Investing in a REIT with a Self Directed IRA

Posted on: August 6, 2021   |   Category: Real Estate
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What is a REIT? 

A REIT – Real Estate Investment Trust – is simply a company that invests in real estate. It appeals to investors who like real estate as an asset, but don’t want to get involved with the actual purchase or management. The REIT handles all the technical and administrative details, while the investor supplies funding. REITs come in three basic iterations and a Self Directed IRA can invest in any of them. 

Types of REITs 

There are three types of REITs:   

  • Public listed REIT 
  • Public non-listed REIT 
  • Private REIT 

A public listed REIT is regulated by the SEC and is listed on the stock exchange. Because of this, it functions in a similar manner to other stocks where investors can buy and sell at will. This arrangement provides a benefit of liquidity which makes it unique amongst real estate investments. However, the stock-like format also comes with a downside. Like other stocks, the share price will be affected by market forces and suffer from stock market volatility. In market jargon, this is known as correlation risk. This risk is present even if the properties that the REIT are holding are performing well and meeting objectives. The REIT’s management team has to play to stockholders’ quarterly expectations and deals will be structured accordingly. In this sense, a public listed REIT is not really so much a true real estate investment, as it is another stock offering that can be used for diversification. 

A public non-listed REIT is also regulated by the SEC, but it is not listed on any stock exchange. This gives the REIT the advantage of low correlation risk. Managers can focus on long term growth and profitability without being worried about the short-term fluctuations that affect stock offerings. However, non-listing comes with the obvious downside of not being as liquid. If you have a need to get in and out quickly, a non-listed REIT may not be the best option.  

A private REIT is neither listed, nor regulated by the SEC. Many of these REITs are limited to accredited investors (i.e. those with a net worth of $1 million and significant income.) Due to the lack of regulation, a private REIT can be more flexible in the type of property it purchases, the way it manages it, and the overall investing strategy. Because of this this, it can often deliver better returns. However, the lack of regulation and possible liquidity are significant factors for investors. If your retirement investing needs the safety of SEC oversight, then a private RIET should be avoided. 

Which Self Directed IRA Account is Best for REIT Investing? 

There is a wide variety of Self Directed IRA accounts. For the purpose of investing in a REIT, we can classify Self Directed IRAs into two main categories: custodial accounts and checkbook control accounts. A custodial account is the classic Self Directed IRA structure where the IRA is held by a specialized custodian and the custodian executes all transactions.  In this kind of account, setup is simple and fast, and the custodian will walk you through every step of the process. 

In a checkbook control account, the account holder sets up a dedicated checking account via which they can perform all transactions themselves. Accounts that possess this functionality include the IRA LLC, IRA Trust, and self-directed Solo 401(k). The setup is a bit more involved and costly, but it comes with the benefits of being able to invest quickly in real time and save a tremendous amount by getting rid of transaction fees.  

Which of these two Self Directed IRAs is best for investing in a REIT? For most REITs, the classic custodial account works just fine. Since the general nature of a REIT is for the investor to place funds and then not do anything else, the additional benefit of checkbook control is not necessary. The classic custodial Self Directed IRA will provide a simple and economical path for investment, especially considering the low transaction nature of the asset.  

The above holds true if the entirety of your Self Directed IRA is invested in the REIT. However, if you plan on investing just a portion of your Self Directed IRA in the REIT, and the rest will be invested elsewhere, then you should seriously consider the checkbook control model. This is because multiple assets often indicate multiple transactions and that is better served with the $0 transaction fees of checkbook control. This is even more relevant when one of the Self Directed IRA assets is transaction heavy, like a physical multi-family unit. 

Additional REITs and Self Directed IRA Facts to Consider 

  • Public REITs, both listed and non-listed, are generally open to all Self Directed IRAs, while private REITs are often limited to accredited investors. 
  • Public REITs are mandated by the SEC to distribute at least 90% of the taxable income to shareholders.  
  • Most financial advisors still push diversification as a core strategy. For a Self Directed IRA investing in a REIT, this could be achieved by investing in both correlated assets (public listed REITs) and non-correlated assets (public non-listed REITs or private REITs.) 

Your First Steps With a Self Directed IRA and a REIT 

If you already have a REIT that you would like to invest retirement funds in, your next step would be to speak to a Self Directed IRA specialist. The specialist will have the knowledge base to understand the structure of your REIT and recommend the best Self Directed IRA account for the specific situation. This is a free call, but also an important one, as choosing the right Self Directed IRA can save you thousands of dollars in the long run. You can schedule a complimentary call here