There is an emerging and growing trend among smart and savvy Investment Retirement Account (IRA) owners, these individuals are investing a portion of their retirement funds in a self-directed IRA Limited Liability Company (LLC) and using the LLC to purchase real estate. These tax-deferred funds can be used to purchase real estate such as net-leased properties, secured with a credit tenant who has signed a long-term lease. Here are the required steps to set up your own self-directed IRA LLC:
- Form a Limited Liability Company (LLC)
- Prepare an operating agreement that meets the specific requirements for a self-directed IRA LLC
- Open a self-directed IRA account with an IRA custodian that permits self-directed investments
- Fund your new self-directed IRA account
- Direct your new self-directed IRA custodian to make an investment in the LLC
- Find a suitable investment vehicle in which you wish to invest
- Write a check from the LLC to purchase the investment you have selected
The most important step, and the key ingredient, is to have a properly prepared self-directed IRA LLC operating agreement that meets the specific requirement for a self-directed IRA. Section 408 of the Internal Revenue Code permits individuals to use a self-directed IRA to purchase land, commercial property, condominiums, residential property, mortgages, trust deeds, real estate contracts or private placements, and many other types of investments with funds held in many common forms of IRAs, including 401Ks, a traditional IRA, Roth IRA and simplified employee pension plan (SEP-IRA). See IRS Publication 590.
What is Net Leased Real Estate?
These are individual properties that are leased, for the most part, by credit tenants on long-term leases of 10 years to 25 years. The term "net leased" means that the tenant is responsible for all operating expenses – real estate taxes, building insurance, utilities and building and ground maintenance. In other words, the investor has little, if any, management responsibilities – which tend to be problematic for individuals without the time or inclination to deal with tenants or maintenance issues.
Net-leased real estate may be a sensible way of diversifying an investment portfolio, and can not only minimize exposure to risk but it is also a strategy to generate constant, stable and predictable monthly/annual income. In addition it comes with added tax benefits derived from depreciation and interest expense deductions. Investors should contact his/her tax advisor to determine if passive activity loss rules apply.
The most common net-leased properties are free standing retail stores leased to a single tenant on a long term basis. Drug stores, dollar stores, automotive service and parts stores, bank branches and restaurants are the most common properties available. There are also quality single tenant industrial/distribution and office (medical) properties available. Credit worthiness of the tenant is everything in rental real estate and due diligence is always highly recommended.
Ned Coyle, CCIM, is an Investment Specialist with concentrated emphasis in the practice of representing buyers of single tenant, net leased properties. These assets are located throughout the U.S. He has three decades of commercial real estate experience and has extensive understanding of valuation analysis and enhancement and has worked on behalf of local, regional and national corporations and banks as well as high net worth individuals and REIT’s.
Ned publishes a monthly newsletter on Investing in Net-Leased Real Estate with timely insights on financing and trends in this asset class. The newsletter also contains information on dozens of single-tenant net leased properties currently available. Subscriptions are available for $120 per year by visiting the website at http://www.netleasesuccess.com/
Ned is a Vice President at CB Richard Ellis, the worlds largest commercial brokerage firm.