Self-Directed IRA Real Estate: Pros & Cons
Self-directed investment can open many doors for the savvy investor. There are many different alternative assets to explore, but the one that is considered most common is real estate investment.
Investment in real estate using an SDIRA can have major benefits; however, there are also some disadvantages to be aware of. Whether you decide to flip houses in a booming market, purchase Oceanside rentals, or become a landlord, real estate can have a substantial payout.
Before you make any major investments decisions, it is crucial to perform your due diligence to decide if the real estate market is for you. Here are the top ten pros and cons of self-directed real estate investment.
#1 – Pro – Tax-Free or Tax-Deferred Account Growth
By using a self-directed IRA, your real estate investments can grow tax advantaged. With a traditional SDIRA, your contributions can grow tax-deferred, while Roth IRA contributions can be withdrawn tax-free upon retirement. These tax advantages can build up quite a nest egg as your real estate investment grows.
#2 – Con – Unrelated Debt-Financed Income
UDFI can occur when any property held produces income. Any gains from such property are indebted at any time during tax year. This triggered penalty can happen with corporate stock, tangible personal property, and often with real estate. If you use a loan to purchase property for your SDIRA, the income for your property would be subject to UDFI. If you don’t have the money upfront, you may have to deal with the penalties should you want to invest.
#3 – Pro – Control over Your Property Choices
As the account holder, you decide what to do with your real estate. You set the price, make changes to the property, and decide whether you want to rent or sell. If you are handy, you can flip the property for a short-term gain, or you can maintain it as a landlord. Select whichever option best suits your investment plan; you control it and it grows under your personal influence.
#4 – Con – Fluctuating Market
The real estate market can fluctuate rapidly, making selling a home very difficult. If you want to build up property to flip, you may have a hard time unloading in a poor market. Sometimes you may have purchase a home and have to sit on it for a while; it cannot always be sold quickly. If you cannot unload, value depreciation is not taken into account. Real estate investment is one of patience, so be cautious.
#5 – Pro – Protected Investments
If you should run into some financial trouble, your real estate investment will be safe in your SDIRA. Self-directed IRA funds are protected from creditors. Should you suffer bankruptcy or fall on hard times, you properties within your IRA will be kept safe.
#6 – Con – Pricey Investment
It is not a surprise that purchasing real estate is expensive. Even if you purchase property at a low point, it will still put a dent in your wallet. Including the costs of all the closing fees, upgrades, taxes and upkeep, real estate could get very pricey. Not every account holder has the up-front cash for these transactions, but as mentioned earlier, taking a loan out with your IRA can have its own issues.
#7- Pro – High Return on Investment
When done right, real estate investment can yield some positive rewards. When compared to traditional stocks, bonds, and mutual funds, real estate has a higher ROI. If you have the funds to put into real estate investment and the patience, it could be a boost for your retirement.
#8 – Con – Third Party Involvement
In order to take advantage of the SDIRA benefits, the IRS requires the involvement of a certified IRA custodian to hold the account. Any investments must be approved by your custodian – including the release of funds. The custodian is responsible for tracking your account transactions to report to the IRS. Unfortunately, this may slow down your turnaround when you need to have cash at your fingertips. It is possible to get “checkbook” control with an LLC account, but you still need to report your transactions to a custodian.
#9 – Pro – Opening an LLC
By opening a limited liability company with your SDIRA, you can gain checkbook control and skip the middleman! Transactions aren’t waiting on administrators and you can purchase whatever you need using your IRA fund. As a real estate investor, you may have to act fast on a purchase or be able to have access to your funds quickly. Owning an LLC allows you the control you need. While you still need to report to your custodian, you only have to pay the fees for one meeting rather than several.
#10 – Con – Restrictions and Possible Disqualification
Taking control of your own investments takes a great deal of responsibility. This means account holders must perform their due diligence and follow the rules rigidly to avoid any penalties. For instance, you cannot use your IRA owned property, nor can any disqualified individuals who may eventually benefit from your savings. You cannot be involved with the investment or use personal money to improve upon it. You cannot benefit from your real estate investment until after retirement. As you look into your options, be careful and secure your investments.
Real Estate Investing for the Future
Investing in real estate using an SDIRA requires patience, careful planning, and the funds to secure your assets. After considering the pros and cons, ultimately only you can decide if real estate is the right asset for your portfolio. Before making any investment decisions, consult the financial experts by contacting Horizon Trust and explore the real estate market today!