Commercial Real Estate Investments for Small IRAs

Interested in commercial real estate investments but don’t have a million-dollar IRA? You aren’t alone. Commercial property can be a great asset. But commercial properties are often valued more than 10 times that of a residential rental property. However, there is a way your self-directed IRA can invest using limited funds.

What Is Commercial Real Estate?

Commercial real estate investments include everything from skyscrapers and office buildings to raw land—assets that are intended to generate a profit, eitherOverlay image of skyscrapers and an investor's hand with a pen, calculating a commercial real estate investment for his IRA. from a sale, through rental income, or development. Depending on their goals, investors can choose to acquire active or passive investments.

An active investment requires more involvement of the investor to perform the daily tasks of managing and/or improving the property. When investing with your IRA, you must understand that IRS rules restrict IRA owners from personally managing property or performing repairs. While your IRA can hire a property manager to do both, passive investments in commercial real estate may make more sense and cost a bit less to acquire.

This article provides an example of a passive investment in commercial real estate and how it can work in your IRA.

The Basics of Passive Investments in Commercial Real Estate for IRAs

Self-directed retirement plans have the ability to invest in private equity and stock, among many other alternative investments to the stock market.

Within that asset class are commercial real estate investment funds that have two arms. Private equity firms and real estate investment trusts (REITs) are types of entities that pool capital from different investors to acquire lucrative property. Multifamily syndications offer another avenue to passively invest in real estate.

Here’s how they work:

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, with the intent 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. To raise the equity, the sponsor offers 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 and compliant with IRS rules prohibiting IRA owners managing IRA-owned property. Your IRA is simply one investor in the larger pool of investors participating in the fund. The management company does take a fee, but it takes care of the upkeep, puts tenants in the offices, etc.

Tips for Commercial Real Estate Investments

If you decide to make an investment in commercial real estate within your IRA, make sure you:

  • 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 Advanta IRA today.

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

About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.