How Much Do You Need to Invest in Real Estate? Less Than You Think

How Much Do I Need to Invest in Real Estate
Surging prices have made it increasingly difficult to invest in real estate. Fortunately, there’s another way to invest in real estate using an unlikely source: Your IRA.

In recent years, March has become the hottest month of the year to sell a house, which prompts many to ask, “How much do you need to invest in real estate?” The answer? Less than you think. 

Climbing mortgage interest rates, low inventory, and high real estate prices lead many houses to be sold within minutes of listing for well over the asking price. This can be disappointing (even nightmarish) for those seeking to make an investment in real estate. Fortunately, there’s another way to invest in real estate using an unlikely source: Your IRA.

What Is A Self-Directed IRA and How Can You Use One to Invest In Real Estate?

While most IRA and 401(k) accounts offer traditional assets like stocks and bonds, a self-directed IRA puts you in the driver’s seat when it comes to your investments. Self-directed IRAs let users invest in alternative assets like private equity, cryptocurrency, securitized art, fine wine, and real estate. 

With a self-directed IRA, account owners have the control and flexibility to invest in assets they know and understand. Expanding your investment options can help you create a diversified portfolio with the potential for outsized returns. 

There are two ways to invest in real estate using your IRA: 

  1. Purchasing a property outright
  2. Buying shares in real estate

This blog will focus on the latter. Buying shares in real estate with your IRA enables you to invest for much less than you would purchasing real estate on your own. (And without needing to take out a loan or manage upkeep.)

However, if you were to purchase a property outright using your IRA, it’s important to know there are some unique rules that would apply. Purchasing a full property with an IRA means you cannot use it personally—it must be strictly an investment. This IRS rule also disqualifies your spouse, immediate family, parents, grandparents, or other majority-share owners from using the property. Like with any investment, doing your research is key. 

Real Estate Investing the Traditional Way Has Become Increasingly Difficult, Especially for Millennials

Millennials who were sidelined due to a series of unfortunate events including the dot-com bust, the financial crisis of 2008, and the COVID-19 pandemic are finally ready to shoot their shot at buying a house. But, real estate prices have steadily climbed over the last 116 months, and housing analysts aren’t expecting that to change any time soon. (Millennials just can’t catch a break, can they?)

In 2021, millennials accounted for over half of all home purchase loan applications. Why? The pandemic was likely a watershed moment, including its push toward remote work. 

How did the shift to remote work affect real estate? It changed where and how people lived. Many who lived in urban areas for a quick work commute switched to remote work and moved to the suburbs with the hope of more at-home workspace. Prices surged because of this shift and made it more difficult for first-time homebuyers and would-be-investors to afford a home or real estate investment.

The good news: While purchasing a home has been difficult in recent months, investing in real estate is easier and more affordable than you may think. And, using your IRA to invest in real estate can be a great option for those who want to get in on the action without having to duke it out with 15 other buyers.

So, let’s get into it. Here are the top three reasons to consider investing in real estate using an IRA.

1. You Can Invest in Real Estate for as Little as $500

Until recently, many assumed that you needed to buy a house or other property to invest in real estate. As discussed earlier, this has been especially difficult in recent years due to the surging housing market. A new study from Zillow demonstrated that the U.S. housing market more than doubled in value over the last 10 years. Nashville’s housing market in particular has skyrocketed. 

In fact, Florida Atlantic University identified Alto’s home city of Nashville as one of the most overvalued housing markets in the nation. Based on their research, Nashville homebuyers are paying a 40% premium on average. This means the average home in the area is going for $394,000 despite an average predicted price of $281,000.

It’s no secret that investing in real estate has long been viewed as a lucrative endeavor. Too often, though, high net-worth individuals were the only ones who could afford to participate. Now, you can invest in real estate using your IRA for as little as $500, making it accessible to almost anyone. 

With the advent of real estate investment portals, you can now invest amounts far less than the price of the property. These portals provide the opportunity to invest in REITs, real estate funds, and securitized property. Whether you’re a newbie or a seasoned investor. 

Finally, everyday investors can access investment opportunities institutional investors have long used to increase their wealth. Alto has 22 real estate investment partners, with minimum investments ranging from $500 up to $100,000. To learn more about our real estate partners, visit our partners page and use the filter to select “real estate,” along with other parameters like minimum investment amount.

2. Investing in Real Estate with Your IRA Can Have Significant Advantages 

As is the case with any holding, there are significant advantages to investing in real estate with your IRA. The primary advantage is that you can use your largest source of investable assets—your retirement funds—to invest in real estate tax-deferred or tax-free, depending on whether you set up a traditional or Roth IRA. (Plus, you can avoid the annual tax reporting requirements associated with owning property outside an IRA.)

When investing in real estate with a traditional IRA, contributions are tax-deductible, meaning investors can often invest more upfront. With this type of IRA, capital gains taxes are deferred until withdrawal. On the other hand, a Roth IRA is funded with after-tax funds and is completely tax-free upon a qualified distribution.

Finally, investing in shares of real estate with your IRA means not having to manage the maintenance, repairs, leasing, complaints, and advertising associated with becoming a landlord. Renting out a house comes with unexpected costs like plumbing issues, roof damage, and a whole host of unforeseen issues. These costs can add up, and when coupled with property taxes, HOA fees, and a property management costs (if you’d rather not deal with tenants directly), you may wonder why you got into the investment in the first place.

While there are pros and cons associated with purchasing real estate in a variety of contexts, buying shares in real estate allows you to access a highly coveted asset without having to go through the arduous buying and management process.

3. Real Estate Has Historically Been a Stable Long-Term Investment

Stock and bond markets often serve as leading indicators of where the economy stands, while real estate has historically been a lagging indicator. This means the real estate market takes longer to respond to macroeconomic fluctuations than many other investment vehicles. 

Over a 25-year period, real estate produced a steady 9.4% and 10.5% annual return in commercial and residential real estate investments, respectively. Some consider real estate the highest-earning asset class available. 

Peter Hernandez, president of the Western Region at Douglas Elliman, commented, “Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments.”

There is no guarantee, but because investing in real estate with your IRA is a long-term investment, there’s a good chance that it will provide predictable, solid financial returns over a long period of time.

Open an Alto IRA to Start Investing In Real Estate Today

With Alto, investing in real estate is accessible for all, not just ultra-wealthy institutional investors. You can start investing in real estate today for as little as $500 with all the tax benefits of using your IRA. 

Open an account today!