Risk is part of any investment. We know that.
But if you understand diversification, you put yourself ahead of the game. You no longer put all of your eggs in one basket – a true recipe for disaster.
While there’s been a debate on exactly how to diversify, most experts agree that real estate is a stable addition. Not only do you own a hard asset for potential cash inflow, you’re likely to see a higher rate of return than owning a stock, especially if you can own part of a Class-A property.
Class A properties are newly built with top line fixtures, systems, and amenities in place. They sit in highly visible locations, such as business districts, demanding above-average rent and return for well-placed investors. They also allow for a higher rate of return, than what a Class B or C may offer, as determined by location, offerings, tenant income, growth opportunity, and rent income.
Such stability and wealth-building opportunities are the reason many investors have been cashing out retirement accounts. They want real estate. “’We’re seeing many people cash out 401(k)’s or IRAs because they want to take advantage of the market,” said LM Funding, as quoted by CNN Money. “In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures — like tapping their retirement accounts — to fund the deals.”
Though, it’s not always advisable without proper investment guidance, notes High Income Real Estate, a firm connecting smart investors with Class-A commercial property opportunities. “You have to make sure it makes financial sense. Legal advice, accounting advice and real estate advice from professionals should be considered along the way.”
While investors cannot invest in non-traditional assets – like real estate – with 401(k) and IRA investments, a self-directed IRA does offer the flexibility to buy residential and commercial real estate, rental homes, deeds and mortgages. When real estate investors use a self-directed IRA, they’re lending themselves the money. Proceeds from the real estate can then be used to repay the loan and any other expenses.
If managed incorrectly, the self-directed IRA can be disastrous, though. It’s why legal and accounting advice is necessary. “The primary mistake is any appearance of self-dealing, where you benefit financially or otherwise from the property in the account before the minimum distribution age of 59 ½,” according to Business Week.
“You cannot receive any personal benefit from the property – which means you can’t live in it or use it anyway. The real estate owned by your IRA must strictly be used for investment purposes,” notes About.com Money over 55.
There’s always a catch.
Handled properly, buying real estate with a self-directed IRA can be lucrative. But remember, doing so involves good professional advice.