Commercial Real Estate Investments in a Self-Directed IRA

Interested in commercial real estate, but don’t have a million dollar IRA? You aren’t alone. However, with a self-directed IRA there are several different options available to obtain the funding you need for the investments you choose to acquire.

Commercial real estate (CRE) can be a good passive investment. Today’s costs are considerably lower than in the past, making now a perfect time to purchase property and diversify your self-directed IRA.  However, commercial properties are often valued more than 10 times that of a residential rental property and your IRA may not be in the million-dollar range.  Hence the question, “How do I get my smaller IRA invested into a commercial property?

First of all, let’s define commercial real estate.

CRE refers to buildings or land intended to generate a profit, either from capital gain or rental income. You can choose to maintain either an active or passive investment in commercial real estate. An active investment requires that you are more involved with the daily tasks of managing and/or improving the property, which in itself is a full-time job. This article will focus on using CRE investments as passive, wherein you would hire a property manager to be in charge of the management of the property. There are several major types of commercial property that can be used in this manner, including multifamily buildings, retail and/or office space, industrial structures, and hospitality establishments.

Why would I want to invest in commercial real estate?

One good thing about using CRE as a passive investment is that someone else manages the property and they mail your self-directed IRA the monthly rental check. Any expenses made toward the property come out of your IRA, or a specific separate account designated for expenditures towards the maintenance of that property.  Another positive thing is the return on investment. Many commercial real estate investments produce double-digit returns, increasing the value of your portfolio with minimal “work” by you.

How do I invest in commercial real estate?

There are many funds that have two arms, if you will. One arm specializes in raising capital by selling shares of a fund. For example, the fund manager may form an entity, such as an LLC or private placement that is trying to purchase a $1 million property that needs some improvements. The financing goal is to raise $500,000 in equity and then borrow $700,000 for a total of $1.2 million.

It’s important to point out that the IRA may be subject to unrelated debt financed income (UDFI) tax in this situation. If the loan secured by the fund is non-recourse, then the IRA is subject to the tax.  However, if the fund manager guarantees the loan, then there is no UDFI liability.

In order to raise the equity, the sponsor will offer units of the LLC or private placement for $50,000-$100,000 each with a minimum investment of one to two units. That’s where your self-directed IRA comes in. You may not want to risk your entire IRA, but $50,000 might be feasible.

The second fund manager’s arm specializes in managing the property. As mentioned before, a property manager relieves the investor of the burden, which makes it a passive investment. The management company does take a fee, but it takes care of the upkeep, puts tenants in the offices, etc.

Why wait to get started?

Ultimately, it is up to you to decide what type of investment to make, which is what makes self-direction powerful.  Here are some tips if you decide to acquire commercial real estate as an investment in your self-directed IRA.
* Get to know your fund manager
* Study the market, understand the time frame (from acquisition to the realization of gains)
* Always seek sound legal and tax advice in every transaction

If you have any questions regarding this article or would like to learn more about self-directed real estate IRAs, please contact us.

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.