September 12, 2022

4 Unique Investment Opportunities for a Self-Directed Real Estate IRA

Paper houses in front of a laptop with “Property Investment” on the screen with an increasing graph to show investment growth after investing with a Self-Directed Real Estate IRA.

Key Points 

  • Self-Directed IRAs offer the unique opportunity to invest in almost any asset.

  • One of the most popular alternative investments purchased with a Self-Directed IRA is real estate.

  • There are many different types of real estate you can invest in including raw land, commercial property, residential property, and crowdfunding opportunities.

When it comes to personal finances, most people do not like uncertainty. However, uncertainty and volatility are exactly what we are experiencing with the stock market this year. Luckily, there is a way to receive a more reliable source of investment income and have more flexibility in what you can invest in. A Self-Directed IRA gives you the power to invest outside Wall Street and in almost any asset you choose. 

One of the most popular investments with a Self-Directed IRA is real estate. This is because it is a tax-advantaged account that is naturally optimized for buying an investment property. Also, real estate provides steady returns, has high growth potential, and has many different types of property classes to choose from. Madison Trust has streamlined the real estate investment process, so it is simple to purchase the property of your choice with your retirement funds. Now you may be wondering, what kind of real estate should you invest in?   

Here are 4 unique opportunities you can invest in with a Self-Directed IRA for real estate.

1. Invest in Raw Land with a Real Estate IRA

Raw land is a great investment to consider for your Real Estate IRA. Raw land generally incurs low ongoing costs and less maintenance than other properties. Raw land also has the potential for substantial returns, evident through the U.S. farmland average return of 11% per year, while the stock market returned only an average of 8%, between 1992 and 2020.

Agriculture land with mountains in the distance as a raw land investment.

Investors in raw land may purchase farmland, timberland, residential plots, improved and unimproved land, land with an active business on it, oil and mineral producing land, and more.  

With a Self-Directed Real Estate IRA, you have the option to buy and hold the land to sell at a profit at a later date. Or, if your IRA has an adequate amount of funds, you can develop the land as an asset in the IRA account. You can also invest in a business like a winery, brewery, or farm and build wealth from the business’ profits.  

An investor may choose to purchase raw land as a hedge against inflation due to the following reasons: 

House icon with lock in the center to show the security and reliability of a tangible asset.

Tangible Asset

Raw land holds value as a physical property. Unlike stocks, land can never reach a zero-dollar value and can be sold for the value of the physical land itself.

Icon plant growing out of money to display a growing investment opportunity.

Scarcity and High Demand

The U.S. has lost 11 million acres of  farmland over the past two decades due to urbanization. Although land is scarce, there is always a high demand for food. With the decrease in supply and increase in demand, food prices have become more expensive, which is ideal for investors looking to diversify their portfolios with raw land and commodities.

Icon of an increasing trend graph to show real estate’s positive correlation to inflation.

Strong Positive Correlation to Inflation

The value of farmland has historically been about 70% correlated with the consumer price index, making it an effective inflation hedge. 

2. Add Commercial Property to Your Self-Directed Real Estate IRA

Another type of real estate you can invest in with a Self-Directed IRA is commercial property. Commercial property ranges from skyscrapers, office buildings, retail centers, hotels, hospitals, warehouses, storage facilities, parking garages, and more.

Many Self-Directed Real Estate IRA accountholders choose to invest in commercial property for its ability to generate passive income through rental fees. It also has a high-income potential, as the typical annual return on purchase price is between 6% and 12% depending on the area, economy, and external factors

Retail center and busy street as a commercial property real estate investment.

In addition, commercial property tenants’ and investors’ interests are often aligned. For example, a company like Starbucks desires to upkeep its brand image in the public eye. As Starbucks maintains and improves the quality of the property, the investor benefits since the value of the property will likely increase.  

There are a variety of residential property opportunities such as single-family homes, multi-family homes, condominiums, townhomes, duplexes, apartments, vacation homes, mobile homes, rental properties, and more.  

Colorful houses on one side of a street as a residential property investment.

Investors in these types of investments often benefit from the Self-Directed IRA LLC. This is because the IRA LLC gives the investor full checkbook control over the funds. This means the accountholder can simply write a check or send a wire directly from their dedicated IRA LLC checking account to purchase the property, pay expenses, and receive rental income. The IRA accountholder serves as the non-compensated manager of the property and has the power to place all investments.  

4. Invest in a High Value Property through Crowdfunding Opportunities with a Self-Directed IRA for Real Estate

If you are looking to invest in real estate but do not have the means to do so on your own, you may want to consider investing with a private equity firm or private REIT (Real Estate Investment Trust). These firms pool capital together from many investors to acquire a costly property that investors cannot afford with solely their own IRA funds.

Paper cutout of people holding hands in front of a stack of coins to show the profitability of a crowdfunding investment opportunity.

For example, assume a fund manager forms an entity, such as an LLC, intending to purchase a property worth $1.5 million. The goal is to raise $1,000,000 in equity and borrow the remaining $500,000. To raise the equity, the investment sponsor may offer units of the LLC for an amount between $60,000 - $120,000 each with a minimum investment of one or two units. As a Self-Directed Real Estate IRA investor, you may choose to invest $60,000 which may not have been possible without the crowdfunding option. This gives you the opportunity to be part of a potentially profitable investment without having to use all of your IRA funds.

Benefits of Investing with a Real Estate IRA include (1) Tax-Efficient Account (2) Many Investment Opportunities (3) Reliable Investment Income (4) Tangible Assets that can never reach a $0 value.

Conclusion: Let’s Put It All Together

As a Self-Directed IRA accountholder, you have the unique opportunity to diversify your retirement portfolio with assets you understand and believe in. Real estate is among the most common investments in a Self-Directed IRA due to its potential for steady returns, wide variety of investment options, and high growth opportunity. Today’s the day to diversify your retirement portfolio by investing in the real estate opportunity you believe in with a Self-Directed IRA! 

Schedule a call today with one of our Self-Directed IRA Specialists to get the process started!

Disclaimer: Madison Trust Company does not provide legal, tax or investment advice. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.


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