Welcome back to the Net Worth Podcast.
Speaker 1: This week we are diving into how Real Estate Investment Trusts, or REITs, held within a self-directed IRA, can be a powerful engine for your long-term net worth growth.
Speaker 2: This deep dive is based on this edition from wearenoyack.com, exploring a smart, hands-off path to real estate investing.
Speaker 1: Check out the full edition on our website, wearenoyack.com.
Speaker 2: Okay, so.
Speaker 1: Let’s unpack this a bit.
Speaker 2: We’re talking REITs.
Speaker 1: We’re talking self-directed IRAs.
Speaker 2: For someone listening, someone really focused on building their net worth, maybe through real estate, but they kind of dread the whole landlord thing.
Speaker 1: Why should this combination specifically be on the radar?
Speaker 2: Well, it’s fascinating really how these two things work together.
Speaker 1: It creates this really passive and tax-efficient way to get exposure to real estate.
Speaker 2: So a REIT, a real estate investment trust, is basically just a company.
Speaker 1: they own or operate or sometimes finance properties that produce income.
Speaker 2: OK, like a portfolio manager but for buildings.
Speaker 1: Exactly.
Speaker 2: Think of it like owning a piece of a really diverse real estate portfolio, apartments, offices, malls, you name it.
Speaker 1: But you don’t actually have to buy the properties yourself.
Speaker 2: No tenants, no maintenance calls.
Speaker 1: And then, here’s the kicker, you put these REITs inside a self-directed IRA, an SDIRA.
Speaker 2: Right.
Speaker 1: And you essentially uh supercharge their growth potential because of the tax advantages.
Speaker 2: You’re combining that passive real estate income with the tax shelter of a retirement account.
Speaker 1: This edition we’re looking at, calls this the missing piece for long-term wealth.
Speaker 2: And honestly, I think that’s spot on.
Speaker 1: Okay, passive and tax efficient definitely grabs my attention.
Speaker 2: So one of the first things that jumps out from this edition is this idea of um steady passive income and compounding.
Speaker 1: How does that really move the needle for accelerating net worth?
Speaker 2: Yeah, that’s fundamental.
Speaker 1: REITs, by law, have to distribute, I think it’s at least 90 % of their taxable income back to shareholders as dividends.
Speaker 2: 90%, wow.
Speaker 1: Yeah, it’s huge.
Speaker 2: So you get this pretty consistent cash flow.
Speaker 1: Now imagine taking those dividends, and instead of paying tax on them every year, you reinvest them inside the SDI-RAE.
Speaker 2: Ah, OK, so they’re sheltered.
Speaker 1: Exactly, sheltered from immediate taxes.
Speaker 2: So every dollar of that dividend goes right back to work.
Speaker 1: buying more REIT shares, which then generate more dividends.
Speaker 2: It’s compounding, but like on steroids, because the tax drag isn’t slowing it down every year.
Speaker 1: Right.
Speaker 2: No annual tax hit, eating away at the returns.
Speaker 1: Precisely.
Speaker 2: Over, 20 or 30 years, that lack of tax drag makes an enormous difference to your final net worth.
Speaker 1: It’s just pure uninterrupted growth working for you.
Speaker 2: OK.
Speaker 1: Here’s the part I think really resonates with a lot of people.
Speaker 2: Getting that real estate exposure without having to be a landlord, know, avoiding the headaches.
Speaker 1: Can you talk about the diversification benefit there and how it helps with like portfolio stability?
Speaker 2: Absolutely.
Speaker 1: And this is a major draw.
Speaker 2: If you buy, one rental property, all your risk is concentrated right there.
Speaker 1: Vacancy, big repair, local market dips.
Speaker 2: You feel all of it.
Speaker 1: Yeah, definitely.
Speaker 2: With REITs, though, you’re instantly diversified.
Speaker 1: You can own pieces of residential complexes in the Sunbelt, industrial warehouses in the Midwest, maybe some health care facilities on the East Coast.
Speaker 2: data centers globally, all through one investment, potentially.
Speaker 1: So you’re spreading the risk across different property types and locations.
Speaker 2: Exactly.
Speaker 1: It smooths out the bumps, adds stability to your overall portfolio.
Speaker 2: It reduces that single property risk significantly.
