Investors seeking more agency over where their money is invested often turn to self-directed IRAs. These IRAs offer significantly more investment control and diverse investment vehicles than other IRA types, benefiting individuals who want a more comprehensive array of investment options.

Broadly speaking, self-directed IRAs have many factors that set them apart from other IRA types, including:

• Broader scope of investment options
• Greater control and decision-making capabilities over investments by the investor
• More investor responsibility
• Potential for increased portfolio diversification
• The usage of a custodian or trustee for specific asset types
• Greater complexity and higher potential risks
  
  

In this article, we will explore some of the best self-directed IRA alternative investments to help you better grasp the options at your disposal and determine which may align best with your investment goals.

Self-Directed IRA Alternative Investments Investors Should Know 

While IRAs allow investors to save money for retirement on tax-advantaged bases, the distinguishing characteristic of self-directed IRAs is that they allow investors to hold many asset types.

Some IRAs may only allow investors to invest their money in mutual funds, stocks, bonds, and other traditional investment options. Self-directed IRAs allow investors to remove the reins and gain more control over how their money is invested.

Instead of brokerage firms or banks controlling where money is invested, self-directed IRAs put investors in the driver’s seat of their own investment strategy, providing the opportunity for self-directed IRA alternative investments such as:

• Real Estate: The purchase of physical properties, such as residential and commercial properties, that are rented out to tenants for rental income
• Private Placements: Direct investing in private companies or not publicly traded ventures; examples include startups, venture capital, or private equity opportunities
• Precious Metals: The purchase of tangible, valuable metals such as gold, silver, and platinum
• Promissory Notes: The lending of money to another party that agrees to repay the loan over time with interest
• Stocks and Bonds: Stocks are shares of ownership in a company that can benefit from capital appreciation. Bonds on the other hand are sort of like IOUs from government entities or corporations used to raise funds. While stocks and bonds are more traditional investment options, with self-directed IRAs, investors have more control over which stocks and bonds they choose to invest in, which could include bonds issued by private entities.
• Cryptocurrency: The purchase of block-chain-backed assets such as Bitcoin, Ethereum, Doge, and other digital currencies that operate independently of traditional financial institutions
  
  

Self-directed IRAs offer investors a multitude of additional investment options while also enhancing the level of control they have over investment options that they would have with a non-self-directed IRA, such as stocks and bonds.

As with any investment option, these alternatives are characterized by their unique advantages and disadvantages, and no asset is perfect.

Note that this comparison serves to provide a broad summary of the advantages and disadvantages of some of the most popular self-directed IRA alternative investments. All investments carry risk and investors should thoroughly research and assess each option, and consult with their financial advisor before making any adjustments to their investment strategy.

Self-directed IRAs offer investors the ability to have greater control over their investments, but they also demand greater diligence and responsibility from investors.

Understanding Self-Directed IRAs

IRAs are popular retirement accounts that can provide investors with advantages over other options like 401(k)s. There are different types of IRAs available. Non-self-directed IRAs can be rigid, investing in stocks and bonds. In contrast, self-directed IRAs offer more freedom of options. Investors control investments, accessing diverse assets and alternatives for better risk management and diversification.

However, self-directed IRAs need a specialized custodian to ensure IRS compliance. Custodians handle assets and transactions but lack investment authority. Self-directed IRAs follow contribution limits, distribution rules, and eligibility criteria like other IRAs.

While self-directed IRAs provide more options and flexibility, they require more investor involvement. It’s important you consult with a financial advisor before using a self-directed IRA.

Canyon View Capital Helps Investors Enjoy Passive Real Estate Returns

Here at Canyon View Capital, we know just how demanding investing can be. We take our cumulative decades of experience in real estate investing to help investors like you try and achieve the benefits of self-directed IRA alternative investments without having to shoulder as much of the burden.

