Five Things to Consider for Your First IRA Investment Property
Experienced real estate investors often purchase properties using their IRA assets. They have a familiarity in these transactions and take advantage of the tax benefits from using their IRA. However, if you are considering your first investment property, there are several factors in determining if it is a good decision. Specifically, if you are purchasing a rental property, these five pointers will help you evaluate your IRA investment property:
1. The profitability of a property is often measured by net operating income (NOI). NOI is simply the rental income less operating expenses (covered next). A general rule is to divide the NOI by the purchase price to give you a return on capital. If you are considering more than one property, this calculation is a great tool to equalize the properties.
2. If you are buying from another owner, be sure to get detailed information on operating expenses. Primary expenses are property taxes, insurance, and common area maintenance. However, be sure to also consider reserves for future capital expenses such as a new roof or repaving a parking lot.
3. Review any existing leases for expirations and other terms that may affect the property. For example, if a large portion of the leases expire in less than a year, you should consider how this affects the purchase price or your overall decision to buy the property.
4. Study other properties to compare vacancy rates and rent prices. This will help you determine if the property you are considering is competitive within other real estate supply.
5. Review recent sales of comparable properties. A qualified appraiser can often help with this task, and it will give you a good idea if your purchase price and return on capital matches your investment objective.
Overall, investment real estate offers two great advantages for retirement income. The assets generate regular cash flow and they will appreciate in value over a long-term horizon. Using your self-directed IRA gives you an expanded ability to take advantage of this asset class.