When you think about an Individual Retirement Account or an IRA, most people generally think about the stocks, bonds, mutual funds, and other assets that makeup such an account. Real property is rarely used when you’re deciding where to invest your IRA funds.
That doesn’t mean it’s out of the question.
Plenty of investors are finding ways to invest in real estate by using their IRAs. You need to make sure you’re using the right IRA, and you need to follow the specific and detailed rules that come with this sort of investment. For example, the only type of IRA that you can use for property is a self-directed IRA, which is independent of any brokerage, bank, or investment company that would make decisions on your behalf.
Let’s take a look at some of the pros and cons of investing with a self-directed real estate IRA, based on our experience providing Winston-Salem real estate services.
Pros: Buying Investment Property in Winston-Salem with an IRA
Here are some of the best reasons to use your IRA funds to buy a property:
- Leveraging your tax benefits
A traditional IRA uses tax-deferred funds while a Roth IRA uses after-tax money. Make sure you understand how your taxes will work, depending on the type of self-directed IRA you’re using. When you buy property, you’ll get to defer or avoid taxes on the profits you earn from that property.
- Increasing your ROI
Markets are volatile. Real estate markets, however, are historically less chaotic than stocks. Understanding your exact real estate ROI is sometimes tricky, especially when you’re at the point of purchase. However, when you consider the fact that you’re acquiring a tangible asset and you’re assessing the value of the property and its potential to appreciate, you’ll see the potential benefits of owning property versus stocks. There’s also the income you’ll likely generate if you invest in a rental property.
- Diversified portfolios are stronger and less risky
When you use self-directed IRA funds to buy real estate, you’re exercising more control over your investment dollars, and you’re also diversifying a portfolio. This puts you in a stronger position if the stock market stumbles, and it leaves you in a less vulnerable position.
Cons: Challenges to Real Estate Investments for your IRA
Most of the challenges that come with using your retirement funds for investment property will depend on your financial situation and your plans for the future. Here are some general things that could potentially dissuade you from this type of investment:
- Real estate is not a liquid asset
When you invest in stocks, you can sell them at any time. If you keep your money in a high-yield savings account, you can access it when you need it. Real estate is not so liquid. You cannot cash out of this investment in a matter of days. Selling will take time, potentially more time than you have.
- Investing in real estate takes time
There’s generally a “set it and forget it” mentality when it comes to an IRA that’s heavily invested in stocks, bonds, and mutual funds. When you use your IRA money to buy property, you’ll have to invest time and resources in finding the right investment and then rent it out. Help from a residential property management company in Winston-Salem will be an excellent option.
These pros and cons will likely apply to any real estate investment you make with your self-directed IRA. We’d be happy to talk about the benefits and challenges specific to your situation as well. Contact us at Capstone Realty Consultants.