Posts Tagged ‘real estate investing’

What you Need to Know About REITs Before Diving in

Monday, December 11th, 2017

 

You may or may not know that REITs (real-estate investment trusts), that invest in all sorts of commercial real estate, have been a favorite of investors for years. So let’s go over why it’s a favorite.

Get used to volatility

REITs can definitely play it hot and cold, and aren’t a set it and forget it type of asset. They require vigilance and a careful eye, which may be a big deterrent for some investors. REITs tend to only move in drastic ways, in either direction, which also mimics how they trend for investors. So expect big ups, and followed by downs, and not a lot of in between.

They’re not for short-term investors

Because of their volatility, REITs are for those who play the long game. Those who plan to let their money and assets work for them. They perform best when given the time. Long periods of time. From 1975 to 2014 REITs had an annualized return of 14.1%, so when it’s compared to performances by the S&P at 12.2%, it’s easy to see their appeal. So give them time to shine.

Buy internationally

Now it’s possible to invest in international REIT funds; some are global; others own only properties outside the U.S. These multinational funds don’t have long return histories, but the experts who follow them believe that combining U.S. and international real estate investments will produce higher returns than the S&P 500 index, along with currency diversification.

Distributions are taxed as income

REITs can be tricky at tax time. By law, REITs must pass 90% of their income through to shareholders, who are liable for taxes on that income without the benefit of a favorable capital-gains tax rate. The distributions are taxed as ordinary income, in other words. That’s not great news for investors in high tax brackets.

However, there’s a good side to this arrangement. REITs’ income is taxed only once, at the shareholder level. This is unlike corporate dividends, which are taxed once at the corporate level and then taxed again to shareholders. Hence the term “double taxation”.

Because of this, REITs are best suited for tax-deferred entities such as IRAs and 401K accounts.

A Real Estate Investment Resource you Haven’t Yet Tapped

Tuesday, October 24th, 2017

Real estate is one of the most popular alternative assets when an investor wants to shy away from the traditional avenues like bonds and stocks. Regardless of its popularity, it’s not necessarily accessible to everyone, namely because the amount needed up front is steep. What more and more retirement savers are discovering is that with the right help and resources, they’re able to use their retirement funds to invest in real estate.

Not all retirement accounts are created equal, a majority of IRAs (individual retirement accounts) are managed by an advisor, and the advisor chooses what your funds are invested in. With a self-directed IRA, you’re the one making the decisions, you’re the one directing your investments, so here’s what you should know about investing with a self-directed IRA.

Tax Benefits

When you open, contribute and use a Traditional self-directed IRA, the income earned off of your investments grow pre-tax. This means that when it comes time to retire, and you take monthly distributions, your retirement income will be taxed as income.
The other option you have is what’s called a Roth IRA, and when you open, contribute and use a Roth self-directed IRA, your earned income is contributed after-tax. When you reach retirement age, your Roth IRA distributions are not taxed.

Which type of account you open is up to you, but the differences are stark. Talking to your tax accountant is the best route for deciding which account is best for you.

Non-Recourse Loans

As a real estate investor, you can easily leverage your IRA by using a percentage of the funds in your IRA to purchase your chosen property and use a non-recourse loan to fund the remaining balance. The reason that you may choose a non-recourse loan over a personal loan is that the non-recourse loan is tied to the real estate it pays for, and not your credit personally. In the case of a default, the lender would seize the real estate property without touching any of your other property or assets. Two things to keep in mind though, one is that the non-recourse loan may have a higher interest as compared to a regular loan, and two, it may be difficult to get approved, since banks are looking at a non-recourse loan as more of a risk for them.

Rental Income

The main reason investors choose real estate is the income that’s earned by either buying and flipping for resale or to rent out to businesses or to families. However you choose to utilize the property, it’s important to note that since you’re buying the property with your self-directed IRA, it’s your IRA that owns the property. This means that any gains made on your investment go straight back into your IRA, and vice versa, any money spent on repairs or taxes come from your IRA as well.

Potential Risks

As with any investment, there are risks and some rules that could be deal breakers for some investors. Familiarizing yourself with the self-directed IRA rules and following them is just simply a part of the process. Violating rules that are set by the IRS could cause your IRA to get disqualified, and get you fined a percentage of the amount in your IRA.

The property in question cannot be used as a vacation house, or a secondary residence, or be rented out to immediate family. You’re also not allowed to do repairs or fixes yourself, you will always have to be at an arm’s length when it comes to your property.

One other possibility is that you could run into UBIT, which stands for Unrelated Business Income Tax. UBIT isn’t scary, nor does it mean you’ve done something illegal, it’s just a tax that your IRA will pay when using debt leverage to buy property, or does a deal with an organization that doesn’t pay corporate taxes.

The Main Six Self-Directed IRA Real Estate Rules

Monday, July 24th, 2017

It needs to be stated that there are definitely more self-directed IRA real estate rules to follow. These are just a handful of rules to get you started on thinking about real estate. Is it right for you? Do you suppose you can easily follow these rules?

Keep it separate

You and your IRA have to remain as two separate entities. Therefore, on all paperwork on your investments, your IRA is solely named. To also keep everything 100% IRS compliant, your IRA administrator helps you with documents and any sort of legal paperwork.

Funding real estate

The real estate property can be bought 100% by your IRA. Regardless if you have $50,000 in your IRA, and you need $100,000 to buy a property, the other half of the money can be loaned to your IRA. However, payments for that $50,000 loan will be paid by your IRA as well. Never by you personally.

Overnight stays

You also cannot stay overnight in the property. Period. Even for one night. If you violate this rule, there’s a chance that your IRA could result in serious tax consequences. This includes any and all personal use for vacations by yourself, or by your family. Think of it this way: your IRA owns the property, not you personally.

Disqualified persons

As mentioned above, the property cannot be used by you or your family. So who specifically are we referring to? Yourself, obviously, your spouse, your children or parents, including any in-laws. They are what the IRS refers to as Disqualified Persons. These same people cannot conduct any business with you or your IRA, and they cannot directly benefit from the property. Say there’s a repair needed, like plumbing, and your father-in-law has a plumbing company, he, unfortunately, cannot do the work needed, because he’s disqualified.

Repairs and fees

All services must be paid through to the IRA. Again, using the plumbing example, if there’s $300 worth of plumbing repairs needed, that money must come directly from your IRA. Utilities are paid with your IRA, or if there are HOA fees due, those also must be paid for by the IRA.

The money coming in

Finally, rent deposits, rent checks, any capital gain, is all funneled back into your IRA. Because again, all the money coming in and going out goes through your IRA. Simple as that.