Why Do Some Custodians Tell You Not to Invest in Real Estate with Your IRA?

You may already know that using assets in your IRA, 401k or other retirement account to invest in real estate provides essential portfolio diversification and a hedge against inflation, but it also offers a way to earn ongoing tax-deferred (or even tax-free!) income. Still, many custodians and financial advisors refuse to tell their clients to invest in real estate with an IRA, despite the many benefits associated with this often-overlooked investment move.

Read on to learn why your financial advisor or custodian is unlikely to mention buying real estate with your IRA, and get familiar with the pros and cons of this lesser known but very attractive alternative investment strategy.

Why Didn’t My Custodian Tell Me About Buying Real Estate in My IRA?

To be blunt, the main reason your financial advisor or IRA custodian probably never mentioned using assets in your IRA to invest in real estate, is simply because he or she can’t earn a commission when you buy or sell property, as they do with transactions involving stocks, bonds, mutual funds and other common investment vehicles.

"Advisors are generally compensated by either selling financial products or by managing assets", wrote Forbes.

They also rarely if ever discuss strategies to improve and protect clients’ overall financial health, including any important financial decisions that don’t involve buying and selling stocks, bonds, mutual funds, insurance or something else that pays an attractive commission.

Also Read: What Are the Benefits and Risks of Using My IRA to Buy Real Estate? 3 Reasons You Should Own KASA Investment Fund Shares in Your IRA How To Use Your 401k Retirement Money for Real Estate Investing

Understanding Self-Directed IRA's

Another major reason your custodian or financial advisor didn’t tell you to invest in real estate using your IRA account could be that he or she simply doesn’t really understand how the process works. Although it’s not difficult, there are certain rules in place that must be carefully followed in order to remain in compliance with the IRS, and some financial professionals have never taken the time to become familiar with the requirements.

"Traditional IRAs limit what you can own - typically just stocks, bonds, mutual funds, ETFs and certificates of deposit", wrote Barrons. "Self-Directed IRAs offer the same tax-deferred growth, but facilitate owning a much wider array of investments: real estate, private equity funds, etc".

With a Self-Directed IRA, the owner (or beneficiary, which is you) controls everything about the investment decisions, but the IRA is actually held by a custodian. Most often a trust company, the custodian will help manage the Self-Directed IRA, including the annual reporting requirements and asset maintenance.

Sadly, instead of telling you about the long list of benefits investment properties offer, your advisor or custodian is more likely to encourage you to purchase shares of a publicly-traded real estate investment trust (REIT). This is despite the fact that these third-party managed holdings typically trade and behave much like the stock market, with ROI that doesn’t even come close to what you can get from a high-performing private real estate investment fund or a brick-and-mortar investment property. But in order to successfully invest in physical property - or know what to look for when selecting a private real estate investment fund - you have to first develop a knowledge base about the subject, which is outside the realm of experience for most financial advisors and custodians, making them ill-equipped to speak about investing in real estate.

Finally, certain licensed financial advisors and IRA custodians are required to follow strict compliance standards and regulations that are designed to reduce unethical practices and provide specialized services. Some of the regulations provide stringent rules for what types of guidance the advisors and custodians can provide, and/or what type of products they are permitted to sell. This can make it impossible for some advisors to provide totally objective guidance on investments that fall outside of their expertise without facing serious regulatory issues.

Pros and Cons of Using a Self-Directed IRA to Invest in Real Estate

Pros: Investing in real estate with a Self-Directed IRA provides built-in tax breaks on the income that your assets provide, and it also allows you to own Shares of real estate investment funds that give your financial portfolio exposure to incredible upside potential of the world’s most lucrative real estate markets…. Without actually owning brick-and-mortar property outright!

"Diversification is another benefit of a Self-Directed IRA", writes U.S. News & World Report. "If you have some funds invested in the stock market, you might opt to place other funds in alternatives like undeveloped land [or other types of real estate]. This setup could help protect you from potential losses during a market meltdown".

In fact, using a Self-Directed IRA to invest in real estate is a great way to protect your hard-earned assets from ongoing stock market volatility, creditors and judgments. Generally speaking, IRA accounts are one of the safest places to set money aside because it is virtually impossible to sue an IRA, since it is technically a trust account.

Using a Self-Directed IRA to invest in real estate also puts you - the investor - in total control. As long as you fully understand whatever you are investing in, this can be a highly profitable tool for building wealth and enjoying a secure retirement.

Cons: No matter how carefully you research assets before investing with your IRA, the stakes are extremely high, since many of the investments cannot be regulated. And as previously mentioned, it is very important to follow all rules associated with using an IRA account to invest in real estate. For example, your family members are disqualified from living in any investment properties owned in your Self-Directed IRA, and repairs must also be paid for directly from the IRA, so you must keep some cash reserves on hand. Lastly, some Self-Directed IRA accounts have hefty fees associated with administration, so be sure to closely evaluate the administration costs associated with potential custodians.

Want to know more about how to invest in real estate using your IRA account?