Talk to any financial planner and one of the key themes that is repeated time after time is “diversification”. It is one of the cornerstones of building a solid investment portfolio that can weather the ups and downs of market cycles.
What most financial planners won’t tell you is that “alternative investments” can offer an ideal vehicle to provide that diversification—and potentially deliver more lucrative returns in the process. Yet most brokerage firms, mutual fund companies and other advisers that manage retirement accounts tend to focus on traditional investment options such as stocks, bonds, CDs and mutual funds. “Alternatives”, such as direct investment in real estate, are not discussed because they are usually not an investment option they offer.
Real estate has long been viewed as a good diversity play (particularly as a hedge against inflation) as well as for the appreciation and yields that it can deliver. Many investors also like buying a stake in a fixed asset such as a shopping center or an office building. IRAs allow account holders to participate in direct real estate investments, but the key is finding an IRA provider who is willing to service this type of investment.
Those individuals who want to be more firmly in the driver’s seat when it comes to planning their financial futures are discovering the opportunities that exist with self-directed IRAs. Self-directed IRAs give individuals the flexibility to build a diversified portfolio with both traditional and what some might consider to be “alternative” investment options, such as direct investment in real estate, limited liability companies and precious metals.
The self-directed IRA structure was first affirmed by a tax court case in 1996 and the retirement savings options have been gaining in popularity in recent years thanks to more media attention by the likes of the Wall Street Journal and CNBC. Some industry estimates place the number of self-directed IRA accounts in the U.S. at 2.5 million and growing. These days, individuals can easily buy and sell stocks, bonds and mutual funds with the click of a button to grow and modify investment portfolios and many are looking for that same control in their IRA or 401(k).
Self-directed IRAs provide a viable avenue for direct real estate investment for accredited investors. A common challenge for most individuals contemplating direct real estate investment is allocating the significant capital required to buy into a real estate investment opportunity, either through a whole ownership or some type of partnership entity.
To address this challenge, real estate crowdfunding platforms have emerged to provide alternative means to make direct real estate investing with accessibility as a key differentiator. Crowdfunding marketplaces, such as CrowdStreet, offer direct investment in quality commercial real estate assets to accredited investors for as little as $25,000. Investing via a self-directed IRA provides the added benefit of allowing individuals to invest with their pre-tax dollars.
A self-directed IRA does not necessarily give an individual carte blanche to make any investment. The IRS does still restrict investment in some areas such as life insurance, collectibles and certain “prohibited” or unlawful transactions. However, self-directed IRAs do give individuals many more options when making investment decisions, including allowing them to participate in crowdfunding. For more information on how to set up your own self-directed IRA, or use your self-directed IRA to invest in crowdfunding opportunities, click here.
