Real estate has emerged as one of the most popular asset classes for self-directed IRA investors. Some investors like it for the hedge against inflation, while others like the idea of having/owning something tangible, that they understand, and that truly interests them. Some want a property that requires work (often common when “flipping” properties), but others want a passive investment that hopefully both appreciates while bringing in a steady monthly income into their IRA.
If you fall into the group of investors who tend to gravitate towards the type of investment that is passive and hands-off, tenants-in-common co-ownership model properties may present an attractive option for you. Large national companies such as Walgreens, Fresenius Medical, CVS, and many others are solid, proven tenants in buildings they don’t want to own. These companies tend to prefer to lease the property so that they can invest their cash back into their business. They will often develop their properties just where and how they want them, then do a sale/leaseback to another party and sign a long term leases (usually about 10 to 20 years, with renewal options). The return on investment on these types of properties typically 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, like taxes, insurance, and maintenance costs.
So, how does an investor afford to buy one of these buildings? Most investors can’t afford to do so on their own, but with a tenants-in-common model, they don’t have to. In this tenants-in-common model (picture it as buying “pizza by the slice”), any investor (no accreditation needed) can purchase the exact size slice he/she wants with the money he/she has to invest (keep in mind that there is usually some sort of minimum contribution). The investor receives a warranty deed representing his/her piece of the whole and the rent generated on the property is prorated to match this ownership interest. This type of ownership is also referred to as an undivided fractional interest in the whole.
When choosing a property to invest in, there are several factors to consider. These range from things like recession-proof tenants, reputation of the sponsor, location, age of the building, type of building, ease of re-leasing at term end, guarantee of national tenant, etc. and will depend on each investor’s preferences.
As an IRA holder, two key concerns when making investments are Prohibited Transactions and Disqualified Persons, as defined by the Internal Revenue Code. With tenants-in-common model properties, there is an added safeguard that protects against getting caught up in either. Your tenant is a national client, who is unlikely to be a Disqualified Person to your IRA. In addition, an investor can’t go fix toilets, paint, carpet, or provide any other type of “sweat equity” in a tenants-in-common model property, which could be a Prohibited Transaction. This type of investment is as hands-off as can be, making it ideal for many IRA investors.
It is important to understand that the owner does not own a security or shares, but rather real property in this model. Should the investor choose to sell his/her interest in the property, he/she has 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, passive income over time. This type of investment usually lends itself more toward asset protection, rather than an aggressive move to get a very large return on their money over a few years and taking the risks necessary to do so. Accordingly, a tenants-in-common model property may be an attractive investment option for IRA investors.
Rockwell Real Estate IRA Investment Properties
Please note that the content above is meant as an educational and informational tool only. As such, any information contained therein is not meant as and should not be construed as any type of advice from Provident Trust Group, LLC, or as any type of endorsement of the author, as Provident Trust Group, LLC is a non-discretionary, passive, directed custodian who does not advise or solicit.