Real estate is an alluring option for many investors, especially within the multifamily realm. However, many investors may be deterred by time commitments and the increased responsibilities of property management. For those investors, we offer investment products that allow them to receive passive income backed by our multifamily properties located throughout the Midsouth and Midwest—they have the potential to earn passive income without needing significant hands-on time.

Real estate investing is considered by many to be an excellent addition to an investor’s portfolio1. However, there are many avenues you can take when looking to invest; multifamily investing is one.

While many investors will leap at the chance of earning income from multiple tenants in a single location, there is also a bevy of potential tax advantages that can augment their tax investment strategy. In this article, I’ll break down some of the tax benefits of multifamily investing so that you can better understand whether or not multifamily investing is for you. I’ll also explain how Canyon View Capital can help if you find that taking advantage of these tax benefits may be too complicated.

Understanding Multifamily Investing 

There are multiple types of real estate investment, each with its quirks and characteristics. Multifamily investing differs from real estate investment strategies, such as single-family or commercial.

Multifamily investing entails acquiring and overseeing residential properties comprising several individual units within a single complex or building. Examples include apartments, duplexes, and condominiums.

Incorporating multifamily investing into your portfolio can prove advantageous due to its unique benefits for investors. However, like any investment, it comes with inherent risks and necessitates substantial hands-on effort to ensure profitability and adherence to investment and tax regulations.

Nevertheless, there exist avenues through which investors can relish the advantages of passive multifamily income without necessitating the typical time commitment for profitability. This approach can enable them to savor a portion of the numerous tax benefits that multifamily investments offer.

What Are the Tax Benefits of Multifamily Investing?

Getting laser-focused on the potentially lucrative nature of rental income is easy, especially from larger properties that can house hundreds of tenants. But there’s more to why multifamily investing can be a boon for some investors.

The tax benefits of multifamily investing can be a significant component of why multifamily investing can embolden a portfolio, especially when investors are able to proactively plan for potential tax liabilities.

While these benefits can be advantageous, savvy investors can use some of the tax benefits of multifamily investing in tandem. Let’s look at an example.

Tax Benefits in Action

Example Scenario:

• You own and manage a multifamily property you purchased for $2 million and have been renting it out for several years while claiming depreciation.
• The property generates $150,000 in rental income in one year but incurs $50,000 in expenses such as repairs and maintenance.
• You are a sole proprietor and qualify for a pass-through deduction under the Tax Cuts and Jobs Act.
  
  

You can potentially utilize the following tax benefits together:

1. Depreciation Deduction: You can calculate the annual depreciation based on the value and useful life of the property. The land is deducted from the purchase price and then the building component is depreciated. For example, if the property has had a useful life of 27.5 years, the deduction would be around $72,727 ($2,000,000/27.5).
2. Property Expenses: Deducting the $50,000 in annual expenses from your rental income would reduce the taxable income from $150,000 to $100,000.
3. Pass-Through Deduction: Since you’re a sole proprietor in this scenario, you qualify for a pass-through deduction, which means you can deduct up to 20% of your qualified business income. If your income from the property is $100,000 after deducting expenses, you can deduct an additional $20,000 (20% of $100,000) from your taxable income.
   
   

This is just one specific micro-example of how the tax benefits of multifamily investing can be woven into an investment strategy. There are many other situations where some benefits would not apply and vice versa.

Understanding that tax laws and regulations are complex and constantly in flux is crucial, so investors should always consult with a tax professional or financial advisor to ensure they receive the most accurate and up-to-date tax and investment advice.

Target Passive Income and the Tax Benefits of Multifamily Investing with Canyon View Capital 

There will be nuances, complexities, and responsibilities associated with any type of real estate investing. However, understanding the potential tax benefits of multifamily investing can help you identify if it’s right for you.

Here at CVC, we offer ways for investors to enjoy the benefits of multifamily investing—including tax advantages—without having to bog themselves down with property management. Backed by our conservative “buy-and-hold” strategy in stable markets, our multifamily properties are intended to provide passive rental income to investors with the potential for large depreciation deductions and passive losses.

