Consider Your Time Frame for Investing in Real Estate with Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: June 7, 2019)

For every type of investment you make, regardless of whether it’s with funds from a brokerage account or funds from your self-directed IRA, you should have some idea of your investing time frame for each asset.

Not all investment types are well-suited for every possible investment time frame. For example, you probably don’t want to hold cash for decades in your self-directed IRA, since you lose out on potential gains in other investments. Similarly, it’s not advisable to engage in the frequent short-term trading of relatively illiquid investments.

Here are some things to consider when evaluating your time frame for investing in real estate with your self-directed IRA.

Investing in Real Estate with Self-Directed IRAContrast Real Estate With Other Investments. It’s important to understand the many administrative differences between real estate investments and other investment classes. When you want to sell a stock or debt instrument from your self-directed IRA, for example, there is generally a market to readily accept your sale, and the entire transaction can be completed within a matter of seconds. Real estate transactions are more time-consuming and expensive, so frequent real estate purchases and sales are generally not the best way to boost your returns.

What Are Your Needs? Your investing timeframe will be driven in large measure by your particular situation and needs. For example, the real estate investing timeframe for a 30 year old individual may very well be different from that of a 55 year old retirement saver. The 30 year old has the time to take a more speculative approach to real estate investing, whereas a 55 year old may place a much higher value on having their investment property generate a current income stream. These considerations can affect how long you may wish to hold particular parcels of real estate.

Investing in Real Estate with Self-Directed IRASimilarly, investors of the same age may have significantly different account balances, and therefore may want to achieve different levels of diversification through their real estate investments. For example, a saver with a relatively small IRA and no other retirement savings may not wish to commit all of their retirement funds to a single real estate purchase.

Match Your Investments to Your Needs. Once you’ve identified your particular needs, you can do a better job of determining an appropriate time frame for holding real estate investments within your self-directed IRA. If you’ll have a need for liquidity within the next few years, then buying large pieces of real estate may not be appropriate.

Consider Adjusting Your Investments if Your Needs Change Unexpectedly. Keep in mind that you may want to reevaluate your real estate investments anytime there is a significant and unexpected shift in your personal situation. You can plan for some investment strategy changes over time, but events may unexpectedly force you to reevaluate your overall investment direction.

Finally, it’s worth staying in tune with local market conditions so that you can take advantage of any short term swings that may be to your benefit. For example, you might buy a single-family home with the expectation of renting it out and reinvesting the cash flow elsewhere. But if the local market experiences a sharp spike in home prices, you may decide that a better investment strategy is to sell the home and reinvest the proceeds in real estate elsewhere.

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