What Type of Real Estate Investment Makes the Most Sense For Your Self-Directed IRA?

Having the ability to invest in real estate with your self-directed IRA means that you have important and powerful alternatives to simply investing in stocks, bonds and mutual funds, as you would be limited to with a traditional IRA custodian.

But even if you’re interested in using your self-directed IRA to invest in real estate, you’ve still got choices to make in terms of the types of real estate to purchase. You can make this determination by asking yourself what are your investment goals and objectives.

Long-Term Growth

If your primary investment objective is long-term growth, then there are a number of different types of real estate investments you can make. Some of the most common types of investment real estate, including single-family and multifamily residential properties, are certainly capable of generating healthy long-term returns.

As with any type of investment, though, you still need to do your research in order to be as confident as possible that you are choosing the right property. Real estate investments as a whole will increase in value over time, but that’s not always the case. And just take a look at what’s happened to real estate prices across the country over the last 20 or 30 years. Some local real estate markets have experienced growth rates significantly higher than others.

When your goal is long-term growth you can also find many opportunities in other types of investment real estate, including commercial and industrial properties, undeveloped land, and even farmland.

Current Income

On the other hand, if you’ve already entered retirement then you’re much more likely to be interested in how real estate investments can generate income to cover your retirement expenses, rather than long-term growth potential. One possible exception is if you have a significant estate that includes other retirement accounts, and you’re looking to make use of a self-directed Roth IRA to help you achieve your estate planning goals.

A Retirement Home

Many self-directed IRA holders consider this type of investment, but fewer than you think actually follow through. Since many future retirees plan to move to a different part of the country once they stop working, it’s possible to buy a retirement home with the funds in a self-directed IRA, and then use that during retirement.

One important factor to consider if you choose to go this route is that any use of that retirement home by you or any members of your family, at any point before you actually retire, is prohibited by the rules on IRAs. That’s because such a use would be considered “self- dealing” (that is, using retirement funds or assets to benefit yourself before you actually take a distribution of those funds or assets), and this could trigger taxes and penalties if it occurs before retirement.

The best piece of investment real estate for your self-directed IRA is the one the best matches your investment goals and outlook