Real Estate IRAs and LLCs
During these harsh economic times many people are turning to alternate investments for their retirement funds. For example real estate has become an attractive investment for some. However, most IRA custodians will not let you invest in real estate.
Most traditional custodians will only allow you to invest in stocks and bonds. Many either do not know or do not acknowledge that you can invest your IRA in real estate or other alternative investments.
However, if the rules are carefully followed it is possible for you to invest IRA funds in real estate. There are some custodians, but very few, who will purchase real estate directly from your IRA account. There are also others who will allow you to set up an entity such as an special IRA LLC and allow you to manage the property as the manager of the LLC.
Such IRAs, especially those utilizing LLCs are not for the inexperienced or uninformed. First, care must be taken due to what are called the “prohibited transactions rules” by the IRS. Many people who have such IRAs and do not seek competent legal advice will run afoul of these rules. This is especially so with respect to Real Estate IRAs using LLCs.
The consequences of a prohibited transaction can be disqualification of your IRA and immediate taxation and penalties. Often the problem is not even known or discovered until years after the fact when the problem can not be solved
Second, you should not invest in a Real Estate IRA unless you are an experienced real estate investor or have a trusted advisor who is experienced. Many people are not experienced in investing, much less real estate investing. For this reason, many prefer the more traditional IRA with stocks, bonds and other securities, whereby their investment advisor assists with investments and often makes all the investment decisions.
A Real Estate IRA may be attractive due to the decline in the real estate market. Many believe that we are at historic lows. If this is true, then the Real Estate IRA may offer good long term appreciation. Also, if rental real estate is involved, then the rents after expenses may also offer a good return and cash flow for your IRA. It should be kept in mind that, property management, itself, is not with without risks.
Although there are significant risks and precautions that need to be taken into account, Real Estate IRAs can be an attractive investment opportunity in lieu of the stock or bond market. However, experience in real estate investing and good legal advice are a necessity.