Real estate crowdfunding investments in IRAs provide a way to passively invest in real estate and still reap the potential returns real estate can offer. Crowdfund investors bypass the hassle of having to personally work on renovations, maintenance issues, or deal with tenants. This hands-off approach is a great fit for self-directed IRA owners, who are limited in the amount of personal interaction they can have with real estate assets held in their accounts.
IRS rules prohibit account owners from performing sweat equity on real estate owned by their IRAs. This means you can’t perform a simple plumbing repair, paint an apartment, or even personally receive rental checks from tenants in your IRA-owned property.
But crowdfund assets don’t require a thing from investors other than the capital they invest. Investors earn income based on the percentage of their buy-in; income and expenses, if any, are paid according to that ownership percentage. It’s a relatively seamless process compared to some of the work individual investors go through to rehab a renovation property or manage multifamily homes.
What Makes Real Estate Crowdfunding Investments for IRAs so Attractive?
Real estate crowdfunding investments for IRAs have quite a few benefits.
- Your IRA can invest with limited funds, which allows you to invest in multiple crowdfunding options if you choose.
- All income grows in your IRA on a tax-sheltered basis.
- Crowdfunds are passive investments, meaning no “work” on your IRA’s part or yours.
- This type of partnering funds with multiple investors can mitigate the level of risk.
- Successful crowdfunds have the potential to produce significant returns.
- There are different crowdfund options available for IRAs.
- Real estate is a desired asset because it doesn’t rise and fall with the stock market.
Additionally, you are no longer required to be an accredited investor to invest in real estate crowdfunds.
In the past, crowdfunding opportunities were open to accredited investors with a net worth of over $1 million and earnings of at least $200,000 income over the previous 2 years. Your IRA is considered an accredited investor only if you personally meet those qualifications. But the JOBS Act changed the investing field a bit, allowing non-accredited investors to participate in some crowdfunding investments. This opened the door for many people (and their self-directed IRAs) to invest in real estate crowdfunds.
Performing Hands-On Due Diligence Is Critical
Even though elements of the actual investment are hands-off, you want to perform exhaustive due diligence before your IRA invests. Check into every aspect of the crowdfund including the platform, manager(s), other investors (if available to you), the property (if applicable), agents involved in oversight, the location—anything that can help you ensure the investment platform is valid and the investment is viable. Doing so can help you avoid fraudulent “deals.”
You also want to find out if any portion of the investment of the crowdfunds are going to be debt-financed.
IRA-owned assets that are leveraged with a loan make your IRA subject to unrelated debt-financed income (UDFI) tax. For example, let’s say that 50 percent of the crowdfund investment is acquired via investors’ capital, and the other 50 percent is debt-financed. Your IRA will owe tax on 50 percent of the income it earns, on the portion of income that was debt-financed. You must be aware of and prepared for this possibility.
Are Real Estate Crowdfunding Investments a Good Fit for Your IRA?
You are the only one who can answer this question. If you’ve wanted to invest in real estate assets but don’t know where to start, real estate crowdfunds can give you the opportunity to do so without a huge investment.
The chance to earn tax-sheltered income for retirement with that investment does sweeten the deal. Diversity in your retirement portfolio is essential, and real estate assets are the darlings in the wide world of alternative investments available in self-directed IRAs. You can certainly learn the ropes with your first investment or two and measure the benefits of the income your IRA takes in versus the level of risk involved.
If you’d like to learn more about real estate crowdfunding in IRAs, contact Advanta IRA. We administrate thousands of real estate IRAs every year and can answer your questions about how it works, our costs for self-directed IRAs, how to get started, and how we work with you throughout each investment process.