Many investors lean on their savings accounts to provide a nest egg for their future. Individual retirement accounts (IRAs) are a great way to save for the golden years. However, many potential investment options are outside your reach when utilizing a standard IRA.

You’ll have to open a self-directed IRA if you want to invest in other options. But what are these additional options? In this article, we’ll unveil some of the best self-directed IRA private investments.

Self-Directed IRA Private Investments

While traditional IRAs can be a great savings option, investors have little to no control over how their assets are invested, and there’s a limited selection of available investment options.

With traditional IRAs, your investments are usually handled by the bank or brokerage that you opened the account with, and the funds are only allowed to be invested in the following:

• Stocks
• Bonds
• Mutual Funds
• Money Market Funds
• Exchange-Traded Funds (ETFs)
• Certificates of Deposit (CDs)
  
  

All of these options available to traditional IRAs are publicly traded assets. Stocks, bonds, and ETFs are all traded directly on stock exchanges. In contrast, mutual funds, money market funds, and CDs are not traded on exchanges but are still considered publicly available investment vehicles.

Self-directed IRAs, however, offer additional investment options, including the ability to invest in private assets such as:

• Real Estate: You can directly purchase and manage various real estate types, such as multifamily, single-family, and commercial properties, that provide rental income and potential appreciation.
• Private Placements: You can invest in securities issued by private companies, including LLCs and limited partnerships.
• Precious Metals: Self-directed IRAs allow you to invest in metals such as platinum, gold, and silver that may increase in value over time.
• Promissory Notes: You can issue capital as a loan to individuals or other entities, which will generate interest over time.
• Cryptocurrency: Depending on your self-directed IRA, you can invest in digital currencies such as Bitcoin and Ethereum, which can increase in value.
  
  

In addition, self-directed IRAs can typically invest in the publicly traded options available to traditional IRAs, further enhancing the selection of available options.

But how do these self-directed IRA private investment options stack up against each other? Let’s compare.

While each option is available to investors with self-directed IRAs, each has its characteristics with regard to its liquidity, level of investor control, tangibility, and income potential—all things investors should consider before deciding on where to invest funds from a self-directed IRA. Moreover, each option requires expertise to increase the chances of success and profitability.

This is a crucial component of self-directed IRAs vs traditional IRAs. With increased flexibility and agency comes increased complexity and burden of responsibility. Private investments, in particular, may come with increased risks and require increased diligence from the investor, so you should always consult with your financial advisor.

Public vs. Private Investments

Now that you understand what self-directed IRA private investments are available to you, you may be wondering why an investor would want to take on extra responsibility for more options. This will always depend on a combination of your financial goals and risk tolerances.

Public investments involve purchasing assets traded on public markets or stock exchanges that are widely available to many potential investors. Moreover, public markets are often characterized by continuous trading with real-time price updates. This means they are subject to market fluctuations.

It’s not always the case, but public investments tend to be more liquid and have shorter investment horizons when compared to some private investments.

Conversely, private investments involve trading assets not widely available on public exchanges and markets. Private investments tend to be less influenced by daily market fluctuations¹ as they are not traded on open exchanges—although all investments are subject to market fluctuations—and tend to offer investors a more active role in the decision-making of the underlying assets. However, some of them, like real estate and precious metals, come with potentially longer investment horizons than their publicly traded counterparts.

Ultimately, the ability to invest in private investment options, such as real estate, is a massive point in a self-directed IRA’s favor because you open the door to additional possibilities and can still typically invest in public investments.

Canyon View Capital Offers Products for Self-Directed IRAs That Can Require Less Hands-On Time

At Canyon View Capital, we understand that investing can be intimidating. While self-directed IRA private investments can open the doors to many additional investment opportunities, they also come with an increased burden on the investor.

For investors who want to enjoy the potential benefits of assets like real estate from a self-directed IRA, CVC offers investment products that can assist.