Speaker 1: You get the income, the potential appreciation of real estate.
Speaker 2: But crucially, none of the landlord duties.
Speaker 1: No calls about toilets, no chasing rent.
Speaker 2: It’s hands off.
Speaker 1: That sounds pretty good.
Speaker 2: Hands off real estate.
Speaker 1: Okay, we keep circling back to taxes and obviously it’s a huge part of this.
Speaker 2: How does holding REITs inside an STRA really maximize net worth growth from that tax angle?
Speaker 1: Yeah.
Speaker 2: What’s the specific power of the STRA here?
Speaker 1: Right, so why the STRA specifically?
Speaker 2: Well, it comes down to sheltering both the income, the dividends we talked about, and any capital gains if the REIT shares appreciate in value.
Speaker 1: Okay.
Speaker 2: So whether you use a traditional STRA where your money grows tax deferred until retirement.
Speaker 1: You pay taxes later when you withdraw.
Speaker 2: Right.
Speaker 1: or a Roth SDIRA where the growth and the withdrawals and retirement are completely tax free.
Speaker 2: Which is amazing.
Speaker 1: It is.
Speaker 2: In either case, those REIT dividends and gains, they just bypass the annual tax bill.
Speaker 1: And remember, REIT dividends are often taxed as ordinary income outside an IRA, which can be a pretty high rate.
Speaker 2: Higher than regular stock dividends sometimes.
Speaker 1: Often, yes.
Speaker 2: So putting them in the SDIRA shields you from that potentially higher tax rate year after year.
Speaker 1: Your money just works harder, compounds faster.
Speaker 2: This addition also points out something interesting.
Speaker 1: Even outside an IRA, REITs have some tax advantages, like potentially qualifying for the 20 % QBI deduction.
Speaker 2: CBI.
Speaker 1: Qualified Business Income deduction.
Speaker 2: It can lower your taxable income.
Speaker 1: Plus, the REIT structure itself avoids corporate-level tax because they distribute most income.
Speaker 2: So they’re already kind of tax-efficient.
Speaker 1: But the SDR takes it to another level.
Speaker 2: Exactly.
Speaker 1: It turbocharges the tax efficiency for your personal net worth.
Speaker 2: Makes sense.
Speaker 1: Now another point this edition brings up is liquidity, which is, you know, big contrast to owning physical property.
Speaker 2: Selling a building takes time.
Speaker 1: How does the liquidity of, publicly traded REITs benefit your net worth strategy?
Speaker 2: Yeah, that flexibility is a really key difference.
Speaker 1: Publicly traded REITs, you buy and sell them on major stock exchanges, just like Apple or Google stock.
Speaker 2: So pretty easily accessible.
Speaker 1: Very accessible.
Speaker 2: If you need your capital or you want to rebalance your portfolio or maybe jump on a different opportunity, you can usually sell your shares relatively quickly.
Speaker 1: Compare that to selling a physical property.
Speaker 2: Oh, yeah.
Speaker 1: Months, maybe longer.
Speaker 2: Brokers, closing costs.
Speaker 1: Right.
Speaker 2: It’s a whole process.
Speaker 1: Now, it’s fair to say not all REITs are this liquid.
Speaker 2: Non-traded REITs or private ones, they often have lockup periods.
Speaker 1: OK, good distinction.
Speaker 2: But having that option for liquidity with the publicly traded ones gives you control.
Speaker 1: You’re not stuck if circumstances change.
Speaker 2: That adaptability is definitely an advantage for actively managing and growing your net worth over time.
Speaker 1: So pulling this all together, if someone’s weighing this up, know, REITs in an SDI or versus just going out and buying rental property, what are the core trade-offs for their net worth strategy?
Speaker 2: It really boils down to your goals and honestly your personality as an investor.
Speaker 1: Direct real estate.
Speaker 2: You get control, maybe some specific tax breaks like depreciation, but it needs serious upfront cash.
Speaker 1: It’s illiquid.
Speaker 2: And it demands your time and effort.
Speaker 1: It’s active.
Speaker 2: Very active, potentially.
Speaker 1: Very active.
Speaker 2: REITs in an SDRR, on the other hand, it’s a much lower entry point financially.
Speaker 1: It’s designed to be passive.
Speaker 2: You get instant diversification.
