Residential vs Commercial Real Estate Investing

Commercial real estate and residential property investments are popular assets that are used to build tax-sheltered income in self-directed IRAs.

Both residential and commercial investments have the potential to garner desired returns but are unique in their benefits. Before deciding on which alternative to add to your retirement portfolio, explore the advantages of both.

Residential real estate investments include single and multi-family homes, rehabs, and rental property. Tax liens and deeds can be purchased with self-directed funds. Private mortgages are also a popular asset permissible in these plans.

Commercial real estate investments encompass office space, restaurants, strip malls, and condominiums, and more.

Pros and cons of residential and commercial real estate investments:

  • Residential property may be cheaper to purchase than commercial property, depending on what you’re looking for.
  • Residential property may be easier to maintain than a large commercial space.
  • Both can go into foreclosure, meaning you can acquire them as such.
  • Commercial space can pose less risk of losing potential income—if one tenant leaves you may have 75 others in place to offset the loss from the vacant unit.
  • For both, you can choose to rent the property out for consistent cash flow over time. You can also sell both now or in the future to make a profit.
  • Income gained by commercial real estate is often relevant to the usable square footage of the space; residential typically is not.
  • If you want to generate substantial income from rental property, commercial rental space with many units may generate more income than a single residential property. They will require more work, as well, so keep that in mind.

Rules of investing in residential and commercial real estate with an IRA:

  • You are unable to vacation in or otherwise benefit from any real estate investment in your IRA until you retire.
  • You are unable to manage property yourself; you must hire a third party to do so.
  • Your IRA is unable to purchase property from or sell property to any disqualified person, which includes you.
  • All income and expenses must flow directly into and out of the retirement plan.

Advanta IRA handles hundreds of real estate investment transactions every year for our clients who use self-directed retirement plans. Our staff works closely with clients to ensure the administrative details of all investments are performed within the regulations of the IRS.

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