While we’re sure you may be familiar with traditional investment options like stocks and bonds within your retirement accounts, there is a lesser-known and highly advantageous vehicle for real estate investment—the Self-Directed Individual Retirement Account (SDIRA). In this article, we’ll delve into what an SDIRA is, how to use it to invest in commercial real estate, and why commercial real estate can be a more compelling choice than residential properties or traditional stocks and bonds for your retirement portfolio.
What Is a Self-Directed IRA (SDIRA)?
A Self-Directed Individual Retirement Account, or SDIRA, is a specialized type of retirement account that provides account holders with more control and flexibility over their investment choices. Unlike traditional IRAs, which limit investments to a pre-selected menu of stocks, bonds, and mutual funds (which are usually connected to your employer), an SDIRA allows you to diversify into a broader range of assets, including real estate.
How it works:
Choosing a Custodian: To establish an SDIRA, you’ll need to work with a qualified custodian who specializes in self-directed retirement accounts. The custodian’s role is to ensure compliance with IRS rules and regulations while facilitating your investment choices. You will need to use the custodian for all purchases and investments made with your SDIRA.
Funding Your SDIRA: Once your SDIRA is set up and complete, you can transfer funds from your existing retirement account or make new contributions, depending on your eligibility and contribution limits. Contributions are determined by your age, so please check with your custodian!
Investment Flexibility: The unique aspect of an SDIRA is its investment flexibility. You can use the funds within your SDIRA to invest in a wide range of alternative assets, including commercial real estate.
How to Invest in Commercial Real Estate with an SDIRA
Using your SDIRA to invest in a Millcreek Commercial Tenant in Common (TIC) brings great benefits to your SDIRA account. Our offerings have long term leases and most of them have a NNN Lease (triple net lease), which means there is steady, predictable income every single month and the tenant will be doing all, if not most, of the maintenance on the asset.
Investing in commercial real estate with an SDIRA involves several key steps:
Identify Investment Opportunities: Search for suitable commercial real estate investments. This can include office buildings, shopping centers, vacant land, industrial properties, or even multi-unit residential properties with five or more units. Thorough due diligence is crucial at this stage. Millcreek Commercial offers debt-free, premium commercial real estate throughout the country. We specialize in TIC properties, meaning we can match your investment to the penny. View our inventory here.
Perform Due Diligence: Conduct comprehensive due diligence on potential investments. This involves analyzing the property’s financials, assessing market conditions, reviewing the lease, and evaluating the potential for rental income and appreciation. It is incredibly important to do thorough research when handling your retirement fund.
Purchase the Property: Once you’ve identified a suitable commercial real estate investment, instruct your SDIRA custodian to purchase the property on behalf of your SDIRA. All transactions and expenses related to the property should be handled by the SDIRA, not you personally.
Manage and Maintain: Your SDIRA custodian will ensure that income from the property is directed back into your SDIRA, and all expenses related to the property are paid from the SDIRA as well. It’s important to note that you cannot personally benefit from the income or use the property for personal purposes.
Stay Compliant: Ensure that you adhere to all IRS rules and regulations governing SDIRAs, including prohibited transactions and required minimum distributions. Your custodian will help you do this.
Why Commercial Real Estate Is Better Than Residential for SDIRA Investments
Both residential and commercial real estate can be viable SDIRA investment options, but commercial properties offer distinct and convincing advantages that make them a more compelling choice for growing your retirement portfolio.
Firstly, the steady cash flow. Commercial real estate properties typically provide more stable and predictable monthly income than residential properties. This is due to long-term leases (our properties range from 10-20 year leases, with rent escalations scheduled), which results in less frequent turnover and consistent cash flow. Comparing this to residential properties, you have to deal with people moving in and out, finding new tenants, headaches of property management, etc. When you invest in commercial real estate with strong, corporate tenants, that is not an issue. (Hurray!)
Second, higher returns. Commercial properties offer higher rental yield and property appreciation compared to residential. Businesses are typically willing to pay higher rents for commercial spaces that work for them.
Third, triple net leases! Some commercial leases, such as triple net leases, transfer many (if not all) of the property expenses (e.g. property taxes, insurance, and maintenance) to the tenant. This results in more predictable and passive income for SDIRA investors. Majority of our properties feature NNN leases—this is the most passive real estate investment that money can buy. View our inventory here!
Fourth, portfolio diversification: Investing in commercial real estate within your SDIRA allows for diversification beyond traditional assets like stocks and bonds. Diversifying into different property types and geographic locations can mitigate risk. We have properties all over the country in different types of real estate, which allows us to diversify your portfolio for you!
Fifth, the potential for appreciation. Commercial properties appreciate over time, providing the potential for capital gains upon sale. These gains can be tax-deferred if you reinvest them within your SDIRA.
Using a Self-Directed IRA to invest in commercial real estate offers the opportunity to diversify retirement portfolios, potentially generate steady income, and benefit from property appreciation. By establishing an SDIRA, working with a reputable custodian, and conducting thorough due diligence, you can tap into the advantages of commercial real estate investments while enjoying the tax-advantaged growth potential of a retirement account.
While residential properties remain a popular choice for real estate investors, commercial real estate’s unique attributes, such as stable cash flow, higher potential returns, and portfolio diversification benefits, make it a compelling option for those seeking to use their SDIRA as a tool for long-term wealth accumulation and retirement planning.