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The Benefits of Using an IRA to Invest in Real Estate

Model house on top of cash

  |  By Chris Shanahan, CISP®

Did you know that you can use your retirement dollars to invest in real estate? Since 1974, investors have been able to use self-directed IRAs to hold alternative assets – essentially, non-traditional assets such as precious metals, private equity and investment property. But even after 20 years, many investors still don’t know that this option exists.

It’s understandable that this strategy tends to fly under the radar. For one thing, the average investor is unaccustomed to investing in alternatives. Even the name “alternatives” conjures up images of risky, complicated investments that only an institution would touch. Which is why many people are pleasantly surprised to discover that they can use a self-directed IRA to invest in an alternative asset they’re already very familiar with – real estate.

Real estate investments can provide returns in two ways: capital gains and rental income. When you hold an investment property in an IRA, you can defer taxes on any gains in value as well as any rental income earned until you begin to take distributions from the account. There are a few rules and considerations to be aware of – for example, the property must be for investment purposes only (no personal use allowed). I’ll cover all the rules in more detail in my next post.

There are several compelling reasons to consider adding real estate to your retirement portfolio. For one thing, it can provide some much-needed diversification to your existing investments. As of 12/2012, Americans held $5.4 trillion in their IRAs, and the vast majority of that money was invested in stocks, bond and mutual funds. And in the recent financial crisis, all three of these investment types lost value at the same time – leaving a lot of investors to play catch up with their nest eggs.

For some investors, real estate is just an investment they’re more comfortable with than traditional stocks and bonds. Like any retirement account, the success of your self-directed IRA is a function of how well the investments do. If you’re more comfortable choosing investment properties than evaluating securities, that can translate to greater confidence in your IRA’s prospects.

And many people prefer real estate investing because it’s something tangible that they can literally see and touch. Owning a physical entity in an IRA gives them more comfort than, say, not knowing exactly how their mutual fund or stock works and what’s causing it to gain or lose money. Many investors like the fact that they can drive by a piece of property and say “Hey, that’s one of my long term investments.”

In my next blog post, I’ll cover some of the most important rules around real estate IRA investing.


The PENSCO 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.