Big Real Estate Deals for Self Directed IRAs

Posted on: October 20, 2021   |   Category: Real Estate
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A Self Directed IRA allows you to think outside the box. No longer confined to the world of stocks and mutual funds, you can start brainstorming new and potentially better assets. Normally, the first go-to asset is real estate. This is because a Self Directed IRA is naturally optimized for buying a property. It has enough of a reserve to make it financially feasible, and the fact that it’s a retirement account means liquidity is not an essential issue. The obvious next question is what kind of real estate should you buy? 

Most Self Directed IRA investors start off with something conservative. A small multi-family (2-4 units) is a typical entry property. However, once you have a foot in the door, it’s only natural to start thinking of what’s next. One approach to this question is just more of the same. If your Self Directed IRA was successful with a small multifamily, why not have your next property be a larger multifamily? You have already developed the skillset for this kind of property and you know what it takes to be profitable. A larger multifamily may not be glamorous, but it will work to grow your retirement funds.  

That being said, there is a subset of Self Directed IRA investors who are even more out of the box. They are attracted to self-direction because of the flexibility it allows. For this kind of investor, what other real estate options are available for a Self Directed IRA? One way to discover possibilities is to see what REITs are investing in. REITs often specialize in specific kinds of real estate, and some of those specialties may be relevant for smaller investors. Let’s take a look at two specific properties trending amongst REITs now and see where a Self Directed IRA may have an opportunity. 

Data Centers 

A data center is essentially a large building with a lot of digital storage space in it. Any company or organization that uses data has to keep that data somewhere. For very small companies the data can be stored inhouse with a local server. However, most companies tend to outsource their data storage needs. The biggest tech companies will have their own dedicated data centers, but most other companies will lease space from a third party.  

In the modern business landscape, data centers are a ubiquitous presence. Being property based in the sense that they require land and a building, they have caught the attention of REITs. There are currently five REITs that focus exclusively on data centers: Equinix, QTS Realty Trust, CyrusOne, and CoreSite Realty Corporation. Together they have a total market cap of $89,473,000,000.  

Does purchasing a data center make sense for a Self Directed IRA? The opportunity is there as there are a number of brokers who can facilitate a data center purchase and can provide listings of available properties. However, the reality of data centers may place them beyond the reach of a standard Self Directed IRA. According to a report from the U.S. Chamber of Commerce, the initial capital expenditure for a standard data center is $215 million. Even with a data center that is half that size, the bar is still too high for most retirement accounts.  

One other factor to consider is the expertise needed to run the data center. With 100+ employees and a highly technical product, running a data center is very much like running a small tech company. REITs who invest in data centers will hire executives with the necessary knowledge base. However, that option is not available for a smaller Self Directed IRA account.  

Self-Storage 

A self-storage facility is a group of small one-room units that are rented out on a monthly or annual basis. This business has seen a resurgence during to the Covid-19 pandemic. With the housing bubble growing and employees no longer commuting in the same way, people are in flux. This means that a lot of them need a place to store their belongings until they get settled. In bigger cities, self-storage units are utilized as an economical extension to what may be a very expensive housing situation. 

Self-storage is attractive to REITs as it is relatively low maintenance and is very much a land-and-building kind of industry. There are five publicly traded REITs that specialize in self-storage: Public Storage, Extra Space Storage, Cube Smart, Life Storage, and National Storage Affiliates. However, the field is still wide open. Even with the size of these REITs, they still only own about 16% of the total number of self-storage properties in the U.S.  

A self-storage business is definitely an option for a Self Directed IRA. It’s possible to buy one property and start running it almost immediately. The price can also be within a doable range depending on the size of the property. Recent listing for a mid-sized property (60 units) are in the neighborhood of $500k. However, with a good location and marketing, a smaller property can also work.  

If you do want to look into purchasing a self-storage business with your Self Directed IRA, keep the following points in mind: 

  • Location – There has to be a sizable enough population in order to make a self-storage business viable. Additionally, you want the business to be visible from a major road as this will be one of the primary ways to drive new business. 
  • Competition – If the area is already flooded with self-storage units, you most probably won’t be able to hit your full rental capacity. This is true for self-storage properties that have already been built, as well as areas that are encouraging the building of more.  
  • Management – You will have to hire at least a part-time manager to run the facility. This could be the single biggest expense of day-to-day operations.  
  • Demographic – For residents to rent a self-storage unit, they will need to have some discretionary funds available. That means you should be looking at an income demographic with a median income of at least $50,000.