How much of a retirement account should end up in real estate at all

Question

I've done a few deals with my own cash and I'm now looking at a 140k rollover, and the first decision isn't which deal. It's what fraction of that account has any business being in real estate.

Some quick definitions since I was fuzzy on this a year ago. A self-directed IRA is a retirement account whose custodian will hold private assets, so you can lend money or buy into a syndication inside the tax wrapper. The tradeoff is that the assets don't have a daily price and you can't sell a quarter of a loan when you need cash.

The case for a big allocation: the tax wrapper is most valuable on income that would otherwise get taxed every year, and interest from lending is exactly that kind of income. If real estate paper is the thing I actually understand, putting it where the annual tax drag disappears looks like the highest-value use of the account.

The case for a small allocation: retirement money is the money I can least afford to have illiquid and concentrated. Public funds settle in two days. A note doesn't. If I'm already exposed to real estate through my own deals outside the account, loading the IRA up with more of the same is one bet, twice.

I don't have a principled number. I have a feeling that says half and a nervous voice that says a quarter.

ryanmck27 · Answer

The illiquidity point lands harder than people expect. A note has a maturity date and you either hold to it or sell at a discount to someone who knows you need out. That's not a two day settlement. If any part of that 140k might need to move on short notice, it isn't the part that goes into paper.

megan_doyle15 · Answer

New enough that I mostly have questions, but yours reads odd to me. You said you're already in real estate with your own cash. Doesn't that answer it? If the outside money is all one asset class, the retirement account is the only place left holding anything different.

How much of a retirement account should end up in real estate at all

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