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Imagine it’s 2008. The stock market is crashing and will soon lose half its value. The real estate market is flat on its face, and there is a foreclosure on every street.

The economy is in a tailspin and showing signs of a recession. The outlook is ugly for investments, and there seems to be no way to avoid the downfall.

How could you have sheltered your IRA to prevent losses and allow continued returns, while the storm raged on? There is a little-known strategy in real estate that might be the answer.

Even in the midst of the market conditions of 2008, there was a real estate investment strategy that could have made you look like the smartest investor around, had you repositioned your IRA funds to take advantage of it. By correctly adding the right type of real estate to your retirement account, you could have enjoyed predictable growth while sidestepping the volatility of traditional Wall Street investments.

Most people are not even aware they can invest in real estate with their IRA. The large financial institutions that act as custodians for retirement accounts do not offer alternative investments, so people assume IRA’s are limited to stocks, bonds, and mutual funds. The secret, however, lies in the Self-Directed IRA, a tool that lets you add the power of real estate to your retirement account.

Your Secret Weapon: The Self-Directed IRA

A Self-Directed IRA (SDIRA) is a retirement account that gives you the ability to “direct” your retirement savings into alternative types of investments like real estate. As long as you understand the rules and align yourself with the right professionals to guide you, it can also be one of the smartest ways to diversify, grow, and insulate your IRA from market volatility.

But before you jump into action, you have to understand some basic principles and the areas where you should exercise caution.

First of all, understand that you cannot directly or indirectly benefit from your SDIRA, and your SDIRA cannot directly or indirectly benefit from you. That means, for example, that you shouldn’t fix and flip houses or manage rentals with your SDIRA. You certainly shouldn’t buy a vacation rental and let your family use it on the weekends. Those examples will likely be prohibited, could endanger your SDIRA’s tax-deferred status, and trigger tax due on your entire account.

More importantly, those strategies could turn managing your SDIRA into another job for you, something it definitely shouldn’t be. When you invest in real estate with your SDIRA, it should be an investment with minimal involvement on your part. Ideally, a passive investment in real estate where you purchase shares, just as you would purchase shares of company stock, and where the real estate is managed by others who have a high degree of expertise.

Also, it is extremely important to align with professionals who understand the rules governing SDIRAs. This is your retirement after all, and you will want to avoid both scammers and well-intentioned professionals who are not familiar with SDIRAs.

Before you can invest in real estate, you will need to open an account with a company that offers SDIRAs and then fund your new Self-Directed account with a transfer from an existing IRA or with a rollover from a qualified plan, such as a 401(k). Be sure to follow the guidance of your SDIRA account administrator so you correctly move your funds from one account to another. Failure to do it right could put you on the hook for a tax liability.

Finding Your Perfect Real Estate Strategy Sidekick

Next, you’ll want to align yourself with experienced real estate company who has a smart strategy for SDIRA investments. As you consider companies to invest with, be sure to avoid the sales pitch of a “good deal” that is not backed by a high degree of experience in both real estate and SDIRAs.

This company should certainly be skilled at finding great real estate investment opportunities, but they should also be able to demonstrate proficiency in the areas of due diligence, property management, capital improvements, asset management, legal, accounting, and (the often overlooked) timely delivery of reports and tax documents, so be sure to ask about the company’s process related to those items.

The company should also understand the rules governing SDIRAs, including prohibited transactions, self-dealing, disqualified persons, required minimum distributions, transfers, and rollovers. They should be able to demonstrate how they stay up to date with tax laws and changes in federal requirements and should be able to offer sound advice so you can feel extremely comfortable with your investment decision. Ask for references, and perform your own due diligence to be sure you’re putting your SDIRA in good hands.

Last, but not least, it is important to choose the right type of real estate. The right company to align yourself with should have a real estate strategy that has the ability to perform, even in market conditions like 2008. Not all real estate is a good fit for an SDIRA, so make sure to test the investment by asking these questions:

  • If the market turns downward, could you lose your investment?
  • Can the strategy insulate your investment from losses?
  • Is it likely your investment will grow at a rate equal to or higher than inflation?
  • In addition to growth, can the strategy deliver an attractive dividend?
  • If the market turns downward, can the strategy continue to deliver an attractive dividend?

By asking good questions, you will be more informed, and should be able to make a wise decision about your retirement nest egg.

Approached correctly, investing in the right type of real estate through a Self-Directed IRA could be the most powerful wealth building strategy your IRA will ever see.

This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.

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