Speaker 1: And as we’ve hammered home, it’s incredibly tax efficient within that SDRR wrapper.
Speaker 2: So different paths to real estate exposure.
Speaker 1: Totally different philosophies.
Speaker 2: If your goal is passive income, long-term growth, leveraging tax advantages without being a landlord, the REITs in an SDR route is often, let’s say, a more streamlined path for many people aiming to build net worth.
Speaker 1: It aligns better with a hands-off approach.
Speaker 2: And thinking about that set-it-and-forget-it idea, this edition mentions different kinds of REITs, publicly traded, non-traded, private.
Speaker 1: How do those choices fit into a more passive, long-term net worth plan?
Speaker 2: Good question.
Speaker 1: The type you choose really influences that set it and forget it feel.
Speaker 2: Publicly traded REITs we know offer liquidity, great for flexibility, but they also bounce around with the stock market daily.
Speaker 1: So maybe not truly forget it if you watch the market closely.
Speaker 2: Right.
Speaker 1: Could cause some anxiety if you’re watching daily swings.
Speaker 2: Non-traded REITs, though, they aren’t listed publicly.
Speaker 1: They usually mean less liquidity, longer holding periods.
Speaker 2: But the flip side is they often aim for higher, steadier dividend yields.
Speaker 1: And their value isn’t subject to those daily market whims.
Speaker 2: Ah, so potentially smoother, more predictable income.
Speaker 1: That’s often the goal, yes.
Speaker 2: Which makes them quite attractive for that long-term, passive, retirement-focused investor inside an SDIRA.
Speaker 1: They kind of fit that set-it-and-forget-it model better for income seekers who don’t need immediate access to the cash.
Speaker 2: And private REITs.
Speaker 1: Private REITs are usually for accredited investors, folks with higher income or net worth.
Speaker 2: They might offer higher return potential, but often come with less transparency, maybe higher fees, and are generally quite illiquid.
Speaker 1: For most people seeking a passive strategy, non-traded REITs inside the SDR often hit a sweet spot between income focus and reduced daily volatility.
Speaker 2: OK, this sounds really compelling, especially for building net worth passively.
Speaker 1: So for our listener thinking, all right, I’m interested, how do I actually start?
Speaker 2: Can we just quickly walk through the steps?
Speaker 1: Yeah, absolutely.
Speaker 2: It’s more straightforward than you might think.
Speaker 1: Step one, open a self-directed IRA.
Speaker 2: Critically, it needs to be with a custodian that actually allows alternative investments like REITs.
Speaker 1: Not all brokerage firms do.
Speaker 2: Okay, find the right custodian.
Speaker 1: Step two, fund the account.
Speaker 2: You can roll over money from an old 401k or an existing IRA or make new contributions within the IRS limits.
Speaker 1: Consolidate funds, got it.
Speaker 2: Step three, choose your REITs.
Speaker 1: based on your goals, liquidity, income focus, whatever you work with your custodian to select and purchase the REITs inside your SD-ERA.
Speaker 2: Pick the investments.
Speaker 1: And step four, really, is let it work.
Speaker 2: Let that compounding happen.
Speaker 1: Let the dividends reinvest, all sheltered from taxes.
Speaker 2: You monitor it periodically.
Speaker 1: Make sure it still aligns with your goals.
Speaker 2: But it’s designed to be low maintenance.
Speaker 1: Smart and passive.
Speaker 2: Exactly.
Speaker 1: As this edition puts it, a smart, passive way to build retirement wealth.
Speaker 2: The process supports that goal.
Speaker 1: You know, when you step back REITs inside an SDIRA, it’s such an elegant structure.
Speaker 2: You get the real estate exposure, the potential for income, the growth, all wrapped up with powerful tax efficiency.
Speaker 1: It really makes you think.
Speaker 2: For anyone serious about financial independence, how much more could your net worth grow if you really harness that power of compounding and tax sheltering, especially with an asset class like real estate, but without the usual barriers?
Speaker 1: It’s a powerful thought.
Speaker 2: That definitely wraps up our deep dive into REITs and self-directed IRAs for net worth growth.
Speaker 1: We really hope you found these insights valuable for your own financial journey.
Speaker 2: Remember to subscribe to Noyack Wealth Weekly on our website.
Speaker 1: wearenoyack.com.
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