The Pros and Cons of Using Real Estate in Your Retirement Plan – Episode 1008

Alternative strategies for retirement are growing in popularity, and for good reason. More and more Americans are realizing that the traditional way to save for retirement is outdated, broken, and ineffective. Buying real estate investments is a great way to exponentially grow your wealth and save for retirement.

To help you determine if buying rental properties in a retirement account is right for you, we’re going to run through some of the pros and cons, and the things you need to consider as you’re building out your retirement plan. Click play to learn the pros and cons of using real estate in your retirement plan!

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The pros:

1. Buying real estate in a tax favored account offers more freedom and more control than traditional retirement accounts can provide. Using a plan like a self-directed IRA allows you to buy a wide variety of asset types, including real estate investments. Unlike a traditional retirement account such as a 401k, a self-directed IRA allows you the freedom to choose the specific investments you want in your portfolio.
2. Certain accounts allow you to create tax-free growth on your real estate investments. If you’re using a tax-advantaged account such as a self-directed IRA to buy rental properties, all of the income you earn inside that account grows tax free.
3. Real estate investments offer a higher level of security than traditional investment types. A stock-based retirement plan leaves your funds vulnerable to the ups and downs of the stock market. But when you have rental properties in your retirement plan, you own a tangible asset that will only appreciate in value and is protected from the volatility of the market. It’s not up for debate, real estate is simply more predictable and stable than other asset types, and because it’s not tied to stock market cycles, you can expect more security in your retirement account.
4. You have the potential to earn higher returns when you invest in real estate than you would via other retirement strategies. Real estate is the number one way to build wealth, so combining its powers with the tax-shelter of a retirement plan, the potential is unmatched. A traditional retirement account gives you limited earning potential, but with real estate you have the opportunity for double digit returns.

The cons:

1. Buying real estate for your retirement means putting off the benefits of cash flow that rental real estate provides. When you buy real estate investments inside of a tax-favored account like a self-directed IRA, all your rental income is locked inside the retirement account. If you are hoping to somehow earn or divide up the cash flow, you won’t be able to do this inside of a self-directed account.
2. Tax-advantaged accounts must follow strict rules and regulations. To compensate for the tax-sheltered gains you can receive inside of your account, you’re going to have to uphold your end of the deal. The IRS has a lot of requirements on how the funds inside your retirement account must be handled. I’m not going to get into the specifics in this video, but it’s important that you understand these rules. To me, the tax benefits are worth it, but be sure to consider all the rules like prohibited transactions before you commit to buying real estate inside your retirement account.
3. Buying real estate inside a retirement account takes away your ability to be hands-on with your property. Depending on your personality type and preferred strategy, this may not be a “con” for you, but it’s something to consider. While in many ways you have more control with a self-directed IRA, there are some ways in which you actually have LESS control with the investment. The IRS prohibits sweat equity, meaning you’re not able to do any work on your property. Your retirement account itself must hire and pay someone to do any repairs, and your custodian will facilitate the transaction. If you’re the kind of investor that likes to do-it-yourself, you may want to reconsider buying rental properties inside of a retirement account.

If you have questions about building out a retirement plan with rental properties, come over to our website and schedule a free 30-minute call with our team at morrisinvest.com. Our portfolio managers are experts in the nuances of buying real estate inside of a self-directed IRA, and we’d be happy to help you develop an investing plan that works for you.

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DISCLAIMER: I am not a financial adviser. I only express my opinion based on my experience. Your experience may be different. These videos are for educational and inspirational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. There is no guarantee of gains or losses on investments.

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