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Did you know that you can invest in real estate of your choice using your IRA account?

There are many investors who are unaware that they can invest into alternative investments, of their choice, using their Individual Retirement Account (IRA) investment dollars.  

Numerous sophisticated investors want to invest into alternative investments (such as individual real estate assets, REITs, private equity, etc.) in their IRA accounts but are limited from doing so because these investments are not available or offered on their financial advisors’ platforms. For investors who want to deploy their IRA capital into real estate and real estate alternative investments of their choosing and selection, an option for them is to open a Self-Directed IRA Account, outside of their traditional brokerage advisory account. 

What is a Self-Directed IRA Account?

A self-directed IRA account (SDIRA) is an account that allows the investor/account holder to invest into many types of assets and funds, including alternative investments selected (SELF-DIRECTED) by the investor.  SDIRA accounts are provided by Trust Companies who act as custodians for IRA accounts, the same way traditional brokerage firms custody their IRA accounts.    The account owner chooses the investments that they are interested in funding, and then the Trust Company processes the investment as custodian.  The benefits of using a SDIRA to make investments into real estate and real estate alternative investments is that in most cases, private real estate investments and REITs, are not available to investors via traditional brokerage firms and advisors because those firms do not want to deal with the processing of alternative investments, private funds, nor specific assets like a single office building.

Benefits of investing into Real Estate using an SDIRA

The concept of investing in real estate and using alternative investments, selected by the investor/account holder, in your Self-Directed IRA could be a new idea to many. The benefits of using a traditional IRA held at brokerage firm, and a SDIRA, are the same from a tax perspective. The big difference being the ability of the account holder to select investments that are typically not offered, nor serviced, at traditional brokerage firms. There are a number of benefits to investing into real estate via an IRA:

  • Real estate investments may be used as an ‘alternative’ to traditional investments that are typically listed and traded on an exchange.
  • Real estate alternative investments are not traded on exchanges, and thus the volatility of the capital markets typically does not play a short-term role in the valuation of a real estate asset or real estate alternative investment. 
  • Real estate income in Traditional IRAs is not taxed until the assets are withdrawn. 
  • Real estate assets are typically held for many years to attempt to achieve both income from the real estate assets and potential for gains from asset appreciation. The income and potential gains are not taxed until the assets are withdrawn from the IRA, thus allowing the cash flow to accumulate or compound over the long run in a tax advantaged manner.  (This is similar to a traditional IRA held at a brokerage firm, the difference being that the investment that the investors has selected, cannot be purchased in a traditional IRA held a traditional brokerage or advisory firm.

Investing in Real Estate for yield and growth using a Self-Directed IRA

Everyone has different investment goals and strategies for their risk/return profile.  Many investors and allocators have two buckets for investment allocations to real estate.

  1. Yield and income:  target yield and return: 7%-10%
  2. Growth, Value-Add, Development: target IRR +15%

Yield bucket:

For a yield alternative to publicly traded fixed income instruments (bonds, preferred stocks, MLPs, mortgages, etc.) where rates and yields are relatively low, some sophisticated investors make investment allocations for their SDIRA into high-quality, stabilized real estate where the cash flow from the buildings, meets their investment targets and goals for current income.  Real Estate Sponsor choice is just as important as choosing the region and specific asset.  You may make a well thought out investment into a type of commercial real estate (Office, Multi-Family, Retail, etc.), in a good region, but the sponsor/asset manager should be a firm with an extensive track record of performance.

The two types of alternative investments that investors typically consider for the ‘Yield Bucket’ are:

  1. Private REITs with institutional quality buildings with existing cash flow, managed by an institutional quality sponsor. 
  2. Credit funds that lend to specific office and multi-family properties. These properties tend to be of lesser quality than the institutional quality office properties in several institutional-quality REITs, and carry higher yields, as expected given the higher risk profile.

The ‘higher return target Growth bucket’:

  1. Direct investment into a specific CRE project that does not have current cash flow but the expectation of a higher return when the project is developed and comes online.
    1. Development projects
    2. Significant value-add projects
  2. Direct investment into a specific loan on a property that does not have current cash flow but will hopefully reach the goals of the sponsor to pay off the loan and pay the interest on that loan.

So, what is a Do-It-Yourself investor to do?


The business of Self-Directed IRA custody and administration is a relatively large industry, although not well known compared to traditional brokerage firms and their custody services.   The reason for this is:

  • Financial advisors and brokerage firms, in most cases, are limited in what products they can offer to clients and only offer products available and approved on the firm’s platform.
  • Often these products are marketed and sold with a commission and / or fee built into the transaction to compensate the advisor and firm for the advice, recommendation, and execution of the transaction.



