Have you been working hard at your job and saving for retirement? Are you interested in growing your money, but unsure of the best path to meet your financial goals? Perhaps you keep hearing that your portfolio needs to be diversified, but have no idea what that truly means. Diversification simply refers to not putting all of your eggs in one basket by spreading your investments out over multiple types of assets. Generally chosen for your portfolio based on your risk tolerance and age, this mix of assets will limit your exposure to one particular market and help reduce volatility over time. Diversification ultimately offers a  smoother ride in the investment world with more consistent gains. A typical portfolio contains three types of assets:

• Stocks (domestic and international)
• Bonds
• Short-term investments (CDs and money market funds)

However, there are more assets to invest in beyond these three. One market with great potential to decrease the volatility of your portfolio is real estate. Investing in real estate can provide passive income and reliable protection against inflation.

Diversifying with Real Estate 

If you are looking to further diversify your portfolio to avoid swings in the stock market, it’s worth considering real estate investing as an alternative strategy. Wondering how to do this successfully? Let’s delve a little deeper into how you can strategically use the money you are already saving in tax-advantaged funds to help you invest in real estate.

Individual Retirement Account (IRA)

IRA accounts are tax-advantaged by being either “tax-deferred” or “tax-exempt.” There are various types of available IRAs, which allow you to hold the typical asset classes of stocks, bonds, and short-term investments. 

• Traditional IRA
• Roth IRA
• SEP IRA
• SIMPLE IRA.

Self-directed IRA

In addition to offering tax advantages, the self-directed IRA permits you to invest in a broader group of assets than other IRAs. That’s why this option stands out from the rest. While you can 

invest in the typical asset classes, the self-directed IRA allows you to also invest in real estate. These must be set up with a company (custodian) that specializes in this specific type of IRA. When using funds for real estate, keep in mind that the property can only be used for investment purposes. Even if it is a vacation property, you cannot use it in any way.  The custodian will explain  all the rules surrounding real estate, but here are a few to note:

• The IRA will technically own the property, not the individual. 
• All property expenses must be paid through the IRA.
• Any income generated by the property will be returned to the IRA.

Benefits of investing in real estate with your self-directed IRA

• Your investments will benefit from tax-deferred status. 
• Your real estate investments will further diversify your portfolio, which offers greater protection from volatility. 
• Any real estate proceeds are automatically returned to the self-directed IRA to be reinvested.

Using a self-directed IRA to invest in real estate will propel you toward the path of financial freedom. Taking control of your money and allowing it to grow will also give you more time and flexibility to follow your passions.