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How to Buy Real Estate with Your IRA

Did you know you can invest your IRA in real estate? Like many people you might have heard about this before but are not quite sure how it can be done.  I’ll walk you through the simple three-step process and how it works.

The good news is it’s simple and easy.  Following this process allows you to gain control over your retirement account and invest in assets you want to invest in.  Let’s walk through each of the three steps one at a time.

STEP 1:  You Need a Truly Self-Directed IRA

First, you will need a self-directed IRA (SDIRA).  If you were to go down to your bank or brokerage and tell them you need a self-directed IRA they would probably tell you that’s what you have.  However, their definition of self-directed means you can choose from a list of limited investment options that they charge a fee or a commission on.  If instead you ask them if you can take title to a specific property in your IRA, what will they tell you?  “You can’t do that” or “you can’t do that here.”  Why?  Because they can’t charge you a commission on the real estate you purchase so they simply do not permit these types of investments.

What makes an IRA self-directed?   The short answer is, it depends entirely on the custodian or trust company who holds your IRA.  Each IRA trustee is allowed to impose restrictions on the types of investments they hold.  Therefore, you need to choose a truly self-directed IRA custodian, one that allows you to choose your own investments, whatever they might be.  There are several truly self-directed IRA custodians that we work with that are not commission-based institutions like your bank or brokerage.  A self-directed IRA custodian will typically charge an annual fee for the IRA service and does not charge commissions or take any percentage of your profits.  This affords you the freedom and flexibility to select your own investments.

Most IRA custodians are not self-directed so step one is to identify a truly self-directed IRA custodian and open a SDIRA.  Once you’ve identified your new custodian, it only takes a few minutes to open a self-directed IRA account.  Most of the process can be handled over the phone or online.

STEP 2:  Deposit Money in Your New Self- Directed IRA

Next you deposit money into your new self-directed IRA.  You can do this a few different ways.  First, you can make a contribution.  Contributions come from your earned income and you can simply take money from your savings or checking account and deposit it into your new self-directed IRA.  Second, if you have already started a retirement account through a previous employer you can move that money into a SDIRA.  You can “roll over” an old 401(k), 403(b) or any other thrift savings plan (TSP) directly into your new self-directed IRA.  Third, if you have an IRA already, you can transfer assets or cash from an existing IRA at your bank or brokerage to your new self-directed IRA.  When you do a rollover or transfer properly, there are no taxes, penalties or fees associated with moving your money from one custodian to another.

Now that you have a SDIRA set up and you have money in it, you are ready for the third and final step in the process, to make your first real estate investment.

STEP 3:  Make an Investment

This is the final step.  You make an investment, in this case, a real estate investment.  If this is your first time purchasing real estate in your IRA it is always advisable to contact your custodian first to ask what paperwork you will need to submit.  Generally there is a “Direction to Invest” form that you complete and instructs the custodian on what you are purchasing in your IRA, how much the investment will cost and where you need to send funds for closing.

One of the most important things to keep in mind is, “Who is going to own the real estate?”  Since you are using your SDIRA, it’s not you but your IRA who is purchasing the asset.  Therefore, when you write your offer to purchase, the purchasers name should read as:

XYZ Trust Company FBO Your Name IRA, #12345

Your custodian will sign and process all of the recordable documents since it is the custodian actually making the asset purchasing.  Now your SDIRA owns the real estate.  When your IRA owns the investment, all the expenses will be paid from your IRA.  IRS rules do not permit you to pay expenses personally.  Paying bills for your SDIRA investments is as simple as instructing your custodian to do it.  With regards to the income your SDIRA makes, here’s the best part of all — all income and profits will return to your IRA, tax protected!  No income tax, no capital gains tax — no tax!  By investing in a tax protected environment your wealth can grow exponentially faster than if you are paying taxes as you go.

By following these three simple steps, you will gain control over your retirement account and become an expert SDIRA real estate investor in no time at all.

  1. Comment by Robert sanders
    January 7th at 12:58 pm 

    Can i put it under my LLC AS A MEMBER? How do i draw out funds for expenses and how long does it usually take? Does all profit have to go back to SDIRA. What about emergency, like health and so on. I am going to look at properties to purchase now at this moment. Thanks

  2. Comment by Mike Shipley
    January 7th at 1:14 pm 

    Hello Marco,

    Thanks for the great article. I use Individual 401K for all my self directed needs and you should look into it. Some call it Solo 401K and has lot of advantages over a Self Directed IRA.


  3. Comment by Ken Bohannon
    February 4th at 3:20 pm 

    If I lend money to an investor, who purchases a property, who must foreclose on such property if the investor defaults? I would want to control this activity but do not know if i must get permission or lose control to the trustee to do so.

  4. Comment by Marco Santarelli
    February 4th at 4:06 pm 

    Ken – the person who could foreclose on the property would be the person who holds the mortgage/note on that property. In your example that would be you, assuming you have your mortgage set up to do so. Just be sure to use an attorney to draft your mortgage documents properly.

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