With over 40 years of experience between CVC principals and a portfolio of multifamily real estate now valued at over $1 billion, we provide  options to investors like you to target savings for retirement.

Real estate can be an enticing investment opportunity due to its potential benefits. But like any avenue for investment, different philosophies and strategies can be applied to obtain specific goals and objectives.

One such strategy is value investing—which is often used for stocks but can be beneficial in real estate investing as well. In this article, I will break down value investing in real estate, explain why investors may wish to implement this strategy into their investment plans. I’ll also explain how Canyon View Capital has tried to apply these practices in our investments as an option to potential investors.

What Is Value Investing in Real Estate?

Value investing involves finding stocks that are undervalued and buying them with the intention of holding on to them until they accumulate in value. Value investing in real estate involves examining markets and purchasing properties that are undervalued, or trading at a price lower than their intrinsic value. Unlike “flipping”—which is a strategy that involves purchasing properties, renovating them, and then quickly selling for a profit—value investing in real estate involves holding on to properties for potential appreciation in the long term.

The table below compares the two real estate investment strategies.

Value Investing in Action

Imagine that your primary market is San Francisco and you’re looking to purchase a multifamily property with the intention of renting it out to tenants. You may find that properties in some areas are expensive due to factors such as higher costs of living, operating expenses, and property values. Instead, you turn your attention to properties in the Bay Area that may be cheaper and will likely experience growth and demand for housing in the future, such as Vallejo or San Pablo.

If you decided to implement a value investing strategy in this area, you’d be purchasing properties for less money, with the expectation that specific market factors will drive demand for properties in these areas.

Benefits of Value Investing in Real Estate

There are many reasons why value investing can be a potentially beneficial approach to real estate investing.

• Cash Flow: Undervalued properties can be purchased and rented out to tenants, providing stable cash flow while anticipating property appreciation which could cover mortgage costs, property maintenance, or simply go back into your pockets as profit. 
• Diversification: Since you’re buying cheaper properties intending to hold on to them for extended periods, you may be able to purchase more, resulting in a diversified portfolio of income-producing assets and protecting you against market fluctuations1. 
• Safety and Stability: Properties are being purchased at a discount, so there is inherently less risk. Because you intend to hold on to properties long-term, you aren’t relying on quick turnarounds to make a profit.
• Tax Benefits: Real estate properties acquired through value investing may qualify for tax benefits such as mortgage interest deductions, property tax deductions, and expense deductions which could lead to more favorable tax returns.
• Long-term Wealth Accumulation: Strategically chosen real estate investments held over a long term have the potential to increase in value and build wealth while providing a source of income.
• Property Appreciation: The main goal of value investing in real estate is appreciation which could lead to potentially significant gains.
  
  

Value investing in real estate makes sense for investors looking for a long-term approach to investing. If you aren’t interested in the time commitment and responsibility of holding on to properties for an extended period of time, flipping may be an option. But, many of the benefits I’ve discussed are unique to a value investing strategy. 

However, like any investment strategy, nothing is guaranteed, and there is always some level of risk. This is why you should consult a financial advisor or tax professional before implementing a new investment strategy. 

How Canyon View Capital Helps Investors Like You

Here at CVC, we’re passionate about real estate investing and try to apply value investing in real estate as one of the pillars of our investment approach. Our principals share over 40 years of cumulative experience in multifamily investing, with a portfolio of multifamily real estate now valued at $1 billion3 centered in America’s Heartland.

Our goal is to leverage our portfolio, experience, and deep local market knowledge to allow investors to enjoy the fruits of real estate investing without purchasing and managing properties themselves. Driven by our “buy-and-hold” philosophy to real estate investing, we seek higher yields than is typical of speculative markets and offer our investors passive losses through appreciation in addition to rental income and tax benefits. 

Investors continually seek ways to enhance their investment strategies and capitalize on available opportunities. In the realm of real estate investment, two prevalent methods that can potentially enhance investment prospects are 1031 exchanges and Opportunity Zone Funds.

