Real Estate Investing with a Self-Directed IRA

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Hearing an investor say that they want to use their Individual Retirement Account (IRA) to invest in real estate is kind of like saying that they want to use their savings account to invest in the stock market. It doesn’t tell you anything, because ‘investing in real estate’ is a huge category of activity. Self-directed IRAs can interact with the real estate market in a startling number of ways; knowing which is best for what can help you make the best decision for your personal retirement goals.

Purchase and…
Perhaps the most common means for a self-directed IRA to invest in real estate is to purchase a property fully, own it outright, and then decide how to maximize their profits. Normally, the account holder will pay the entire purchase price from the IRA, or they’ll use their IRA funds for the down payment and get a non-recourse loan for the rest of the purchase price. Other options include partnering with other entities — individuals, companies, or even other IRAs — and owning a share of the property and thus a proportionate share of the earnings.

Once purchased, a property can be:
• Held: if you reasonably expect it to increase in value significantly more than the cost of maintaining the property,
• Flipped: if you believe that you purchased it well below the price you can sell it for, either before or after an appropriate renovation,
• Developed: if you purchase empty land you believe will become valuable with the right addition or buy an apartment building to convert to condos, or
• Rented: if your goal is to add an ongoing income stream (and hopefully appreciation).

Because the IRA holder can choose the kind of property they’re most familiar with — be it single-family residences, multi-family structures, commercial buildings, industrial property, farmland, undeveloped areas, or even air, water, or mining rights — this kind of investment gives them the opportunity to leverage their experience and expertise.

Indirect Investment
An IRA can also be used to invest in real estate through a third party. Purchasing stock in a private entity that itself purchases and holds, flips, or rents out real estate is the most obvious means of indirect investment. You can also use your IRA to fund real estate loans to individuals or companies, and have them owe you mortgage payments — another path to building an ongoing income stream.

Limits On Real Estate Investing With an IRA
There are a few factors to take into account when you start making plans to get into real estate with your IRA. The first and most obvious is that if you take direct control of the property before the age of 59 1/2, you will pay the 10% penalty for removing value from your IRA before it matures. When you’re talking about real estate — that tends to be a punitive amount. Once you reach that age, you can take the property as a distribution from your IRA and do anything with it that you please.

Also, your IRA limits the ways in which you as the account holder can interact with your own real estate. For example, neither you nor your immediate family nor any entities owned by or fiduciaries working for them are allowed to live in, repair, add to, or otherwise work on the property.

The upshot is, as long as you’re willing to direct the broad strokes and allow your IRA to hire the contractors, property managers, or other experts to do the hands-on work, you can use it to invest in the real estate market in a wide variety of ways.

DISCLAIMER: none of this is intended to be accounting, legal or tax advice. Please seek the assistance of a qualified party before acting.

One consideration with a Self-Directed IRA is that the income generated by the property must stay in the IRA unless you want to pay penalties. Though the investment will not add to the monthly income coming into the house, it will be adding to the income that builds wealth for retirement - along with some nice tax benefits.

Many with self directed IRAs are using them to invest in hard money loans.
(I have no affiliation and I am not promoting this company but this article supports the notion that self directed IRA holders are funding hard money loans)

Can a person use a self directed IRA to lend to their real estate business similar to taking a second loan on you apartments. However, instead of borrowing from the bank, you would borrow from you Roth IRA. Would this be a good idea? I would like to pay of a few second loans and start paying interest to myself. Thanks, Chris