• Thu. Dec 1st, 2022

Best Roth IRA Real Estate Investments

ByWillie M. Evans

Mar 25, 2022

Having a diversified portfolio with balanced asset classes in your Roth IRA can be simple if your idea of ​​diversity only includes stocks and bonds. Historically, real estate diversification within your Roth IRA was reserved for the ultra-savvy and ultra-rich. With real estate investment trusts (REITs) growing in popularity, new crowdfunding platforms, and widely available information on opening a self-directed IRA (SDIRA), investing in real estate with your Roth IRA has never been easier. never been so simple.

Key points to remember

  • Investing in real estate in a Roth IRA is easier through a REIT.
  • You can invest in individual real estate by opening a self-directed Roth IRA, but there are fees, rules, and more risk.
  • Investing in real estate through a self-directed Roth IRA using a crowdfunding platform can mitigate risk and more easily comply with regulations, but includes even more fees.

Using a REIT in your Roth IRA

If you’re looking to invest in real estate in your Roth IRA in the easiest and easiest way possible, a real estate investment trust (REIT) is the way to go. A REIT is a pooled investment resource that buys, manages and finances income-generating properties. There are REITs specializing in residential, industrial, commercial and agricultural real estate of varying densities. A REIT allows investors to diversify into real estate without assuming the individual risks and tasks associated with buying and managing a property as an owner.

REITs primarily pay dividends and generally do not appreciate significantly. Due to their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy.


REITs are required to pay out 90% of their income annually to investors as dividends.

The best REIT for your Roth IRA will depend on the type of real estate you want to invest in and what’s available through your brokerage. Investopedia maintains a drop-down list of top performing REITs for each month. Major brokerages like Vanguard, Fidelity, and Schwab have their own proprietary REITs in addition to allowing investors to buy into other publicly traded companies.

Opening a Self-Directed Roth IRA for Real Estate Investing

A self-directed IRA (SDIRA) can be opened like a Roth IRA or a traditional IRA. Both options require you to open the account through a custodian, which limits you to where you can open your account. If you’re opening a self-directed IRA specifically to invest in real estate, make sure the custodian you use permits real estate investing. SDIRAs typically have higher management fees, so keep those in mind.

Investing in Individual Real Estate in an SDIRA

The Internal Revenue Service has very specific rules about investing in individual real estate in an IRA. Namely that the property must be purely used as an investment and not used by you or a loved one.

In addition to IRS rules and regulations, investing in individual real estate within your Roth IRA can be difficult. Acquiring the capital needed to buy real estate can take years, and individual real estate investing involves significant risk. Individual properties can become undesirable as a result of natural disasters, business closures, school district underperformance, and a number of other factors beyond your control.

Your property may need repairs that you cannot cover, you may have long periods of vacancies, or you may have tenants who are not paying. During the coronavirus pandemic, there have been eviction bans which, while saving thousands of people from becoming homeless, have left some homeowners without income for over a year in some cases.

If you need a stable and reliable income in your old age, individual property investment in an SDIRA may involve more risk than you think.

Crowdfunded Real Estate Investing in an SDIRA

Crowdfunded real estate investment platforms allow individual investors to pool their money into real estate investments. By pooling assets, the entry barrier to investing in real estate is much lower. Some platforms have a minimum investment buy-in as low as $10.

Investing in real estate this way in your Roth IRA also eliminates much of the individual hassle of real estate investing: finding deals, negotiating them, and managing the properties. Crowdfunding can also mitigate individual risk by allowing you to buy a fractional share of multiple properties instead of a large share of one. This real estate investment option will have the highest fees because you will pay fees to the custodian of your self-directed IRA in addition to the crowdfunding platform fees.

Should you hold real estate investments in your Roth IRA?

The decision whether or not to hold a real estate investment depends on your own risk tolerance and your desire to invest in real estate. If you hold REITs in your portfolio, keeping them in your Roth IRA is a better place to hold them for tax optimization purposes. In general, REITs tend to pay high dividends that are heavily taxed, so it’s a good idea to keep them in the account where you never have to pay taxes.

How to choose a REIT?

Choosing a REIT is like choosing a stock. You are looking for historic returns, find out about the management team and read the prospectus. One good thing about REITs is that they are very liquid. Unlike a rental home, you can sell and buy another REIT on the same day if you decide you don’t like your chosen one.

Is real estate a safer investment than stocks?

The common phrase when comparing real estate to stocks is: the value of a house cannot drop to zero, but a stock can. Real estate generally retains at least some value even when the real estate market has experienced a significant downturn. Keep in mind, however, that a share cannot be seized because you haven’t paid property taxes. Owning inventory won’t get you sued by a homeowners association because your tenant parked an RV on your property for a month. Although investing in a REIT eliminates some of these risks associated with individual real estate investing, all investments carry risk. Consider your risk tolerance before investing in real estate, just as you would before investing in anything else.

The essential

Investing in real estate is a great way to diversify your portfolio. REITs are a great asset class to own if you want the stability of real estate without the work and risk of buying and managing it yourself. If you’re going to have REITs in your portfolio, it’s best to have them in a tax-efficient account like a Roth IRA. If you want a more convenient option, you can opt for a self-directed IRA. If you’re comfortable with the risks, restrictions, and extra work, you can invest in individual real estate in your self-directed Roth IRA. If you prefer a more hands-off approach but want more individual control than you can get with a REIT, investing in a crowdfunded real estate investment platform through your self-directed Roth IRA is the choice for you. .