Here at RealCrowd, we’re a big proponent of the Yale Model of allocation, because it emphasizes a clear, but often overlooked fact: portfolios which include a healthy chunk of real estate significantly outperform ones which don’t. In fact, Thomson Reuters recently conducted a study showing that core commercial real estate provides the best risk/return profile of any major asset class.
Unfortunately, most allocation models offered by financial advisors conveniently skip devoting any portion to real estate. Likewise, property is also usually omitted from self-directed IRAs and 401ks. This is sub-optimal for investors, because the benefits and attributes of real estate make it a near-perfect fit for self-directed retirement plans.
The reason for the common oversight is that direct investment in real estate, even for high-net worth individuals, used to be difficult compared to buying up bonds, stocks, and, maybe as an after thought, achieving indirect diversification into property via marginal, high-fee REITs.
Fortunately, times have changed. Using RealCrowd’s platform, it’s now easy for future retirees to include commercial real estate opportunities in their retirement plan portfolios.
Here’s a rundown on why anyone with a self-directed 401k or Roth IRA retirement plan should consider adding real estate to their portfolio:
Long-term horizon. Real Estate investing is a long-term game, which works well with retirement accounts. Millennials and Generation X still have between 10 and 35 years to hold commercial real estate, allowing for appreciation and paydown of debt. At retirement, obtaining the highest cash income without reducing your principal equity investment is paramount to ensuring an extended retirement income stream.
Leverage. Commercial real estate provides rental income that covers debt payments. This makes commercial real estate an outstanding long-term investment class, because as your tenants pay down the ﬁnancing for you, equity is built up in the asset. Once you no longer have debt payments, your cash return instantly increases, multiplying your cash ﬂow multiple times over. Owning real estate long term in your retirement account allows for the paydown of the debt when you don’t need the cashflow, and a magnified cash stream when you need it most… when you’ve retired!
Diversification. Property acts as an excellent hedge against cyclical changes in other parts of the economy. For example, depending on the monetary headwinds, investors are often seen rotating en masse out of bonds and into stocks, or vice versa. Real estate has a lower volatility, and it provides a foundation to keep a strong retirement portfolio regardless of market fluxes.
Low volatility. Again, the value of real estate tends to fluctuate slowly compared to other assets. While a stock suffers or thrives on an unexpected earnings report, determining the long-term value of a particular property is a comparably predictable affair. Real estate prices in general are tied to large macroeconomic movements that push right on through seasonal trends.
Tax-deferment. The income earned through real estate is a big pull for many investors. Of course, that income is taxable. That’s not the case when the investments are held in a Roth IRA retirement account, however. The taxes on any income and gain in value are deferred until the distributions are withdrawn from the account.
The days where it made sense to rely solely on the usual stock-bond mix for retirement portfolios is now behind us. There are now virtually no practical barriers standing between accredited future retirees and the benefits of real estate opportunities.
If you’d like more information regarding how you can set up your own self-directed retirement account, please create a RealCrowd account and send us an email at firstname.lastname@example.org. We’ll send you a list of custodians that can assist you or have them reach out to you directly.
*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — Enroll Now.*