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A Q&A on Owning Single-Family Homes in an IRA

House Outline filled with Question Marks

  |  By Matthew White, CISP

Buying a single-family home to hold as an investment property is a popular strategy among self-directed IRA holders. Investors can benefit not only from any potential price appreciation but also from a steady income stream if they rent the property to tenants.

This summer, PENSCO hosted a roundtable to discuss real estate and Adiel Gorel of ICG Real Estate Investments said that one housing market he was keeping a close eye on was Jacksonville, Florida. I blogged about why Adiel thought Jacksonville was a good market for IRA investors to consider, and I recently caught up with him to discuss holding real estate in a retirement account.

Here are some excerpts from the discussion:

MW: Why would an investor want to consider owning a single family home in a self-directed IRA?

  • AG: Real estate, in general, is a good asset class. It is a hard asset that usually keeps up with inflation. Historically, it has grown at 1.5 times the rate of inflation.

    Single-family homes are the most liquid real estate that’s available. When you go to sell your single-family home, your potential buyer is everyone in the marketplace. When you go to sell an apartment complex that you own, your potential buyer is a small group of people or a syndicate that might want to buy it.

    I look at this as a long-term investment that you hold for at least a decade. It’s not a stock. You want to be able to hold the home long enough so you never have your back against the wall and need to sell in a down market. 

MW: What percent of a portfolio do you recommend an investor hold in real estate?

  • AG: Investing is all very subjective and personal. When someone is just starting out, and they own a portfolio of stocks and bonds, they may want to dip their toe in the water. So I would recommend maybe 10% or 15%.

    If an investor warms up to real estate investing, develops a comfort level and has a natural affinity for it, they could consider holding 25% in real estate.

MW: This summer you singled out Jacksonville, Florida as a market that you liked because of the housing market opportunities that will come with the widening of the Panama Canal. Is there another market that you favor?

  • AG: Most investors have seen that the great deals of the recession are largely not here anymore. In the last year, we’ve seen a big influx of investors to states that everybody put on the sidelines -- the stable states. These states didn’t go up like crazy and they didn’t go down like crazy. States like Texas and Oklahoma. Now, people are flocking to markets like Dallas and Houston and Oklahoma City.

    I would give the nod to Oklahoma City because the prices are very much the same as they are in Dallas. The rents are very much the same as they are in Dallas. But the property taxes are less than one half of those in Dallas, and that means much better cash flow if you are buying an investment property.

    In addition, in the past few years they’ve discovered a reserve of oil gas that is referred to as the South Central Oklahoma Oil Province, or SCOOP. This bodes well for the future in terms of demand for houses.

    (Editors note: This article discusses how Oklahoma is being affected by falling oil prices.)

MH: The Federal Reserve decided not to raise interest rates at its last meeting. What does that mean for buying single-family homes?

  • AG: We’ve seen how real estate performs in a rising rate environment many times before, and mortgage rates don’t typically jump right after an interest rate rise.

    By delaying the rate hike, the window for taking advantage of such low rates got bigger, but it’s not indefinite. Investors should use it wisely and work with a professional who can help you set up a non-recourse loan to buy a single-family home in a self-directed IRA.

For investors who are interested in learning more about holding single-family homes in a self-directed IRA, you can read my blog post on non-recourse loans.

(Editor’s note: This interview has been edited and condensed for brevity and clarity.)

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.