commercial property market begins recovering this window of opportunity will narrowed.
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.
