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It’s complicated—there are a lot of rules, and it requires a lot of capital—but investing in property through an IRA can be a good way to diversify your investments, especially if you feel like you’re currently investing in too many stocks.
How property investment through an IRA works
First off, this would be a pure investment: You and your family can’t live in or use the property, although you can rent or lease it out as a way to make money. To do so, you also need what’s called a “self-directed IRA,” which requires a third-party IRA custodian—a financial institution that makes sure your investment follows IRS and government regulations at all times. A custodian is not an advisor, but they’ll make sure the paperwork is on the level. Otherwise, all investing decisions are yours alone (a self-directed IRA also lets you directly invest in cryptocurrency, precious metals, LLCs, and REITs).
Really what you’re doing is holding onto the property while you have the IRA, as technically the property is owned through the IRA itself. Since you don’t own it exactly, you can’t sell the property back to yourself when cashing out the IRA, nor can you do your own repairs to the property, otherwise known as “sweat equity.”
What are the benefits, then?
Historically, property has a high rate of return comparable to the stock market, and it can be a good way to diversify your portfolio if you’re worried about having too much money tied up in stocks. There are also tax advantages as you can do both a regular IRA (earnings are tax-deferred until you’re older and ready to retire) or Roth IRA (your contributions are taxed upfront, but you get to keep whatever the IRA earns).
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Self-directed IRAs also give you direct control over your investments. This can be a bad thing if you have no idea what you’re doing, but the flexibility is appealing to DIY investors. For that reason, a self-directed IRA is probably best for people who already have some experience in managing or investing in property. For more on the finer details on self-directed IRA accounts, and how to open one, check out this Nerdwallet post.
