October 16, 2021

Investment Benefits of Self Directed IRA Real Estate

Self Directed IRA real estate is becoming a well-established investment tool.self directed ira real estate

Even with the fiscal crises strong in the memory of most, IRA and 401(K) plans are still recognized as smart investments. What many of our customers don’t realize, however, is that they can strengthen these plans even further through diversification into self directed real estate and other plans. IRA rules can be confusing because they prohibit people from managing their own funds. This leads many investors to believe that the fate of their capital is completely out of their hands. In reality, however, the rules only say that you can’t make transactions or withdrawals on your own. Setting up a self directed plan opens the door to many non-traditional investments while maintaining the ability to make investments in traditional assets like stocks, bonds and mutual funds.
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Among many options available under self-directed plans, is the investment into self-directed IRA real estate, a great way to broaden your investment portfolio. Self directed IRA real estate has a number of benefits over other kinds of investment. For one, people who invest in real estate are taking advantage of a long-term market that has the potential for growth. Real estate purchased under a self directed real estate plan has remarkable tax advantages. Rents and capital gains are deferred, or in the case of a Roth IRA, are tax-free. There is no other mechanism making available this type of pre-tax growth.
Over our nation’s history, real estate has appreciated in value while non-tangible investments have wavered. A Self directed IRA real estate plan allows the investor to invest in “what they know” and can diversify the portfolio. Self-directed IRA real estate is becoming a well-established investment tool. In fact, investors have been using their IRAs and 401K real estate plans to buy real estate since 1974. Self directed IRA real estate Plans are designed to help investors make the most of their retirement funds. We recommend that you seek more information on the subject of self directed. Consult your attorney and accountant alike and, better yet, find a Self Directed Facilitator that will establish a conference call.

Self Directed IRA Real Estate Place Investors in Charge

ira real estate investment

Many people think that their legal obligation to manage their IRAs through a custodian means that they don’t have any control over their money, but this isn’t true. Self-directed IRA real estate investment ensures that consumers are always the ones in charge of their retirement savings.

Real estate is a great way to invest for retirement. Unlike many business-related investments, like stocks and mutual funds, real estate usually has the longevity to last until retirement and still have value that can be added to your estate. Even though there are temporary downswings, like the housing bubble, these don’t last forever because people will always need places to live and do business. Moreover, a well suited income property usually weathers the storm while producing consistent income during the swings in value.  Multi-family is a good example of this type of investment where rents have gone up in markets, even during the downturn, due to the increase demand from those needing to rent.

Self-directed IRA real estate investment lets people diversify their portfolio into assets once thought only possible through REITs.  For instance, many of our clients use our IRA plans to directly invest in real estate without ever paying penalties and not having to pay fees and operational costs associated with REITs / Brokers.  IRA rules dictate that investments in items like commercial buildings, undeveloped land, rental apartments and even vacation properties can be paid for using 401(K) or IRA funds. Unlike other early withdrawals, these do not incur penalties or early-distribution taxes while in a Self-directed Plan.  For this reason, many of our clients use their retirement funds to generate extra, lower-risk income.

This strategy puts our investors in control and it is easy to understand. Most of our customers who use their self-directed IRA funds for real estate purchases do so because they are investing in “what they know”.. There are few restrictions on the type of property you can invest in and the rent or profits you make count as returns on investment for the retirement fund, there is no K1 or Schedule E.  In fact, gains in this type of investment are not reported on the tax return.  Instead, there is simply a one-time report of value each year for the IRA.  This is a great way to take advantage of growth and allow the “would be” tax dollars to work to your advantage.

There are other advantages to self-directed IRAs.  The flexibility of self-directed IRA account makes it perfect for helping out relatives’ who own businesses or may be investing in properties.   Under certain guidelines, your IRA can make loans to others as “private money” lending.  You establish the terms for repayment and loan the money from your self-directed account.

Real Estate Investment Using your Self Managed IRA

houseIRAs are a popular retirement tool, but many people do not know that a self-managed IRA is an option. The advantage of a self-managed IRA is that you decide what to invest in, whether it be traditional or non-traditional investments.  You may choose to invest in things that the managers of a more traditional IRA will not – including real estate.  Real estate is a good long-term investment, and IRA funds are well suited for longer term investing.

What is a Self Directed IRA?

IRS Publication 590, Individual Retirement Arrangements, explains the different types of IRAs. The traditional Individual Retirement Account is one type; the self-directed one is another. You decide how the money in your self-directed IRA is invested by working in coordination with a trustee.   You become your own “wealth advocate” and will quickly find out how easy the process can be even for the less experienced investor.  Certainly there are “do’s and don’ts” of self-directed IRAs, but with the right facilitator and custodian, this structure becomes a real advantage to the investor and opens many doors once reserved only for a select few.

Why Real Estate?

Unlike stocks and bonds, real estate is, well, real — it is a tangible asset with real value that doesn’t usually fluctuate with the whims of Wall Street.  Buying rental properties, especially multi-tenant properties, provides steady income to the IRA and diversity in more ways than you might think. There is the obvious fact that you can put money into real estate, stocks, bonds and other types of investments; however, you can also choose multiple types of real estate – rental properties (commercial and/or residential), undeveloped land or even value properties that are often referred to as “ flipped” or “flips”.

Things to Know

  • Be patient – Creating a self-directed IRA can take time, usually about three weeks.  Also,  many custodians don’t allow for self-directed accounts.
  • Financing-  The down payment on a property can be from the IRA.  This is a great way to leverage the investment.   You should contact an IRA facilitator that can guide you towards a lender that accepts IRA loans.
  • It is still an IRA – All profits from the property have to go into the IRA, and you cannot benefit from it before retirement. Also,  you cannot live in or use the property yourself.
  • It is still an IRA, the up-side – The income from the real estate is tax deferred (or in the case of a Roth IRA, tax free) , and you can make other tax deductible contributions to the account, as long as you don’t go over the annual contribution limit.
  • An IRA is an individual account – You have to avoid conflicts of interest, so your spouse or children cannot be part of the deal and neither can your parents or grand parents. .
  • It’s not a ‘set it and forget it’ investment – All expenses associated with the property have to be paid from the IRA account.

Real estate can be a very good investment. With self directed IRA real estate investments, you can broaden the scope of a retirement plan and utilize your money the way that you want to.