Why Investors Choose to Invest in Alternatives Using Their Self-Directed IRAs

There is an entire investing universe that extends beyond basic long positions in equity and fixed income investments.

Why Investors Choose to Invest in Alternatives Using Their Self-Directed IRAs

There is an entire investing universe that extends beyond basic long positions in equity and fixed income investments. While stocks and bonds provide a solid long-term core for most retirement portfolios, incorporating alternatives provides a tool to achieve higher yields, greater diversification, protection against inflation and the ability to own hard assets.

Alternative assets are the fastest growing segment of the retirement market. An alternative asset is an investment that isn’t among traditional asset classes, such as stocks and bonds. These investments are more common and well-known. For example, many investors know the ins and outs of real estate, but can’t navigate the complex world of Wall Street. This is one reason alternative asset investments have become increasingly popular. The second reason arose from the 2008 financial crisis. Many alternatives have a low correlation to stocks, bonds or both. This low correlation can be a real asset to investors in times of market uncertainty as they strive to control the volatility and downside risk of their portfolios.

With alternative assets growing in popularity, we wanted to highlight one of the lesser known investment vehicles that can be an ideal for investing in alternatives: The Self-Directed IRA.

What is a Self-Directed IRA?

Banks, brokerage firms and insurance companies have historically controlled the type of investments made with IRAs and 401(k)s. They offer a more traditional approach to investing by limiting options to publicly traded stocks, bonds and mutual funds. Today, with information so readily available from a wealth of sources, investors can research and make sound investment decisions without relying exclusively on these traditional advisers.

A Self-Directed IRA is a type of individual retirement account (IRA) that gives you, the investor, control over your investment decisions, and is a great vehicle for investing in alternatives. The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record-keeping and IRS reporting requirements. The “self-directed” aspect kicks in each year, since you must accurately value your investment annually and report the value to your IRA custodian.

What are the benefits of investing in alternative assets in my SDIRA?

1. Diversification
In general, most Americans have an enormous amount of financial exposure to the equity markets. Whether it is through retirement investments, such as IRAs or 401(k) plans, or personal savings, many of us have most of our savings connected to the stock market. In fact, over 90% of retirement assets are invested in the financial markets. With ~ $30 trillion in retirement assets as of 2018, you can see the scope of that exposure. Investing in non-traditional assets offers a form of investment diversification from the equity markets.

Additionally, the more diverse your portfolio, the greater chance that your assets will offer lower correlation. In other words, they are less likely to move in the same direction. However, diversification does not assure profit or protect against loss. Nevertheless, the use of non-traditional asset classes can help protect your portfolio when the market is down, preventing you from losing more than the market.

2. Higher Yields and the Illiquidity Premium
Many alternatives are illiquid, creating the potential for long-term investors to earn a greater return for holding these assets for a longer period of time. They also generally exhibit low correlation to stocks and bonds given the distinctiveness of the underlying asset classes. Finally, many of these vehicles can offer higher income than traditional stock or bond portfolios due to the underlying liquidity, complexity, credit and/or leverage risks. In a low interest rate environment, a higher yield may be an attractive feature for many investors.

3. Inflation Protection
Rising food and energy prices, along with high federal debt levels, have recently fueled new inflationary fears. As a result, some investors may look for ways to protect their portfolios from the ravages of inflation. It is a matter of guesswork to estimate whether these inflation risks are real. However, for some retirement investors, protecting retirement assets from inflation is a big concern. Inflation can have a negative impact on a retirement portfolio because it means a dollar today may not be worth a dollar tomorrow. It decreases the value of money so that goods and services cost more, causing the cost of necessities, such as food, gas, shelter, clothing, medical services, etc., to increase.

4. Hard Assets
Buying hard assets is seen as one way of protecting your portfolio from inflation. Many investors recognize that investing in commercial real estate can provide a natural protection against inflation. As you may know, rent tends to increase when prices increase, acting as a hedge against inflation.

Many alternative assets, such as real estate and precious metals, are tangible hard assets. In other words, you can see and touch them. With real estate, for example, you can drive by the property in your car and say, “I own that in my SDIRA.” For some, that’s important psychologically. This is especially the case in times of financial instability, inflation, or political or global upheaval.

