Tenants-in-Common Triple Net-Lease in your IRA. Why it makes sense.
Real estate is the most popular asset class of self-directed IRA investors. Diversification among asset classes should be the driving factor in placing a fair percentage in your overall portfolio.
Some like it for the hedge against inflation. Others like the idea of having/owning something tangible, that they understand, and that they are truly interested in. Some want a property that requires work (flip properties) and others want a passive investment that both hopefully appreciates but also brings in a steady monthly income back into their IRA. For whatever the reason, real estate offers much to those who are aware of and understand true self-direction in their retirement accounts.
For the passive and conservative investor, Triple Net leased properties present an attractive option. Large national companies such as Walgreens, Fresenius Medical, CVS, and many others are rock solid tenants in buildings they don’t want to own. They want to lease and invest their cash back into their business. These types of tenants will often develop/build their properties just where and how they want them, then do a sale/leaseback to another party and sign a long term a lease (10 to 20 years, with renewal options). The return on investment on these types of properties often ranges from 5 to 7.5%, depending on the tenant and the property. These tenants will also pay most if not all of the expenses on the property over this lease term. Triple Net means they pay taxes, insurance, and maintenance.
How does an IRA investor afford to buy one of these buildings? Most investors can’t afford to do so, but with a Tenants-in-Common co-ownership model, they don’t have to. In this TIC model (picture it as buying “pizza by the sliceâ€) any investor (does not have to be accredited) can purchase the exact size slice they want with the money they have to invest (most often there is some minimum). They receive true ownership with a warrantee deed in their piece of the whole and the full rent on the property is prorated to match your interest ownership. Each month a rent check is deposited in your IRA. It really is quite simple. This type of ownership is also referred to as an undivided fractional interest in the whole.
There are several factors to consider in a property choice. Recession-proof tenants, reputation of the sponsor, location, age of the building, type of building and ease of re-leasing at term end, guarantee of national tenant, Triple Net or not, etc.
Two key concerns in self-directed IRA real estate investment are “prohibited transactions†and “disqualified personsâ€. This type of investment provides an added safeguard to investors from getting caught up in either. Your tenant is a national client with a solid reputation, not family or other disqualified party. In addition, an investor can’t go fix toilets, paint, or carpet (themselves) a Triple Net medical clinic or pharmacy (a prohibited transaction). This type of investment is as hands-off as can be, perfect for a safe and steady IRA investment.
It is important to understand that the owner does not own a security, or shares, but rather real property in this model. Should they choose to sell their interest in the property, they have that right at any time. In many contracts, the other owners in the building/property usually have the “first right of refusal†to purchase the property from the seller should they want out. Most investors, however, buy these type of properties for the long-term for steady, reliable, and passive income over time. This type of investment lends itself more toward asset protection (taking good care of what they’ve worked so hard to accumulate), rather than an aggressive move to double their money over a few years and taking the risks necessary to do so.
For the conservative investor looking to own institutional quality real estate for the long-haul, a Triple Net tenants-in-Common property is an attractive investment option.
By Scott LeFevre
President/Managing Partner
Rockwell Real Estate IRA Investment Properties