IRA Real Estate Archives

IRA Investing in Real Estate: What You Need to Know?

February 1, 2023 by Marco Santarelli

Investing in real estate as a part of your retirement planning requires you to learn the governing rules and regulations that will affect your decision. Some conventional IRA experts say that it is better to stay away from investing in real estate through IRAs due to the strict government control over them and the hefty penalties imposed on wrongful transactions.

However, if you have a bit of help from a knowledgeable adviser, do your own due diligence, are aware of the rules governing IRAs, and have a keen eye to spot real estate deals, then real estate investing may be the way for you to further diversify your IRA account.

In order to make a real estate investment with your IRA, you need to make sure your IRA is with the right type of custodian, one that will allow you to make alternative investments. However, it is important to keep in mind that the custodian of the IRA, when you choose to go self-directed, only carries out the details of your investment transactions in your specific direction.

Therefore, the custodial firm you select for your account is not responsible for an errant investment, a poor purchase, or a prohibited transaction made on your part because your custodian is essentially a third party to your investment selection.

Investing in real estate through a self-directed IRA can be a viable option for those looking to diversify their retirement portfolio and potentially earn higher returns. However, before making this decision, it is important to thoroughly understand the pros and cons, as well as the rules and regulations that govern self-directed IRA investments.

Pros of Investing in Real Estate with an IRA:

Diversification: Real estate investments can provide portfolio diversification, thereby minimizing total risk. By spreading investing dollars across different asset classes, investors might potentially lessen the impact of market swings in any one area.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds. This can be especially true for well-chosen properties that appreciate value over time and generate rental income.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management. This level of control can be appealing to those who prefer to be hands-on with their investments.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation. Unlike stocks and bonds, which can fluctuate in value, real estate can offer a sense of security, especially if purchased at a reasonable price.

Cons of Investing in Real Estate with an IRA:

Complexity: Real estate investing can be intricate and may necessitate extensive research and due diligence. Among other variables, investors must examine market conditions, property conditions, financing opportunities, and rental demand.

Risk: Investments in real estate are susceptible to property market declines, decreased rental income, and property damage. Although there are measures that may be used to mitigate these risks, it is essential to recognize that real estate investing is not risk-free.

High Costs: Investing in real estate may be a costly endeavor due to the variety of fees that may be incurred, such as those associated with the financing and management of the property. Investors must not only have the financial means to meet these costs but also be prepared to make the kind of long-term commitment that is typically required by real estate investments.

Restrictions: Self-directed IRA investments are subject to stringent rules and restrictions, including prohibited transactions and disqualified individuals. Noncompliance with these rules may result in significant tax penalties. Investors must be aware of these restrictions and understand their legal obligations.

What Real Estate Qualifies For Being Purchased Through an IRA?

A real estate investment made to a self-directed Roth IRA, if you plan on holding it directly in your retirement portfolio, should only be rented out to a non-disqualified person. It should be purely a business transaction, where the rental or lease income from the property goes back into the IRA account. The real estate should not serve a primary or secondary use for the IRA owner, and should not be used as a vacation home.

Neither can you use the IRA property as a personal residence or for the benefit of any disqualified family member, even if you or the disqualified family member pays at or above fair market rates to use or rent out the IRA property, since this would also be considered a prohibited transaction?

All the taxes, expenses for property repairs and property maintenance work should be paid directly from your IRA account. Even if you don’t manage to find a tenant immediately, then you will have to continue with the payment of taxes and mortgage, so your IRA account needs to be flush with funds to finance the continuing expenses a real estate purchase will incur.

Most custodians disallow or disapprove of a mortgage facility to fund the real estate investment and only allow non-recourse mortgages, which are more expensive. Non-recourse mortgages may incur a higher rate of interest and generally require more money down.

Other guidelines to consider when making an investment inside your IRA include:

Your IRA cannot indulge in any property transactions with disqualified persons, including immediate family or a company in which you or a family member hold a specified percentage of shares.

Neither you personally nor other disqualified persons can give a loan to the IRA for making any investment or purchase.

The IRA is the owner of the purchased property, and all legal documents will be executed in the name of the IRA.

All income from investments made through the IRA should go back to the IRA account.

What Kind of Property Is Suitable and Can be Purchased Through the IRA?

You can purchase various types of real estate through your self-directed or Roth IRA, including single-family homes, multi-unit properties, condos, apartment buildings, mobile homes, and commercial and retail spaces.

Since it is not possible to reside in or use the buildings owned by the IRA for personal purposes, they need to have good potential as rental or lease properties. If you have a property management consultant working for you, they might be able to work out a good deal for you. Reliable, consistent, and quality tenancy is essential for your rental property to achieve good returns.

