February 21, 2024

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Almost every American working in the private sector knows the good old days of company pensions are permanently in the rearview mirror. That has resulted in the government taking several measures to encourage Americans to save for their retirement.
One of those is an individual retirement account (IRA), an investment where workers can put up to $5,000 of their annual pretax income to grow wealth by using that money to take advantage of various investment opportunities. 
IRAs have proven to be popular investment vehicles, but they have some restrictions as to what investments you can take advantage of. For a long time, many IRA custodians did not allow the accounts to take advantage of alternative investments like real estate. That also meant there were not a lot of real estate offerings for IRA holders. 
However, that has changed, and there is a growing number of real estate offerings that accept IRA contributions. You can also roll some (or all) of your traditional IRA into a self-directed IRA. Self-directed IRAs offer investors the flexibility to invest in real estate, albeit with a few restrictions. Keep reading to find out more about how to boost your IRA returns with real estate investments. 
One simple way to invest in real estate with an IRA is through a self-directed IRA. A self-directed IRA functions just like any other IRA account with a few notable exceptions. Under a standard IRA, you put your money into an IRA, and the fund manager grows your wealth by investing it in various traditional investment offerings such as securities and bonds. However, in a self-directed IRA, you make the decisions about what investments you make. 
Self-directed IRAs give you more freedom to put your money into alternative investments like real estate. Remember, though, that even with a self-directed IRA, you are still restricted to the investments your IRA’s custodian (account manager) allows. So, before you begin investing in real estate, make sure you roll your existing IRA (or start your IRA) into one with a custodian who allows real estate investments. 
Once you’ve started your self-directed IRA, the next step is to figure out what kind of real estate investment you want to make. Before you decide to buy an investment property, you must consider a few things. First, you will have to buy the property flat out. You cannot get a mortgage on a property bought by an IRA. You will have to purchase whatever piece of real estate you want in full without financing. 
Why? It’s because of IRA rules that prevent self-dealing. Remember, IRAs are designed to help you stash your income on a pretax basis until retirement. Accordingly, they have prohibitions on what is known as self-dealing, which is using IRA funds for any immediate tangible benefit. Using your post-tax income to make mortgage payments on a property in your self-directed IRA counts as self-dealing under IRA rules. 
Once the property is in your self-directed IRA, you can do one of the following three things:
Bear in mind that regardless of how you choose to make money with your self-directed IRA real estate, you are prohibited from using anything but the funds in your IRA to make any needed improvements, repairs or pay other property-related expenses.
The same thing applies to any profits you make or rents you collect. All funds must come from or go directly into your self-directed IRA.
Spending even a penny of your profits or putting a penny of your own money into expenses counts as self-dealing. If you violate this prohibition, the funds in your self-directed IRA will no longer be tax deferred, and you will be faced with a hefty tax bill. 
Putting your own money into or spending non-IRA funds on the real estate in your self-directed IRA are not the only self-dealing violations you need to be mindful of. When in doubt, remember that you can never directly benefit from any transaction related to the property in your self-directed IRA. 
That also means you can’t purchase the property from a disqualified person, which is any of the following:
The title for the property in your self-directed IRA must list the self-directed IRA — not you — as the property owner. Your self-directed IRA cannot purchase a property you already own. You are also prohibited from functioning as a property manager — on or off site — if you use your self-directed IRA property for rental income. You must hire a third-party management company that’s not run by a disqualified person. 
If you have any doubts about a specific transaction or expense related to your self-directed IRA, check with your custodian. It could keep you from making a costly mistake. 
The rules on self-dealing with IRAs are meant to be strict. The government wants a solid firewall between the tax-deferred funds in your self-directed IRA and any money or real estate you already have access to. In addition to that, buying a property free and clear with your self-directed IRA funds is likely to cost six-figures even in an affordable real estate market. That could be a sizable chunk of your IRA funds.
Luckily, there is a better, more efficient way to invest in real estate with your self-directed IRA than scouting properties and buying them with your self-directed IRA. The world of real estate crowdfunding has opened up a large variety of options. Numerous real estate investing platforms have offerings that will accept both traditional and self-directed IRA contributions. 
Fundrise is one of the most popular and well-respected real estate crowdfunding platforms. It was put together by a team of established real estate professionals who wanted to make building a real estate portfolio simple. It’s a great place to start investing your IRA into real estate because Fundrise has its own IRA. 
That’s right. You can roll some — or all — of your IRA into a fund that consists of a diverse portfolio of real estate assets chosen by the Fundrise braintrust. All of the assets in the fund were chosen for their unique combination of upside, ability to resist market downturns and projected ability to generate long-term investor profits.
It doesn’t get much easier than set it and forget it, and the Fundrise IRA allows you to do exactly that. You don’t have to worry about accidentally violating any provisions of self-dealing, and Fundrise will do the accounting, pay the distributions and issue the statements. 
CalTier is another widely respected real estate platform with two fund options that accept IRA contributions. Its multifamily fund is set up to seek out B- and C-rated multi-family properties in growing markets throughout the Southern and Western United States. 
The multifamily fund focuses on adding value to properties by making management more efficient, upgrading units and raising rents. You can buy into the fund for as little as $500, and the fund is projecting an annual 8% return. Investors will benefit both from the passive income on the rents and property appreciation when CalTier sells the assets in the fund. 
If you are the type of investor who enjoys the challenge of picking your own offerings and having control over where the assets in your self-directed IRA go, CrowdStreet may be a great option for you. It is one of the leading online real estate investing platforms and has an impressive array of offerings that accept both IRA and self-directed IRA contributions.
The Crowdstreet Opportunistic Fund I LLC is accepting investor contributions to buy between eight and 10 commercial properties with high upside and long-term revenue potential. The assets in the portfolio will be spread across several real estate sectors, including multi-family and industrial. If the opportunity arises, the fund may also purchase lodging, retail or office properties. 
The fund has a minimum buy-in of $100,000 and a hold period of three to seven years. It’s projecting an internal rate of return of 18% to 22%, and distributions will be made to your self-directed IRA on a quarterly basis. So, if you wanted to go with an aggressive fund with assets managed by the CrowdStreet adviser team, the Opportunistic fund is worth considering. 
Additionally, CrowdStreet is always posting new offerings on individual assets in the multi-family, industrial and commercial sectors. The average investment minimum for these offerings is somewhere around $25,000, and they each have their own risk profile and projected return. So, even if you’re not into funds with assets chosen by someone else, CrowdStreet has a wealth of real estate options for your self-directed or traditional IRA. 
As you can see, there is no shortage of quality options for self-directed IRA holders when it comes to real estate. You can pick your own individual properties for flipping or passive income. You can also choose from a large menu of funds and individual offerings from some of the many real estate crowdfunding platforms that are open to you.
No matter how you decide to go about adding real estate to your self-directed IRA or IRA, your equation as an investor remains the same. You need to carefully consider your investment goals and be as familiar with the potential risks of an investment as you are with the upside. Consult a financial advisr and your IRA’s custodian. Invest wisely. Hopefully, real estate will prove to be a perfect addition to your IRA.
Arrived Homes allows retail investors to buy shares of individual rental properties for as little as $100. Arrived Homes acquires properties in some of the fastest-growing rental markets in the country, then sells shares to individual investors who simply collect passive income while waiting for the property to appreciate in value over 5 to 7 years. When the time is right, Arrived Homes sells the property so investors can cash in on the equity they’ve gained over time. Offerings are available to non-accredited investors. Sign up for an account on Arrived Homes to browse available properties and add real estate to your portfolio today.


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