While these investment tools do share commonalities, their distinct contrasts indicate that choosing a straightforward path between the two will not always be easy. As we look at a comparison of 1031 exchanges vs. Opportunity Zone Funds, we will aim to empower you to form your own conclusion and gain a clearer insight into which aligns better with your investment strategy.

1031 Exchange vs Opportunity Zone Fund: Which Is Best?

Both 1031 exchanges and Opportunity Zone Funds are tax-advantaged real estate investment tools that allow investors to defer capital gains taxes from the sale of an investment property. They also lend themselves  to portfolio diversification and wealth accumulation, making them both great options for investors depending on their financial strategy.

However, when comparing 1031 exchanges vs. Opportunity Zone Funds, there are key distinctions to understand, as aside from these similarities, they are extremely different avenues to similar end goals.

What Is a 1031 Exchange?

When investors sell real estate under normal circumstances, they must pay income taxes on the profits from the sale to the IRS and potentially a state government. These taxes can be as much as 33% of the profits (the difference between the sale price and the original purchase price) of the sale , which can dampen profitability.

However, 1031 exchanges allow investors to defer these taxes by taking the proceeds from the sale of the relinquished property and investing them into a new property(s). This means the investor can hold on to their capital as it is reinvested into the new property(s). It’s worth noting that the new property must be considered a “like-kind” property—one used for investment purposes.

1031 exchanges are outlined in section 1031 of the Internal Revenue Code1. While they can be powerful tools with many benefits for real estate investors, they are heavily regulated, and those engaging in 1031 exchanges are beholden to strict rules and timelines.

Other important factors of 1031 exchanges include:

• 45-day window: After selling the original property, investors have 45 days to identify the replacement property(s).
• 180-day window: After selling the original property, investors have 180 days to complete the 1031 exchange process.
• Qualified intermediaries (QI): Investors are not allowed to hold on to funds from the relinquished property sale during the 1031 exchange process and must allocate those funds to a QI.
• Increased flexibility: 1031 exchanges don’t have to be a one-to-one swap. They also allow investors to swap one property for multiple and vice versa, which means they can expand or consolidate their real estate holdings.

What Is an Opportunity Zone Fund?

Opportunity Zones are economically challenged communities designated by a state to be eligible for private investments through a tax incentive program introduced in the Tax Cuts and Jobs Act of 2017. They are an alternate strategy to a 1031 exchange and the primary aim of this initiative is to foster economic development and job creation within these underserved areas through private investment.

When investors purchase properties in Opportunity Zones Funds, they can defer, reduce, or potentially eliminate capital gains taxes depending on how long the property is held for investment. At the onset of an Opportunity Zone Fund investment, there are 180 days from the sale of the original property or asset to invest the capital gains into a qualified opportunity fund (QOF).

• Five-Year Holding Period: The first level of Opportunity Zone Fund tax benefits allows investors to defer paying taxes on up to 10% of the original capital gains.
• Seven-Year Holding Period: After seven years of holding a QOF, investors can defer an additional 5% of the original capital gains, bringing the total deferral to 15%.
• Ten-Year Holding Period: After holding the Opportunity Zone Fund investment and QOF funds for at least 10 years, investors can exclude any capital gains realized from the appreciation of the funds within the QOF from their taxable income.
  
  

Both of these tax tools have their advantages and disadvantages. Although Opportunity Zone Funds can allow investors to defer or eliminate capital gains taxes while potentially improving economically distressed areas, they are restricted to particular locations that may not be profitable long-term, which carries a high level of risk.

On the other hand, 1031 exchanges allow for potentially indefinite deferral of capital gains taxes while allowing investors to swap, consolidate, or even expand their real estate holdings. However, they are complex beasts that require strict adherence to guidelines and narrow timelines.

Moreover, there is always a level of risk associated with any investment. That’s why investors should always seek counsel from a qualified financial advisor before commending a 1031 exchange or Opportunity Zone Fund.

