Apr 25, 2024
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If you’re looking to boost your nest egg without riding the stock market roller coaster, it may be worth thinking outside the box. While you can invest with an Individual Retirement Account (IRA) to meet your retirement goals, a self-directed IRA gives you a wider range of investing options.
With standard IRAs, you’re generally limited to more traditional investing options such as stocks, bonds and ETFs. With a self-directed IRA, you can invest in alternative assets, such as precious metals, cryptocurrency and real estate. Plus, you still get the same tax advantages as a traditional IRA.
“I’d venture to say that most investors are not aware that they can invest retirement funds outside of the ‘stock’ investment types,” says Andrew DeNardo, president and head of investor relations with First National Realty Partners (FNRP), a private equity firm that specializes in the purchase and management of grocery-anchored retail.
“Using a self-directed IRA is a great way to deploy retirement funds into other investment vehicles to diversify your portfolio — especially if you’re sick of the stock market volatility that we’ve seen over the last three to four years.”
Self-directed IRAs provide more options than regular IRAs and are managed by the account holder, which could appeal to more experienced investors. But for those with less experience, there are ways to maximize the benefits of self-directed IRAs while minimizing volatility.
Why commercial real estate?
The stock market can experience massive swings from day to day, and while that’s okay for someone with a high risk tolerance, not everyone wants to roll the dice with their retirement savings. Commercial real estate is a non-correlated asset; in other words, property values are less tied to what’s happening in the public markets.
Using a self-directed IRA to invest in commercial real estate offers tax-deferred growth, portfolio diversification and illiquidity; it could also be used for estate planning.
“Some may think that liquidity is a benefit for investing and there is some level of truth to that. Those that have a sizable IRA account may not want to deal with market volatility and the constant need to manage that by trading in and out of investments,” says DeNardo. “Real estate typically does not bring that level of volatility and is not illiquid when investing into a private partnership.”
This approach tends to offer strong returns compared with traditional stocks and bonds, according to FNRP, and acts as a hedge against inflation. But it doesn’t come without risk.
“One pitfall of investing in commercial real estate through an IRA compared to directly is related to taxes,” says DeNardo. “Investors should understand these differences.”
There are a specific set of IRA rules that govern the use of a self-directed IRA, including prohibited investments and transactions. For example, prohibited transactions include the transfer or use of IRA assets by or for the benefit of a disqualified person, excess contributions, early distributions and the accumulation of excess amounts. If these rules aren’t adhered to, you’d be on the hook for taxes.
How to get started
Within a self-directed IRA, there are three ways to invest in real estate: via a direct purchase, through a partnership or through shares in an LLC. Each option has its pros and cons, and one may be a better fit depending on the investor’s circumstances and goals. For example, if you’ve never invested in commercial real estate before, you may prefer a partnership or purchasing shares in an LLC rather than a direct purchase.
With a direct purchase, you’re the sole beneficiary of the rental income and profits, but you also become the property manager (you can outsource this, but you still have to “manage the manager”). Plus, you’ll need the upfront capital. However, if you have the time, money and expertise, as well as a long investment horizon, this could be a good fit.
Another option is a partnership, where you partner with one or more investors to leverage IRA funds in purchasing a property. This requires less upfront capital and less time to manage the property, but you’ll have to split the profits. In some cases, there may be a lead partner, so the other partners can take a more passive role.
A third option is using an LLC to purchase and manage a property (which is allowable under the investment rules for self-directed IRAs). In this scenario, a deal leader like FNRP finds, finances and manages the property while individual investors purchase shares in the LLC. This approach may be a good fit for investors with smaller account balances or those who have no interest in managing property but still want to benefit from the cash flow and profits (in proportion to their share of ownership). One drawback is that individual investors don’t have a say in major investment decisions.
How FNRP can help
FNRP, which specializes in grocery-anchored retail with historically strong return potential, offers a turnkey investment solution for account holders. As a private equity firm, FNRP acts as the deal leader, providing expertise, doing the legwork and streamlining the process, while investors passively collect distribution income.
“Our investing thesis is based on necessity-based real estate, which addresses food and shelter — the essentials in Maslow’s hierarchy of needs,” says DeNardo. Necessity-based real estate is about investing in communities where people live, eat, work and play.
FNRP has developed relationships with the nation’s largest essential-needs brands, including Kroger, Walmart and Whole Foods, and provides insights into the best properties both on and off-market. Investors can research FNRP’s offerings at their convenience, request and execute investment documents and then track and manage the progress of their investments through their personalized investor portal account.
By investing in commercial real estate with a self-directed IRA, you stand to benefit from strong, risk-adjusted returns and protection for those investment returns from taxes. Every investor’s financial situation is unique, so consult your CPA or tax advisor to discuss your options.
Vawn Himmelsbach is a veteran journalist who covers tech, business, finance and travel. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, CBC News, Yahoo Finance, MSN, CAA Magazine, Travelweek, Explore Magazine and Consumer Reports.
