Self-directed IRAs (SDIRAs) are powerful retirement tools that allow you to invest in a broader range of assets than traditional stocks, bonds, and mutual funds, such as real estate, private equity, and precious metals. Unlike regular IRAs, SDIRAs offer greater investment flexibility and control. Investing in commercial real estate, and more specifically multifamily real estate, through an SDIRA can be a beneficial way to diversify your retirement portfolio and potentially enhance returns. This approach combines the tax advantages of an IRA with the income and appreciation potential of real estate investments.

Investing in multifamily real estate offers a range of compelling benefits. And, historically, income from private real estate has outpaced other asset types, offering predictable and durable revenue. Real estate also has a low correlation with stocks and bonds, helping reduce portfolio volatility. Additionally, these real assets can hedge against inflation, as both rental income and property values often rise alongside increasing costs, safeguarding investor wealth over time.

Why use an SDIRA for investing in multifamily real estate?

Portfolio Diversification

One of the biggest benefits of an SDIRA is the ability to diversify your investments away from mainstream options. Traditional IRAs often limit investments to stocks, bonds, and mutual funds. An SDIRA allows for alternative investments – a broader range of assets, including real estate, which can help mitigate risks associated with market volatility.

Tax Advantages

Investing in real estate within an SDIRA enables your earnings to grow tax-deferred (Traditional IRA) or tax-free (Roth IRA), depending on the account type. This means rental income and capital gains can compound without immediate tax implications, potentially accelerating your growth.

Control Over Investments

SDIRAs put you in the driver’s seat. Instead of relying on fund managers or financial advisors, you can handpick investments aligned with your financial goals. This allows you to invest in assets you understand and that provide the most value for your investment strategy. While SDIRAs typically have a custodian to oversee compliance with IRS regulations, you are the ultimate decision-maker and bearer of the risk.

There are a few key considerations to be aware of when using an SDIRA to invest in real estate:

Prohibited Transactions and IRS Compliance

Avoid transactions that involve disqualified persons, such as yourself and certain family members, or entities you control, such as your home, a vacation home you use regularly, or your office, even if you pay yourself rent. Doing so could lead to penalties or loss of tax advantages. It is important to note that a rental property or other assets could be pulled out of an IRA to become your personal residence once you retire.

Unrelated Business Income Tax (UBIT)

Financing is typically used to acquire a commercial property, and income from the debt-financed portion may be subject to UBIT(UDFI), meaning income is taxed based on the percentage of the property financed. Many investors think this can be negative, when in reality it can be a net positive. Keep in mind when calculating income subject to UBIT, depreciation is a deductible expense, offsetting the amount of taxable income and, in many cases, significantly reducing the UBIT liability. So in many ways, you get both the SDIRA tax advantages and cash investment in real estate tax advantages, all in one investment. 

Understanding these tax implications is crucial to planning your investments effectively.

Higher Fees

SDIRAs can have higher fees than traditional IRAs due to custodian services, account setup, and asset management costs. Compare custodians to find one that aligns with your budget and investment strategy.

Due Diligence is Critical

With freedom comes responsibility. When using a self-directed IRA, you are now responsible for researching, vetting, and managing investments, which requires time, effort, and expertise. Evaluate market trends, property management teams, and long-term financial forecasts to make informed decisions. Multifamily investing has a historically strong performance track record. That said, it’s still critically important that you work with only proven private real estate sponsors to increase your odds of success.

Truly Self-Directed

Many IRA custodians advertise “Self-Directed” IRAs but often restrict investments to a limited, approved menu of options. To maximize flexibility and control, ensure the SDIRA truly allows for a broad and diverse number of alternate investments, including into LLCs that hold real estate assets, not just direct property investments. Before opening an account for multifamily investments, also confirm the custodian will act promptly on your directions with prompt approvals and good communication.

How 37th Parallel can help

37th Parallel has available investment opportunities for SDIRAs, both in single assets and Funds. 

With a focus on Class A and B multifamily communities in stable, high-demand markets and a 100% profitable track record, investors can feel confident they’re partnering with an experienced and proven team that will manage their capital efficiently and generate consistent returns. 

You may have diligently funded your retirement accounts over the years, but may lack large amounts of cash for new investments. When that’s the case, many of our investors use their retirement accounts to invest in multifamily real estate. 

If you’re seeking a new IRA custodian, we can provide referrals to trusted, truly Self-Directed IRA custodians who have received positive feedback from our clients and consistently delivered excellent service. Just let us know. 

For more information on our investment opportunities and how you can use an SDIRA to access those opportunities, just reply to this email or schedule a call with our Investor Relations team.