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Millionaires Share Why Real Estate is the Best Investment

real estate is the best investment
4 Minute Read

Real estate is the most popular alternative investment among self-directed retirement investors (with good reasons, which we’ll soon share). With a Self-Directed IRA, all income and gains the real estate investment generates are tax-free until you make a qualified distribution. If you establish a Self-Directed Roth IRA, a pre-tax retirement plan, you never have to pay tax on the income you withdraw from the plan.

There’s no doubt that using a retirement plan is the best way to invest in real estate, but why is real estate such a popular investment to make?

Why Real Estate?

Investors like the fact that real estate is a tangible asset they can see and touch. It produces a steady stream of rental income and appreciates in value during times of inflation. Hear what five of the world’s top entrepreneurs (who earned millions from their real estate investments) have to say about investing in real estate.

Best Investment

Real estate is still an excellent investment, whether you have years of industry experience or you’re testing the waters. It’s true, success is a greater guarantee when you invest in assets you know, which makes the Self-Directed IRA a perfect retirement vehicle to make investments, as it opens the door to a world of possibilities. However, Barbara Corcoran, founder of the Corcoran Group said in a CNBC interview that she became a millionaire from real estate “mostly through necessity” – with no industy experience to back the fruits of her labor.

So follow these tips and, with your Self-Directed IRA, you may become a millionaire before reaching retirement.

1. Own the Property – Don’t Rent it

Purchasing property requires a larger capital than to rent property. However, if you have the money, experts advise owning property to rent it out, flip it, or subsisize it. If you have a Self-Directed IRA, you can use your retirement funds to purchase the property, but keep in mind of the IRS prohibited transaction rules. Among the few prohibited transactions is to live in a property you puchased with your IRA funds. But that doesn’t stop you fom turning it into a cash cow buy purchasing the property in a good location, and then renting it out for a consistent stream of income.

Nonrecourse Loan

If you don’t have sufficient funds in your retirement account, you can take out a nonrecourse loan. However, this will subject you to the UBTI tax on the debt-financed portion of the property, which can be as high as 37%.

However, the rental income you geneate can help you pay off the mortgage payments and hopefully provide extra income to flow into your IRA tax-deferred.

Peter Hernandez, President of the Western Region at Douglas Elliman says it’s always a good time to buy real estate. Even with the curent fears of recession, the market is stong, he says. And don’t forget the potential tax benefits on real estate investments.

2. Choose “Winning” Real Estate

Not every real estate investment is a good investment. Location is important, but another factor to consider is the type of property you purchase. When looking at real estate, focus on properties that have a greater chance of appreciating in value over the years. Grant Cardone, a sales expert and New York Times best selling author said in an interview that he only purchases property in upscale locations that provide consistent cash flow. His property of preference are multifamily homes. 

Although Cardone typically avoids single-family homes in low-income areas, he recommends such investments over having your money sit idle in a bank.

3. Best Investment for Tax-Breaks

Tax breaks and real estate investments go hand-in-hand. As a landlord, you will experience tax deductions in the form of maintaining and repairing the property, services rendered (such as legal consultation), utilities and property tax deductions – to name a few.

When you add up all these tax deductions, you wil quickly see that, as a real estate investor, you’e in a favorable position from a tax standpoint. Compare that to investments in traditional assets, such as stocks, which offer little opportunity for tax-breaks.

Holly Parker, founder and CEO of the Holly Parker Team at Douglas Elliman couldn’t have been more correct when she said: “Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties.”

4. Flip it, Rent it or Subsidize it – Real Estate Gives You Options

When you purchase stocks or bonds, in general, your only options are to buy or sell. Whereas real estate gives you unlimited options.

In a CNBC article, Daniel Lesniak, founder of Orange Line Living shared just a few options that investors have with their real estate investment.

“You can buy a house with the intent of flipping it, then rent it if the market turns south.”

If the property significantly appreciates in value over the years, you can sell. Other options include leasing or subsidizing the property. If you purchase land, you can build the property from scratch.

For the individual who wants the most out of his or her investment, real estate is the type of investment that takes on many forms.

5. Multi-Family Properties are Growing

Real estate is an investment that offers greater and more consistent returns than many other investments. New properties are built each year to supply a growing demand: the human population. According to Robert Martinez, founder and CEO of Rockstar Capital, “Populations almost never decrease,” which is why the demand for housing is always high.

Martinez suggests multifamily apartments, which continuously generate an increase in income. Because apatments are becoming more attractive, people who are not interested in real estate investing typically rent apartments over buying  a house.

Key Takeaways

If you establish a Self-Directed IRA to invest in real estate, make sure you go through a passive custodian that allows you to make such investments. In general, banks and finanacial institutions do not allow clients to make investments outside of the products they sell, which are typically traditional investments.

When investing in real estate:

  1. If you use retirement funds to purchase the property, beware of the prohibited transaction rules surrounding the investment.
  2. Focus on the location and the type of property, which will require extensive research on your part.
  3. Residential properties, such as multi-family apartments, are on the rise. If you have the capital, choose multi-family apartments over a single-family resident.

Real estate does require large capital and a lot of work unless you hire a contractor to take care of the needs of the property, but if managed the right way, most often guarantee high rewards. Contact IRA Financial to speak with a certified specialist on establishing a Self-Directed IRA to purchase your real estate investment in a tax-advantaged manner.

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