This year has been a wild ride for real estate investors because of the COVID-19 health crisis. More so than in the past, the environment has encouraged investors to diversify outside mass-marketed funds exposed to significant volatility. Investors are showing a growing interest in diversifying into private assets, including commercial real estate. This represents a unique opportunity for commercial mortgage brokers to expand relation-ships with existing clients while attracting new ones.
Many investors are unaware that they have options beyond the public market for their retirement savings and can directly invest in commercial real estate to grow what is often their single largest financial investment: their individual retirement account (IRA). This flexibility is especially useful to investors who are already active and experienced in segments of the commercial real estate market.
As a commercial mortgage broker, you understand the importance of maintaining strong relationships with your client base and are often viewed as an expert by your clients. At the same time, you must be aware of each client’s unique borrowing situations and investment opportunities, as well as the overall environment. So, it is worth knowing how an investor can use their personal retirement savings to purchase commercial real estate. You will be providing valuable information to your clients that could benefit them financially.
At a time when mortgages brokers also are adjusting to the new market realities of the pandemic and are diversifying their businesses, this is a good time to become knowledgeable in areas of investing that are not widely known. It will further strengthen your value with clients. This could increase the demand for commercial mortgages and create additional growth opportunities for your business.
The IRS allows a surprising amount of flexibility when selecting investment types and structures for retirement accounts. Whether these are IRAs, 401(k) accounts or even health savings accounts (which follow the same investment rules as IRAs), investors can select from a range of options that are not available on many retirement platforms. This flexibility makes self-directed investing, as it’s referred to, particularly well-suited for people with larger retirement balances who prefer to have a portion of their investments outside of public markets.
Beyond portfolio diversification, self-directed investing presents an opportunity for commercial real estate investors to place money in asset classes they know well, such as an office building or multifamily housing. The commercial real estate investor can draw upon their experience and have more control. This is important when managing retirement funds.
Given the long-standing regulations governing retirement investment accounts — IRAs were established under the 1974 Employee Retirement Income Security Act — as well as the growing popularity of self-directed investing, you might assume many knowledgeable investors know they can use retirement funds to invest in alternative assets. This is simply not the case. Only a small percentage of investors realize they can use their retirement accounts to fund direct real estate investments, while an even smaller share is aware that debt can be used in the capital structure of the purchase.
There are a few important facts commercial mortgage brokers should know when it comes to self-directed retirement investing. First, the IRS does not limit retirement accounts to public-market investments. Although many retirement-plan providers limit the types of investments offered through company-sponsored retirement plans, IRS rules allow a broad array of investments.
Nothing prevents retirement-plan providers from supporting a more open architecture and investment platform. In fact, only certain assets are specifically prohibited by the tax code, such as collectibles, insurance contracts and some precious metals. Real estate is one of the most popular assets for self-directed investors.
The IRS also allows investors control over the selection of the plan provider. Investors can move money from one individually owned plan to another with no tax consequences. If an investor would like to directly invest in real estate using their retirement funds, they simply need to open an account with a self-directed plan provider or custodian.
The process is quick and straightforward. Funding generally requires only a week or two for the money to settle, during which time investors can finalize their investment. There is one possible exception: Employees with balances in 401(k) plans tied to their current employer may be subject to transfer restrictions on funds contributed by the sponsor company.
If an investor would like to directly invest in real estate using their retirement funds, they simply need to open an account with a self-directed plan provider or custodian.
Notably, the IRS permits debt in retirement plans. Many commercial mortgage brokers don’t know this. The IRS will allow the use of leverage in retirement accounts to purchase and capitalize assets. Other assets, including public ones, also can be leveraged, but real estate is generally one of the few investment types that lenders are consistently willing to collateralize.
Furthermore, investors are not limited to traditional banks as lenders. Asset sellers, individuals and even other IRAs can loan money to retirement-account plans using a mortgage. By using debt to complement their equity stake, many commercial real estate investors can put their IRA funds to work in additional real estate deals or other investments, creating increased demand for their mortgage broker partners.
Commercial mortgage brokers who can speak knowledgeably to their clients regarding the full breadth of their investment and funding options are providing an invaluable service. Even the investors who are vaguely aware of self-directed retirement-account investing often develop preconceived notions from their current plan providers. They worry about the complexity of using IRAs to invest in assets such as real estate or the potential liability for unrelated business income tax.
Here’s a secret: It’s not that complicated. Frankly, some plan providers may be misinforming investors to discourage them from moving their money out of their current plan, even if that investment is in the best interest of the client. As you are considering ways to build rapport with your clients, think beyond traditional avenues for real estate funds.
This is an educational opportunity for your clients. Many investors can likely use their IRA in ways they are not aware of. Beyond creating additional opportunities for new deals, you might also get additional business via increased client loyalty and referrals.
Leveraged real estate has built personal wealth for many investors over the years. Today, with so much public-market uncertainty and recent price fluctuations, these same investors may likely embrace the chance to use leveraged real estate to boost the value of their retirement plans — to the benefit of their commercial mortgage brokers as well. ●