Can I Invest My IRA in Real Estate?
There has been a lot of media attention recently on this topic. According to the Social Security Board of Trustee’s 2006 Annual Report, the social security system will begin to run negative by the year 2017 and will be completely insolvent by the year 2040. Well this is kind of scary. Obviously, investors need to do what they can to fund their own retirement as social security is uncertain.
People often ask me whether this is even legal. The fact is that you have been able to buy real estate within your IRA account since IRAs were created. In fact, the IRS generally only prohibits investments in artwork, stamps, rugs, antiques, gems and insurance contracts. So real estate is fair game. All you have to do is establish a “self-directed” IRA.
I think the misconception exists because most IRA trustees do not allow real estate in their IRAs. This is because they have their own portfolio of investments to market as well as concerns over higher administrative costs associated with self-directed IRAs. But with the recent increase in real estate activity, investors are looking for creative ways to invest (and trustees are looking for extra ways to make money).
Historically, the self-directed IRA industry has had just a fraction of the entire IRA industry. But that is starting to change. Self-directed IRAs allow individuals to take control of their financial plans by investing in any real estate they choose, such as land, single-family homes, apartments, or any other form of real estate investment. A self-directed IRA is legally no different from any other IRA. The term “self-directed” simply means that you choose your IRA’s investments.
Now that you know that you can do it, the discussion turns to “should” you do it? Well the answer here may not be the same for every person.
It clearly depends on how much of your net worth is tied up in real estate. I have read articles saying that everyone should have 20% to 30% of their investments in real estate. I’m not going to prescribe a specific percentage for you. Each person has their own comfort zone. But certainly everyone should have some form of real estate investment, even if it is a real estate investment trust (“REIT”).
Not only is real estate a great investment, but it is less volatile than stocks and is also negatively correlated to stock market returns. But because real estate is generally actively managed, many folks may not have the stomach for it. So determining whether you should hold real estate in your IRA depends, in part, on your overall portfolio mix and your temperament.
However, the tax deferred nature of IRAs should not be ignored. An IRA may be a great vehicle for your real estate investments if you have a real estate strategy that would otherwise result in short-term capital gains (flipping homes, land splits, etc).
Answering questions about retirement investments is never easy. Please make sure you do your own research and clearly understand any changes to your retirement assets. But for people who desire the ultimate control and flexibility that a self-directed IRA offers, it can be a wise choice. Putting real estate in an IRA may be an even better one.