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You Asked, We Answered: Yield Alternatives for IRA Investors - Real Estate Investment Trusts (REITs)

reitsEstimated reading time: 3 minutes

For May's national webinar we discussed Real Estate Investment Trusts (REITs). Participants who joined our free webinar had the opportunity to ask Bill Neville, Business Development Manager at The Entrust Group and Jon Bren, our guest and expert on REITs from KBS, questions regarding this popular investment strategy. Continue reading to see what types of questions were answered...

Q: Can a REIT be formed in lieu of an LLC in order to invest in residential rental properties?  Can my Roth IRA then be an investor in that REIT?

A: Keep in mind a REIT is a managed investment and will have other investors investing in it also. There are requirements to establish a REIT, below are some of the requirements:

  • Must at least have 75% of its total holdings in real estate, cash or U.S. Treasuries
  • Must be a taxable corporate entity
  • Must have a managing board of trustees
  • Must have at least 100 share holders
  • May not have 50% of its shares be own by less than 5 individuals
  • Must at the least receive 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
  • Pay at least 90 percent of its taxable income in the form of dividends

Q: What is the minimum dollar investment for a REIT?

A: This depends on the REIT requirements and vary from REIT to REIT.

Q: How a private placement REIT different from investing through crowdfunding websites?

A: Crowdfunding portals are the result of the JOBS Act, seemingly to allow non-accredited investors to invest in private placements. However some of the crowdfunding portals only accept accredited investors. And, a crowdfunding portal could provide REITs as investments if they wanted to. A REIT is a type of investment, an asset. A crowdfunding portal is an avenue to invest in assets, including potentially a REIT.

 

Q: With a self-directed IRA, can I invest in my own condo as an individual and still earn around 8-10% return? It gives me control and 100% liquidity opportunity whenever I want. In this context, what is the added value of REIT?

A: Actually you can invest in a REIT since the REIT can invest in a condo you are interested in. This can eliminate the Prohibited Transaction rules since there is a managing board over the REIT. The only thing the REIT cannot do is offer you preferred treatment by having an investment in the REIT since that could be considered an indirect prohibited transaction.

Q: Are there limitations on the types of REIT programs that can be invested in other than the regular prohibited person’s rules?

A: It could vary from REIT to REIT. It is highly recommended to work with an investment advisor to vet out each REIT before investing.


Q: Can a trust be a disqualified "person"?

A: Yes it can. Here’s a link to the IRS prohibited transaction FAQs which answers most of the prohibited transaction questions as well as lists the types of disqualified persons and entities. It is highly recommended to work with your legal counsel before proceeding with a transaction since engaging with prohibited transactions has tax consequences.

Thank you to everyone who participated in our national webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.

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