The Importance of Investing Retirement Funds in Real Estate

The main advantage of investing your retirement savings in real estate avenues is that it provides a suitable option of diversification. From your IRA (Independent Retirement Account), a fixed amount of money must be set aside for a property that benefits your long term goals. Importantly, the IRS is closely associated with this account and permits a certain tax relief in this mode of investment. Of course, there are specific guidelines laid down that must be complied with completely.

A Sound Investment

In the recent past, many investors have overlooked the real estate sector as an investment option and have a lopsided portfolio, which is overweight in stocks and other financial securities. According to the data provided by the US Department of Housing and Urban Development, the number of people owning houses has declined from 69.2% to 65% presently. People often overlook the advantage of leveraging their funds manifold and investing in a sizeable property with the help of a mortgage. In simpler words, an individual can buy a house with current market value of $500,000 by making a down payment of just $10,000, but have the opportunity of gaining the advantage in case of appreciation in value on the whole amount of $500,000!

If an investor already owns a home, it still makes good sense to invest in another home or office as the rent generated will significantly increase one’s income. Besides, it can go on to pay a mortgage if one exists and its real estate value will increase over time.

Different Avenues of Real Estate Investments

Just in case you are of the opinion that managing properties or tenants or fixing broken windows is bothersome, there are other ways of indirectly investing in the real estate sector.

• There are some Exchange Traded Funds that provide complete exposure to the real estate sector and are good alternates. One such ETF is the Vanguard REIT Index, which invests in both residential and commercial properties and owns shares in about 120 real estate companies across all sectors. All the accrued earnings have to be paid out as stipulated by the law and offer’s a 4.01% dividend yield and also have one of the lowest expense ratios.
• There is the Vanguard Global ex-US Real Estate ETF that has interests in 35 countries and the only ETF that includes properties in emerging markets. There is a 50-50 division of investments between the US companies and all the other countries put together and naturally offer’s a substantial amount of diversity. With the lowest expense ratios in the industry and a dividend yield of 3.44%, it makes for a compelling case.
  
• Another option is SPDR Dow Jones Global Real Estate ETF, which provides exposure to most real estate funds all around the world with a decent dividend yield of 3.77%.
  

However, there is a caveat, and every investor must carefully assess the different pros and cons and the risks involved before investing in these ETF’s.

Conditions

A real estate retirement fund being linked to the IRS, there are some conditions that must be fulfilled:

• The main purpose of availing the benefits offered by the IRS must be purely investment oriented.
• The property must never have been previously owned by your spouse (except your siblings) or other family members.
• In case a mortgage has been utilized to finance the property, it is advisable to be aware of the UBIT (Unrelated business tax), which is basically an income gained by the mortgage portion of the amount.
• After purchasing the real estate, all the relevant expenses that may come with the deal must be paid from the Plan of the IRA. Hence, you need to always ensure that sufficient funds are available in the plan.
  
• On selling the property, all the sale proceeds will go into your Plan account. This process is carried out by an Administrator under your directions. The property can also be transferred in part or full after reaching the age of 59 years and six months.

It makes good sense to invest your hard earned retirement funds in real estate as it is an established fact that the returns are good on a long term basis, be it in the form of rent from an acquired property or in the form of dividend yields. Besides, with the added advantage of a mortgage, a large exposure can be created and with the elapse of time the value of the property in dollar terms can appreciate substantially. At a later date, you also have the option of the property being passed on to you.