Pros and Cons to Owning Real Estate Through a Self-Directed IRA

If you’re saving for retirement (which we hope you are), you’re likely contributing money to a tax-advantaged retirement account such as an IRA or 401(k). In these accounts, you have the option to invest your savings in asset classes such as stocks, bonds, ETFs, and mutual funds. 

But research is showing that these types of investments aren’t providing the returns – and thus the security – that pre-retirees need to see before they feel comfortable retiring. Plus, the investment options in these types of accounts are restricted to four or five asset classes when in reality, investors have 34 asset classes to choose from to build wealth and save for retirement.

So if you cringe at the thought of entrusting your life savings – your security and your freedom to retire comfortably – to Wall Street, it’s time to consider investing your retirement savings in assets that you know and have more control over. For instance, consider investing your retirement savings in real estate using a self-directed IRA. 

We understand that some investors may be skeptical about investing their retirement savings in assets other than stocks and bonds. If that’s you, check out our previous blog posts about this topic. You might just find that the time to begin investing in real estate – or another asset class you’re familiar with – to pursue a more secure retirement lifestyle is today:

What Is a Self-Directed IRA?

A self-directed IRA (SD-IRA) is a type of individual retirement account that can hold a variety of asset classes that are not typically available in regular retirement accounts. As its name implies, investments in an SD-IRA are directly managed by the account holder rather than by a brokerage house (although the account is still administered by a custodian or trustee). 

With an SD-IRA, investors are not limited to stocks and bonds. An SD-IRA allows you to diversify your investments into other asset classes – asset classes that may indeed provide significantly higher returns and monthly cash flow opportunities – while still enjoying the benefits of a tax-advantaged retirement account. These asset classes include, but are not limited to:

  • Real estate

  • Precious metals

  • Building bonds

  • Hedge funds

  • Private equity

  • Many more 

The idea is not to invest in everything that’s available with an SD-IRA, but to invest in the asset classes you’re familiar with or would like to become familiar with. 

The contribution limits for an SD-IRA are the same as the contribution limits for a traditional or Roth IRA. In 2021, investors under 50 can contribute a maximum of $6,000 to their IRA accounts, or $7,000 if over age 50. 

Pros & Cons of Investing in Real Estate With a Self-Directed IRA

At Chicago Trust Administration Services, we’re big fans of using real estate to build long-term wealth and generate more secure retirement income. But with that being said, we know that real estate investing isn’t for everyone. If you’re considering investing in real estate, it’s important to do your research and to know the pros and cons, a few of which we cover below.

Pros of Investing in Real Estate With an SD-IRA

We get excited when talking about real estate investing, so forgive us if we’re a little enthusiastic about the benefits of investing in real estate with an SD-IRA. 

Benefit Number 1: Diversification

An SD-IRA gives you the opportunity to significantly diversify your portfolio. Having an SD-IRA does not mean that you have to invest all of your money in real estate or other nontraditional asset classes. You can absolutely still keep a portion of your retirement savings in a 401(k) or regular IRA that is invested in stocks and bonds.

Benefit Number 2: Potential for higher returns (and cash flow!)

If you’re a savvy real estate investor with an eye for good deals, you know you can generate great returns on your investments – and great monthly cash flow – much more quickly than you typically can from stock dividends. This means that your investments may begin to provide you with income before you’re ready to retire from your job. (But beware of penalties if you withdraw money from an SD-IRA before you turn 59½).

Benefit Number 3: Historical appreciation

Real estate has historically appreciated over time and is much less volatile than the stock market. This isn’t to say that real estate doesn’t have its ups and downs, but the downs are typically less frequent than they are in the stock market. Additionally, real estate investments can often hedge against inflation, which dampens the returns on stocks and bonds.

Benefit Number 4: Tax advantages

Real estate is something large numbers of investors already know, get excited about, and trust as a good investment. But many real estate investors only use after-tax or taxable dollars to fund their real estate investments without realizing that they could be taking advantage of a tax-deferred or tax-exempt retirement account. An SD-IRA gives you the option to do that.

Bonus Benefit: Legacy-building

Real estate investments can also build generational wealth for decades to come if you plan to educate your children on real estate investing and transfer these assets to them when you pass away.

Cons of Investing in Real Estate With an SD-IRA

However, there are also potential downsides to investing in real estate, which may or may not be relevant to investors depending on their preferences and the level of involvement they wish to have with their investments. Consider the following to determine whether or not you have the time, temperament, and patience to invest your retirement funds in real estate.

(Possible) Downside Number 1: Knowledge and experience 

You need to be or become a savvy real estate investor. You’ll have to dedicate time to do research to learn how to spot and analyze good deals. You’ll also need to spend significant time searching for those deals and – in today’s market – moving quickly once you’ve found one. 

(Possible) Downside Number 2: Time and effort commitment

Real estate investments may require work and effort on your part. For example, if you decide to invest in rental properties (which can be great for cash flow purposes), you may need to spend time maintaining the property, vetting tenants, and responding to maintenance requests. Or you could hire a property manager to take care of this for you, although this expense will reduce your returns.

(Possible) Downside Number 3: Illiquidity

You need enough cash to invest in many properties in different locations to be properly diversified and generate enough returns to be worth your investment. Additionally, real estate investments are considered illiquid compared to stocks and bonds. However, this isn’t much of a problem if you plan not to touch your principal investments anyway.

Learn More By Contacting Chicago Trust Administration Services

For many people, the pros of real estate investing far outweigh the cons. And if you’re already a real estate investor but haven’t taken advantage of a self-directed IRA, it’s time to learn more about your options. At Chicago Trust Administration Services, we are the catalyst to help you close on real estate deals quickly, painlessly, and in compliance using a self-directed IRA.

To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz