Are you tired of treading water in the stock market? Looking to “opt out” of market volatility as much as possible? Many smart investors are looking for insulation by upping their allocation to asset classes that have little or no correlation to the equity market.
One old standby that continues to capture attention is real estate. Besides a low/no correlation to stocks, real estate is a classic inflation hedge and a great income play. But buyer beware: Each of the three approaches to owning real estate in your IRA comes with “strings attached.”
Self-directed ownership. In case you haven’t seen the commercials or read the ads in airline magazines, it’s possible to own real estate inside of your self-directed IRA.PRO=Direct, pure investment into real estate that you can see and touch for yourself.CON=It’s difficult to diversify geographically and by sector (mix of apartments, retail, medical buildings, etc.) and it’s illiquid until you can find a buyer.STRING ATTACHED=There are enough IRS regulations (on what you CAN’T do with your IRA owned real estate) that it will make your head spin. For example, you cannot physically maintain the property or use it personally. If you do, the tax deferral of your IRA is blown and you’ll owe a HUGE tax bill.
Public ownership. Owning REIT stocks or REIT funds can provide broad diversification among many geographic regions and sectors.PRO=Public REITs can be purchased easily on the open market and are liquid.CON= Public REITs are not considered a pure real estate play since you only own equity in a company, not tangible real estate, thus the inflation protection prowess is relatively tame.STRING ATTACHED=The liquidity feature of public REITs is also its Achilles heel since they are traded on the equity markets, causing them to retain a much higher level of correlation to market swings.
Private ownership. Opportunistic private REITs can provide the benefits of direct ownership and diversification.PRO=Opportunistic private REITs are a pure play on real estate that offer virtually no market correlation, tangible ownership, strong dividend income, and inflation protection. It’s even possible to obtain granularity by selecting a REIT that is geographically specific (like NYC or Texas) or sector specific (healthcare facilities or grocery-anchored).CON=Lack of transparency. It’s difficult for investors to decipher what’s a good private REIT and what isn’t. Always look for high occupancy rates (85 percent at a minimum), low leverage (ideally 50 percent or below), dividend stability, and a stated exit strategy (look for a 3-6 year hold). The Blue Vault Report is a great, unbiased resource for evaluation.STRING ATTACHED=Since private REITs are in the acquisition stage (buying) of real estate and they not traded on the open market, they are generally illiquid. Never allocate more than 35 percent of your total capital to this type of REIT. The ideal allocation would be 15-25 percent.
By adding just the right dash of real estate in your IRA, you may be well on your way to better protecting your hard-earned savings from the next 2008 and future inflation.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.
Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.