Canyon View Capital Wants to be Your 1031 Exchange Partner

Understanding the advantages and disadvantages of 1031 exchanges vs. Opportunity Zone Funds is a significant first step toward your next investment goal. Canyon View Capital could be a powerful partner if you decide that a 1031 exchange aligns with your investment strategy.

At CVC, our leadership boasts over 40 years of experience in real estate investing and tax-advantaged portfolio investment. Leveraging this expertise, we assist investors keen on 1031 exchanges in reaping the tax benefits while delving into multifamily real estate. Our approach relieves them from the burden of property management by seamlessly exchanging into one of our properties in America’s Heartland as tenants in common.

Investors are always looking for ways to get a leg up and enhance their investment strategy, and real estate investors are no different. Fortunately, there are many tools and tactics that real estate investors can utilize to do just that by deferring taxes, mitigating risk, and increasing returns.

Two of these strategies are 1031 exchanges and Opportunity Zone Funds. While both strategies offer their comparative advantages and disadvantages, investors may wonder if it’s possible to take advantage of both with the same asset.

If you’re wondering if you can 1031 exchange into an Opportunity Zone Fund, you aren’t alone. While the short answer is “no,” that doesn’t mean that there aren’t other avenues that investors looking to do so can take advantage of.

Can You 1031 Exchange Into an Opportunity Zone Fund?

Since 1031 exchanges tax deferral tools that require the exchange of “like-kind” properties, Opportunity Zones unfortunately do not qualify. That means there is no way to 1031 exchange directly into an Opportunity Zone.

1031 exchanges and Opportunity Zones are different strategies with different purposes. While Opportunity Zones can use real estate as investment vehicles, they are funds, meaning they are not tangible assets like real estate, which 1031 exchanges require.

Why Can’t I 1031 Exchange into an Opportunity Zone

1. Nature of Investments: 1031 exchanges require relinquishing one property in exchange for another real “like-kind” asset. Opportunity Zones are funds, not real assets, so they don’t qualify for 1031 exchanges. Opportunity Zones are not primarily capital gains deferral tools and are instead incentives to invest in specific economically distressed areas to promote economic growth.
2. Timing and Requirements: 1031 exchanges have strict timing requirements that involve identifying a replacement property within 45 days and completing the process within 180 days. Opportunity Zones have their own set of time requirements. Still, they are much more protracted, with investors gaining better incentives the longer they invest in an Opportunity Zone fund and receiving the max after 10 years. 1031 exchanges can be exited after only about two years.
   
   

However, while it’s not possible to 1031 exchange into an Opportunity Zone, that doesn’t mean that the two cannot be used as part of the same investment portfolio. For example, one of the hurdles of a 1031 exchange is the tight windows and guidelines investors must follow to complete one successfully.

Since investors only have 45 days to identify replacement properties and 180 days to complete an exchange, Opportunity Zones can act as a second option for investors who may fail to complete the 1031 exchange process.

It’s important to note that while both options can be beneficial, like any investment, they carry risks. Check with a financial advisor before deciding to take on a 1031 exchange or invest in an Opportunity Zone.

If you’re interested in using a 1031 exchange to move funds into an Opportunity Zone, chances are you’re an investor looking for an exit strategy from direct property management. While you can’t 1031 exchange into an Opportunity Zone, other 1031 exchange vehicles may align with your investment strategy.

Exchange into One of Canyon View Capital’s Multifamily Properties

We understand that it may be frustrating to learn that you can’t 1031 exchange into an Opportunity Zone. That doesn’t mean you’re out of options; Canyon View Capital wants to help.

At CVC, we manage a multifamily real estate portfolio centered in America’s Heartland. Our principals have over 40 years of investing experience and have used that expertise to grow our multifamily investment portfolio to over $1 billion¹ in aggregate value. By investing in one of our properties as tenants in common, you can benefit from many of the tax incentives and advantages of investing in real estate without the hassle of property management.