How Much Real Estate Should Go in My IRA?

How Much Passive Income Do You Want In Your Retirement?

Another way to decide how much real estate to put in your IRA is to determine how much passive income you’ll need during your retirement. This number can be tricky to calculate, but there are a few general rules of thumb to help you get started.

The average American retiree needs 80% of their pre-retirement income to uphold a similar lifestyle after they stop working. Say you earned $100,000 per year pre-retirement, then you’d most likely want to earn around $80,000 per year in retirement.

Suppose you’re interested in funding your entire retirement with passive income through self-directed IRA real estate investments. In that case, you’d need to ensure that they generate about $7,000 – $10,000 a month in rental to account for covering all the other associated expenses.

If that’s your goal, you should have $1 – $2 million worth of real estate in your self-directed IRA.

Do You Want to Hire a Property Manager?

The stringent rules of buying rental real estate with an IRA make property management more challenging. The IRS states owners of self-directed rental properties are prohibited from doing much (if any) hands-on improvements to the home. This means an owner wouldn’t be able to implement any high-ROI home improvements or even respond to tenant maintenance requests. Partnering with a rental property management company makes it easiest to stay compliant with IRS rules.

Working with a property management company has many upsides, especially for people who want to ensure that their rental income is as passive as possible.

Property management companies can take the hassle out of owning rental property.

They can help you find and screen tenants, collect rent and handle any repairs or maintenance issues that may come up. This can free up your time to focus on other things, like continuing to make money in your retirement years.

Working with a property management company usually costs about 10% of the monthly rent. So, if your rental property is bringing in $1,000 a month, you can expect to pay around $100 a month for property management services.

If you’re willing to work with a property management company, then you can be encouraged to pursue as many self-directed IRA real estate investments as you want.

If you prefer to independently manage tenancies, there are ways to do so within the IRS rules. However, it gets complicated fast. You’d be well advised to limit the volume of self-directed IRA real estate investments you have.

What’s Your Target Asset Allocation?

Asset allocation simply means the percentage of your portfolio made up by different types of assets.

For example, you might aim for 70% stocks, 30% real estate. Within each asset class, you’ll can diversify as well: you might want the stock portion of your portfolio to break down as half US stocks, half international stocks. On the real estate side, you might want some rental properties plus some real estate crowdfunding investments.

How does this affect how much real estate should go in your IRA? Because if you’re going to own both stocks and real estate, stocks are much easier to hold in an IRA. You can invest in stocks through a regular IRA with your brokerage firm, rather than going through the hassle of setting up a self-directed IRA.

Besides, real estate comes with plenty of inherent tax advantages, from deductions to ways to avoid capital gains tax. Many real estate investors use their IRA to hold stocks, and own real estate “normally.”

Should You Invest in Real Estate with a SDIRA?

The bottom line is that there’s no one-size-fits-all answer to how much real estate should go into an IRA. You need to ask yourself some crucial questions to determine the right amount for you.

By considering your unique financial goals and asset allocation, you can make an informed decision about how much — or how little — to invest in real estate through your IRA.♦

Have you decided how much real estate should go into your IRA? What are you aiming for?

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