So, which alternatives can I invest in within my SDIRA?

Self-directed IRAs allow for direct ownership of many types of alternative investments, as opposed to investing via a mutual fund or ETF that at best provides indirect exposure to these alternative vehicles.

Some of the alternative investment options available to investors within self directed IRAs:

  • Real estate
  • Hedge funds
  • Private equity investments
  • Private placements
  • Cryptocurrency
  • Private corporate debt instruments
  • Real estate notes and trust deeds
  • Gold and precious metals
  • Crowdfunding
  • Structured settlements
  • Tax liens

Primary Benefits of Owning Investment Real Estate in a SDIRA

Real estate is REAL. It is tangible, finite and has historically been a multigenerational builder of wealth. Rather than an alternative retirement investment, real estate can be a key vehicle for growing one’s IRA account. Unlike more traditional securities, investing in real estate allows the SDIRA owner total control over his assets. This makes a self-directed IRA real estate strategy a good one for hands-on investors who want more than a passive approach to their retirement.

Another benefit of using a Self-Directed IRA to purchase real estate is found in the potential tax benefits. As is the case with any investment in your IRA, you benefit from tax-deferred income until the day you take withdrawals. Or, if your investment holdings are in a Roth IRA, your investment gains accumulate tax-free, and you can withdraw it tax-free.

You still must wait until you reach age 59½ to withdraw your funds, or else you will be subject to an early withdrawal penalty, and the withdrawal will be included as ordinary income on your tax return. However, active investors may buy, sell, or flip properties and move funds from one project to another while maintaining the tax-deferral status of the IRA.

How To Invest in Real Estate with a Self-Directed IRA

At Excelsior Capital, part of our mission is to educate our investors. Oftentimes, the first step in the educational process is awareness. By making our investors aware of opportunities, market and industry trends, meaningful data points and different types of investment vehicles – to name a few – we help to create a more sophisticated investor base.

The investment options available to those using self-directed retirement accounts go way beyond real estate. We work with several reputable trust companies to provide individual investors the ability to set up SDIRAs. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will provide much-needed guidance as you travel through the murky and confusing waters of the IRS tax code. As always, we welcome the opportunity to discuss further and make referrals when appropriate.

Previous Articles


The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.


How Much Money Do I Need to Start Investing in Commercial Real Estate?

We frequently have conversations where people tell us, “I want to start investing in commercial real estate, but I’m not sure if I have the capital.”


Benefits of Owning Commercial Property over Residential

While both types of real estate investments have their benefits, investing in CRE can be more advantageous for several reasons.

The Revolution That Wasn’t

How has technology impacted modern finance and created an asymmetrical relationship between Wall Street and individual investors? In this episode, we speak with Spencer Jakab, the author of The Revolution That Wasn’t and editor of the Wall Street Journal’s Heard on the Street column.

Tax Savings Secrets: How Cost Segregation Analysis Can Save You Money

How can cost segregation analysis help real estate investors maximize their returns? In this episode, John Hanning explores the potential benefits of cost recovery studies and depreciation.

What is a Family Owner’s Manual and Do I Need One?

It’s time to make sure you and your family are set up to continue success for generations to come. Today, Josh Kanter shares his journey transitioning from practice as a transactional attorney to reorganizing his family’s activities under a single-family office.

Key Characteristics of High-Performing Family Offices

Are family offices becoming more popular? In this episode, Robert Daugherty dives into the importance of having a functional family office, and the role of the Chief Learning Officer in it.

Talking to Your Parents about Their Finances

As your parents age, you may find that you want or need to broach the often-difficult subject of finances. In this episode, Cameron Huddleston, an award-winning personal finance journalist, discusses how to have meaningful conversations with your parents about their finances.

Pros, Cons, and Features of Robo-Advisors for the Wealthy

Learn how to amass wealth – the right way, for you. In this episode, Barbara Friedberg, a former portfolio manager and university investments and finance instructor, delves into how robo-advisors have revolutionized traditional financial advisory services.

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?


Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.

Excelsior Capital

104 Woodmont Blvd, Suite 203
Nashville, TN 37205

Contact Us