Leveraging Your IRA to Invest in Multifamily Real Estate

Leveraging Your IRA to Invest in Multifamily Real Estate

For many self-employed entrepreneurs and part-time workers who don’t have access to a 401k, Individual Retirement Accounts (IRAs) are the gateway to financial independence and have great tax advantages. Both traditional and ROTH IRAs offer fantastic opportunities to save for retirement while building long-term wealth. However, they come with limitations. These accounts are managed by financial institutions, restricting investment choices to a predetermined selection of funds, stocks, and bonds.

This is why many investors are switching to a self-directed IRA or ROTH accounts. With a self-directed account, you can self-direct your investments, diversifying beyond traditional options to alternative investment classes. 

By choosing a self-directed account, you can break free from financial constraints and sculpt your retirement nest egg according to your vision. This article dives into the world of self-directed IRAs and unlocks the true potential of your money through Multifamily real estate investments. 

What is a Self-Directed IRA

Self-directed IRAs (SDIRAs) may seem like rebels in the retirement world, but they follow many of the same rules as their traditional counterparts.

Like traditional IRAs, SDIRAs adhere to the IRS’s contribution limits and withdrawal rules. These guidelines serve as guardrails, ensuring that your retirement savings journey stays on track. While both traditional and Roth IRAs offer distinct tax advantages, SDIRAs carve out their own niche in the financial landscape. 

One of the benefits of Traditional IRAs is that contributions are tax-deductible, offering potential savings during tax season. While Roth IRAs offer investors the possibility of tax-free distributions in retirement. In essence, the key difference lies in the timing of the tax benefits: with traditional IRAs, you get tax deductions upfront, whereas Roth IRAs offer tax-free withdrawals when you reach retirement age.

What Sets Self-Directed IRAs Apart

Unlike traditional retirement accounts where decisions may be filtered through custodians or administrators, SDIRAs (self-directed IRAs) empower you, the account holder, to take the driver’s seat in managing your investments.

While SDIRAs typically have a custodian administrator overseeing compliance with IRS regulations, you are the ultimate decision-maker and bearer of risk. As the captain of your financial ship, you’re intimately acquainted with your risk appetite and investment objectives. This means you can tailor your investment strategy to align with your unique goals and tolerance for risk. 

The autonomy afforded by SDIRAs also means shouldering the responsibility for navigating the risks inherent in your investment choices. Whether you’re eyeing real estate ventures and private equity opportunities or alternative assets, the onus is on you to conduct thorough due diligence and assess risk factors before diving in. It is this control that gives you the flexibility to pursue investment avenues that best complement your financial objectives.

Advantages of a Self-Directed IRA

While navigating your retirement course of action, using self-directed IRAs When it comes to planning for retirement, using self-directed IRAs (SDIRAs) can provide three significant benefits that can help you achieve financial independence. Let’s take a closer look at each advantage:

  1. Portfolio Diversification – By using SDIRAs, you’re not limited to traditional assets like stocks and bonds. Instead, you can diversify your portfolio with a wider range of assets, which can help minimize risk while increasing your growth potential.
  2. Potential for Higher Returns—If you’re knowledgeable about alternative assets such as real estate, SDIRAs can provide an opportunity to earn higher returns on your investments.
  3. Tax Benefits—SDIRAs offer investors tax benefits, making them an excellent investment vehicle for those looking to achieve investment success while minimizing their tax liability.

How to Invest in Multifamily Real Estate Using an SDIRA

Conducting proper and thorough due diligence is crucial when making investments. This involves researching and evaluating the partner or sponsor you are investing with, the product or business you are investing in, and the potential risks involved. By doing so, you can make informed decisions and minimize the chances of any negative outcomes.

Step 1

Before investing alongside someone, it is important to understand their ability to acquire, fund, and fulfill their projections. At Viking Capital, we prioritize transparency and offer our investors a track record of our properties and their performance. This helps our investors make informed decisions about their investments and ensures that they are partnering with someone who has a proven track record of success. 

Step 2 

It is important to conduct thorough due diligence on a potential asset before investing. Just like our acquisitions team, investors should also analyze the region and location of the property. They should be given a concise business plan that demonstrates how returns will be met and a timeline for their distribution. Lastly, investors need to ensure they align with the metrics outlined in the business plan before committing to the investment.

Step 3 

Risk assessment. Any investment has inherent risk, so understanding where the risk is for this property is important. For instance, if the property’s business model is value-add, the risk could be not completing the renovations as planned, leading to lower than projected NOI. Another risk to consider is economic, which involves assessing the economy and the conservative nature of the projections. If the projections are too optimistic and something happens in the economy, it could harm the investment’s potential.

Once you are satisfied with the due diligence, it is time to fund. This is where your SDIRA comes in. By using a well-established and trusted self-directed IRA company, they will act as the liaison in the process of funding. Once you have directed them on how much you would like placed into the investment, it is their job to ensure your capital is deployed while maintaining IRS rules and regulations. In essence, custodians are the linchpin of the self-directed IRA ecosystem, bridging the gap between compliance and opportunity. With their guidance, you’re free to explore the vast landscape of alternative investments.

Benefits of Multifamily Real Estate Investment

Passive Investing

People who are busy with their careers often look for ways to generate income and savings without having to take on a second profession. One way to do this is by investing money and letting it do the work for them. For those who are focused on building long-term wealth for retirement, passive investing provides the most significant benefit.

Companies like Viking Capital take responsibility for handling the day-to-day operations of the investment property on your behalf. As a passive investor, you can relax and enjoy distributions as your money works so you don’t have to.  It’s a mutually beneficial arrangement: the deal sponsor ensures the investment thrives while you reap the rewards without the hassle of hands-on management.

Tax Advantages

  1. Mortgage Interest Deductions: Picture this: unlimited mortgage interest deductions. As a real estate investor, you can harness the power of these deductions to offset a portion of your cash flow profit, putting more money back in your pocket come tax time.
  2. Bonus Depreciation with Multifamily Properties: Investing in multifamily properties opens the door to bonus depreciation when paired with cost segregation. This dynamic duo allows you to front-load depreciation deductions, turbocharging your tax savings and enhancing your overall return on investment.
  3. 1031 Exchange Provision: The IRS’s provision of a 1031 exchange. This powerful tool enables investors to defer capital gains taxes when selling investment property by reinvesting the proceeds into a like-kind property. It’s a strategic move that allows you to preserve your investment capital and continue building wealth with minimal tax impact.

Asset Appreciation

Historically, real estate has appreciated over time, which is ideal for an IRA’s long-term investment horizon.

The Takeaway

There are numerous benefits of using an SDIRA to create wealth. While taking control of your investment decisions may seem daunting, there is also great potential for rewards. By diversifying your portfolio and investing in alternatives such as real estate, you can often mitigate the financial challenges of the markets. Diversified portfolios are essential for success and risk management, ensuring better opportunities for wealth creation over time.

If you are interested in investing in real estate, take a look at our open investment opportunity, Villas at Sundance, or book a call. We are happy to help you through the process. Book Now.