Financing Commercial Real Estate Investments With Retirement Funds

Commercial real estate investments are quite commonplace, but it is unusual to see investment property as part of an Individual Retirement Account, or IRA. It is possible to purchase real estate via your IRA as a mean of diversifying your portfolio, but there are some stringent rules that must be followed.

Self-Directed IRA

First, real estate can only be purchased with a self-directed IRA, which allows a broader range of investments than stocks, bonds and mutual funds. Set up a self-directed IRA, and consider creating a Limited Liability Corporation (LLC). Investments in your new self-directed IRA can be made on behalf of your LLC rather than by you as an individual, which gives you even greater freedom of investing. You will need a new custodian for this self-directed IRA, as most traditional and Roth IRA custodians do not handle self-directed IRAs. Finally, roll over your current IRA into the new one. Now you are free to begin investing in commercial real estate via your self-directed IRA.

Be Prepared

Before you leap into this new investment strategy, be aware that there are many caveats and cautions that apply to real estate investments. Perhaps most importantly, be prepared to purchase the real estate with cash from your self-directed IRA. It is possible to obtain a loan for purchase of property as part of your IRA, but it must be a non-recourse loan per IRA rules. In the rare event that you do carry a mortgage on property in your self-directed IRA, rental income or other profits earned from that property are not fully tax-exempt. A percentage of the profits from the property, corresponding to percentage of the property that is mortgaged, are subject to taxes.

Potential Risk

Another risk of including commercial real estate investments in your self-directed IRA is that even without a mortgage, you must be prepared to cover a wide range of expenses and fees associated with the property and your IRA. Custodial fees will be higher with a self-directed IRA. Monthly operating expenses for your investment will include property management fees, property taxes, maintenance and insurance. If you lose tenants, you risk losing cash flow to help cover these expenses.

Investing in commercial real estate as part of your retirement portfolio can be extremely lucrative. But this sort of investment strategy is best-suited to those investors who have sufficiently large retirement accounts that they can afford to navigate all of the rules covering real estate IRA investments, as well as absorb the various fees and expenses of such.

SHARE IT: LinkedIn