Educational resource for how to use a SD-IRA for investments into Real Estate:

There are significant participants in the SDIRA industry providing the service of custodian for a large number of alternative investments. Many of these SDIRA firms have extensive educational information available to investors to learn how to use their IRA dollars for investments into real estate and real estate alternative investment products.  The article link below provides additional info on Self-Directed IRAs.

Self-Directed IRA’s:Just the Facts…



KBS Direct makes no representations as to the appropriateness of an investment in KBS Growth & Income Real Estate Investment Trust REIT for ERISA plan fiduciaries and IRA owners and no investment advice is being provided.  ERISA plan fiduciaries and IRA owners should consult with their own advisors and counsel before making an investment in the REIT’s shares.  This is not an offer to sell securities. Offers to sell, or the solicitations of offers to buy, any security can only be made through a private placement memorandum and other official offering documents that contain important information about risks, fees and expenses.


Self-Directed IRAs: Just the Facts

Real estate alternative investments are an increasingly popular element of diverse retirement portfolios. For some investors, it can make sense to include real estate in a retirement portfolio by holding the property in a self-directed IRA.

While the rules governing real estate held in IRAs can be strict, there are a number of benefits to keeping real estate in an IRA:

  • Real estate can be used to generate rental income, and rents can be raised over time to keep pace with the market. Likewise, rising prices can increase the resale value of real estate. That real estate income has tax-advantaged growth potential of its own when held in an IRA.
  • Real estate income in Traditional IRAs is not taxed until the assets are withdrawn. Assets withdrawn from Roth IRAs are tax-free.
  • Real estate investments are typically not correlated with fixed-income or equity investments, and can provide a hedge against inflation.

Here’s what you need to know about using real estate as an IRA investment and the rules for investing.

What types of real estate can investors buy in a self-directed IRA?

Self-directed IRAs can be used to hold a wide range of real estate investments, including raw land, single- and multi-family rental properties, commercial properties, private funds and real estate development companies.

What are the rules for investing?

The idea with any asset in a self-directed IRA is that the account is earmarked for your retirement. As such, there are rules to keep you from accessing any current benefit from the real estate asset.

To ensure that a real estate IRA remains qualified and its assets stay tax-deferred, IRS rules restrict certain transactions:

  • No personal use or use by certain relatives. Although the IRA is in your name, and the property within the account is for your ultimate retirement benefit, you can’t receive any current direct or indirect benefit from any asset held in your IRA. In terms of the property, you can’t live in it, vacation in it, use it or get any indirect benefits from it, like payment for managing it—and neither can any “disqualified person” as defined by the IRS.
  • Investors can’t work on the property. You must pay an independent person to maintain and repair it.
  • Investors can’t use a mortgage to purchase the property. Non-recourse loans (in which a lender’s only recourse for non-payment is recovery of the collateralized asset used to secure the loan), however, are allowed.
  • The IRA must pay all expenses related to the property. Investors must be sure there are enough funds held in the IRA to cover potential major capital expenditures as well as ordinary maintenance costs and property taxes. Don’t pay expenses with your personal funds.
  • If the property operates at a loss, investors cannot claim the losses on their tax return, nor can they claim any depreciation.
  • Investors who hold real estate in traditional IRAs must take required minimum distributions (RMDs) beginning at age 70½ and should make sure the IRA holds sufficient liquid assets, beyond the value of any real estate held within it, to cover those withdrawals.

How does the investment process work?

Work with experienced professionals to help you choose the right property:

  • Realtors can help identify investment properties.
  • Lenders can help with non-recourse loans.
  • Financial advisors and accountants can prepare a cash flow analysis to help predict the potential return on investment.

Select a knowledgeable service provider:

  • Investors should use a custodian that specializes in the custody and administration of non-publicly traded investments, such as real estate, to handle real estate transactions within an IRA.
  • The custodian can help set up the right accounts when you’re ready and will also report deposits, withdrawals and balances to the IRS.

An experienced custodian can help streamline the process of investing in real estate in a self-directed IRA as investors work to build a diversified multi-asset portfolio to help achieve financial goals.

For additional information, see IRC Section 4975 and Millennium’s Guide to Holding Real Estate in Your Retirement Account.

A special thank you to Millennium Alternative Investment Network® (MAIN)® for providing this insightful article.  Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.