Pros And Cons Of Self Directed IRA Real Estate | Asset Protection for Real Estate Investors : Royal Legal Solutions

Pros And Cons Of Self Directed IRA Real Estate

Self-directed IRA real estate is among the most popular alternative assets. However, it’s not for everyone. We’ve already given you a helpful overview of what a self-directed IRA for real estate investing is. Below is a closer look at the pros and cons of this type of investment. Read on to find out if this growing investment option is right for you.

Pros

Higher Returns

Real estate as a non-traditional asset can lead to higher returns. According to Investopedia: “Real estate has outperformed the stock market approximately two to one since 2000, earning 10.71% annually versus 5.43% for stocks (1).” This is not always the case. However it can explain why according to a 2014 Morgan Stanley Survey, real estate is the most popular alternative asset class among millionaires (2).

Tax-deferred Gains

Real estate investment gains are tax deferred. When real estate is purchased outside of a self-directed IRA, gains are taxed at the federal and sometimes state tax level. In contrast, gains on self-directed IRA real estate are taxed when those funds are withdrawn. This can occur after decades of unhindered growth.

Control and Stability

Unlike traditional IRAs, a self-directed IRA real estate investment can be more familiar and manageable. Global conditions and political factors often increase the uncertainty of stocks. Real estate as a physical and often local asset offers a more manageable alternative. Plus, when combined with checkbook control through an LLC or business trust, transactions aren’t subject to administrative control from a faraway custodian.  Investing can be as easy as writing your own personal check.

Cons

You Must Do Your Own Due Diligence

A self-directed IRA doesn’t include a separate entity who will perform due diligence on each transaction. The custodian’s role is as a “passive custodian.” She may have real estate investing experience, but this doesn’t mean that your investments are vetted. We can help simplify self-directed IRA access to real estate and other private investments, so you can focus on performing your due diligence.  

You Must Learn Complex Rules and Regulations

A common mistake when dealing with this particular form of investment is “self-dealing.” This includes any transaction that unfairly benefits the owner of the IRA or any of her family members. Examples include renting out an IRA owned rental property to a child or paying yourself for rental property management. A mistake like this can lead to a taxable event or even worst jeopardize the status of your IRA.

A Streamlined Self-Directed IRA Approach

The self-directed IRA real estate investment can offer high returns, tax deferrals and an increased sense of control over investments. However, these benefits come with a responsibility to complete due diligence on all transactions and be aware of “self-dealing” rules. We’ve streamlined the self-directed IRA investing process so that you can focus on these responsibilities. Contact us today for more information.

Discuss The Legal Safety Of Your Real Estate Investment Portfolio With Our Team? Give Our REI Legal Team A Call Now!512-757-3994

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