In a previous blog post I talked about choosing the right real estate investment for your IRA and I thought it might be helpful to dig a little deeper on what is considered an “indirect” real estate investment in an IRA. To be clear, your IRA is investing in real estate and is doing so through a fund or legal entity as opposed to owning title on the property. The various types of indirect real estate IRA opportunities can include anything from multi-billion dollar real estate investment trusts (REITs) to joint ventures and private LLCs and LPs, all of which (under most circumstances) can be held in an IRA. In general, indirect investing requires less effort – meaning your IRA doesn’t have to deal with the day to day management of the investment property. For instance, in a private equity deal structured as an LLC, there are very few steps for the IRA account to complete. Typically the IRA account owner will fill out the subscription paperwork for the IRA to be a member of the LLC, and then instruct the alternative asset custodian (such as PENSCO) to countersign any applicable documents and send the funds from the IRA account to the real estate investment company. This is far less labor-intensive than the steps involved in direct real estate investing, which can include scouting investment properties, finding a broker, finding a title company, finding a loan servicer, finding a property manager, finding renters, etc. Additionally, the IRA account owner does not have to deal with any extra paperwork concerning the renting or leasing of the underlying properties held in the LLC, as that is usually taken care of by the investment company itself. The LLC will also manage any payments coming in from rentals or sales, and they will generally do all the accounting and make any distributions to the IRA account (please note: like all IRA investments, any distributions from the LLC or payments to the investors MUST be paid to the IRA account and not the underlying account owner). So while there is less effort, the trade-off is the owner usually has little to no input about the underlying properties in the fund and how/when to buy or sell the properties within the portfolio. The investment company will generally choose where and when to invest the client’s money, in contrast to the client being in complete control over a single, direct real estate purchase. As with all self-directed IRA investments, choosing which investment vehicle to use depends heavily on the IRA account owner’s risk profile and investing strategy. Regardless of which method appeals to you, the tax advantages of holding a physical piece of property or an equity position in an LLC are attractive to self-directed IRA investors looking for long-term income generating or growth strategies. About the Author: If you have a question about investing in real estate using a self-directed IRA, Pensco Relationship Manager Michael Howe should be your first phone call. Since 2010, Michael has answered every question imaginable about self-directed IRA transactions, ranging from the simple to the very
The post The fundamentals of indirect real estate IRA investing appeared first on Personal Real Estate Investor Magazine.
