Real Estate In Your IRA

I’m not going to talk about buying property using your IRA. This is possible and legal using a self-directed IRA and there are many companies on the web that will help you do it. The only problem with this strategy is that all funds used must come from the IRA. So you can flip property, buy rental property, buy vacant land, or whatever using your IRA funds, but ALL costs – property costs, taxes, maintenance, insurance, etc. must be paid for from the IRA. In my area, costs for property are higher than the amount I have in my IRA, so this isn’t an option for me (unless I want to invest outside my area and I do not have the comfort level to do that yet).

But I can get a similar investment using the stock market and buying shares of publicly traded REITs. A Real Estate Investment Trust is a company that is required to pay out 95% of it’s taxable income as dividends to shareholders. Typically, a REIT will specialize in one type of real estate - shopping malls, hotels, residential units, etc. - and may also specialize further by geographic region. These companies own buildings and collect rent from the tenants, or they make real estate-backed loans and collect interest on the loan. These profits are then distributed to the shareholders. It’s not unusual to find REITs that have a 12% or higher dividend yield. Compared to the dividend of other blue chip stocks, usually in the 1% to 3% range, this is quite an improvement. (Dividend yield is the yearly amount paid in dividends divided by the stock price. It is basically your return on investment, ignoring fluctuations in the price of the stock itself.)

Unfortunately, the recently passed repeal of taxes on dividends does not apply to dividends paid by a REIT. This is because REITs themselves pay no tax and hence, the dividend does not incur the “double taxation” the law was written to eliminate. One way around this is to do what I have done – buy REITs inside of a Roth IRA. That way, all the dividends are tax-free.

By buying a REIT, you are basically investing in whatever type of real estate the REIT invests in, wherever it invests. You can thus tailor your IRA to your favorite real estate segment.

Next time, I’ll detail three of my holdings, my reasons for buying them, and the returns I have gotten. I’ll also discuss my goal: obtaining dividends equal to the amount I can put into a Roth IRA and thereby doubling my Roth growth.