A reputable property management company service will help to ensure you need not have to worry about other management problems like leaky pipes or troublesome neighbors. However, the property management fees should be paid out of your IRA account.

Rental Market Considerations

Buying a property to rent is very different from buying property for self-use. Your rental residential property need not be located in the same suburb or close to where you live. Research the property and rental values in your state or county. You will be able to spot areas where there is a strong and sustained demand for rental homes.

Rental values are also high for areas that boast good connectivity with city centers or commercial and corporate hotspots. A boom in employment may also trigger a higher rental demand. Small towns and suburbs are seeing tech giants and start-ups setting up offices, which in turn has resulted in a demand for rental properties from young professionals.

University towns generally have good demand for condos and apartments.

When buying property for investment purposes, it may also be a good option to buy in an upcoming area with good connectivity to urban nerve centers. Proximity to hotspots may also be a good sign that the next region to go upscale will be yours.

The Bottom Line

In conclusion, investing in real estate with an IRA can offer potential benefits, but it's important to thoroughly understand the risks and restrictions involved. Before making a decision, it's recommended to consult with a financial advisor to ensure that it aligns with your overall financial plan and goals.

Real estate has traditionally given good returns. However, a profitable investment won’t just happen on its own. If you plan to invest in real estate, then you should thoroughly complete your own due diligence, research your target market, speak to experts, hire an advisor, read up on the related news, and understand all the legal regulations before taking the plunge. As with all other forms of investment, it is the educated and well-informed investor who takes calculated risks that makes the most of their dollar.

And one last piece of advice, you may want to consult with a real estate attorney and a real estate tax accountant before you dive into investing in real estate with your IRA.

What is Self-Directed IRA Real Estate?

February 1, 2023 by Marco Santarelli

Self-Directed IRA Real Estate

A self-directed individual retirement account (SDIRA) is a type of IRA, managed by the account owner, that can hold a variety of alternative investments. A self-directed IRA is a type of retirement plan that gives the account holder control over their funds and investment choices. It allows for alternative investments such as real estate and private equity to be used to grow retirement savings.

The account owner has the power to make informed investment decisions and can choose to invest in assets they are knowledgeable about, thereby enhancing their IRA's earning potential. The account holder of a Self-Directed IRA can invest in a broader range of assets, including real estate. A self-directed IRA is similar to a traditional or Roth IRA in that it allows you to save for retirement tax-free and has the same IRA contribution limits.

The only distinction between self-directed and other IRAs is the type of assets held in the account. Self-Directed IRA real estate investing permits individuals to invest in real estate with their retirement funds without paying taxes or penalties on the funds spent or the profits produced. Instead, the investment grows tax-free or tax-deferred until retirement, when it is withdrawn.

Self-directed IRA plans are considered more powerful than traditional IRAs because they offer a wider range of investment options. In addition to traditional stocks, bonds, and mutual funds, self-directed IRAs allow the account holder to invest in alternative assets such as real estate, private equity, and precious metals, providing a potentially broader and more diverse investment portfolio. The account holder also has more control over their funds and investment decisions, as opposed to having a financial advisor make these choices for them.

Investing in real estate through a Self-Directed IRA can provide a number of advantages, including the possibility of higher returns, diversification of a retirement portfolio, and the ability to invest in a tangible asset with the potential to appreciate in value. However, it is critical to understand that investing in real estate through a Self-Directed IRA entails risks and responsibilities, such as the need to manage and maintain the property as well as comply with the rules and regulations governing IRAs.

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

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 that 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 an 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 in 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 an 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 an 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 that 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 purchaser's 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.

Pros of Self-Directed IRA Real Estate Investments

Diversification: Real estate investments can provide diversification to an investment portfolio, reducing overall risk.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation.

Cons of Self-Directed IRA Real Estate Investments

Complexity: Real estate investments can be complex and may require a significant amount of research and due diligence.

Risk: Real estate investments carry the risk of property market downturns, declining rental income, and property damage.

High Costs: Real estate investments can be expensive, with costs including property purchase price, financing fees, and property management fees.

Restrictions: There are strict rules and restrictions in place for self-directed IRA investments, including prohibited transactions and disqualified persons. Failure to comply with these rules can result in significant tax penalties.

In summary, Self-Directed IRA real estate investment allows individuals to use their retirement funds to invest in real estate, potentially providing benefits such as higher returns, diversification, and the opportunity to invest in a tangible asset. However, it's important to understand the risks and responsibilities that come with investing in real estate through a Self-Directed IRA.