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Investing in Real Estate with a Self-Directed IRA

Self-directed IRAs have seen more attention in recent years, and the growing interest is easy to understand. The traditional offerings associated with an IRA, like stocks and bonds, are reasonable enough, but retirement savers want flexibility beyond the average CDs, ETFs and mutual funds. SDIRAs provide this flexibility.

Expanding on that point, SDIRAs allow for more diversified investment options, letting you place your money in everything from precious metals to real estate, notes to tax lien certificates. You’ll enjoy far more freedom as an investor to pursue your goals and secure your financial stability as you near the end of your career.

So how do you get started? And what can you expect? We’ll walk you through everything you need to know, simplifying the subject so you can manage both your property investments and retirement account, reaching a balance that’ll sustain your income and keep you comfortable.

To start, we’ll define SDIRAs in greater detail, then describe their function in real estate.

Self-Directed IRAs and Real Estate

An SDIRA is essentially a traditional or Roth IRA in which your custodian — the institution keeping records and reporting to the IRS — allows you to invest in a wide range of options permissible in a retirement account. At the end of every year, you’ll have to measure the value of your investments and communicate those numbers to your custodian. As a note to help you in the investment process, these custodians can also provide guidance moving forward.

After you’ve decided on a reputable IRA custodian, you should also establish a limited liability company to hold your assets. As you invest in real estate, an LLC will serve as a precautionary measure to prevent potential lawsuits that might occur from injuries on the premises. From there, you can buy, sell and flip properties, but it’s essential to remember you’ll have to pay back all income you generate into your SDIRA.

Neglecting to acknowledge the rules and regulations might result in penalties, so review them before diving in. They’re easy to follow, and the benefits far outweigh any potential risks involved in the process. To give you a better understanding of what you can hope to gain through SDIRAs, we’ll touch on a few of the advantages, showing you why retirement savers have found them such an attractive option.

Value of Self-Directed IRAs

If you’re new to real estate investments, SDIRAs provide a sort of safety net as you navigate the industry. The money you spend on properties isn’t money you live on, but instead, drawn from your retirement account, and though you still depend on those funds, they’ll provide a foundation on which to build.

You’ll also enjoy tax benefits. Similar to any other investment in your IRA, your income is tax-deferred until you make a withdrawal, unless your holdings are in a Roth IRA, in which case you won’t have to worry about taxes at all. That said, you’ll have to wait to take out funds to avoid an early withdrawal penalty.

Beyond the realm of real estate, SDIRAs provide you a level of portfolio diversification other options don’t. We briefly mentioned this earlier in the article, but this point is important to stress for those who feel restricted in their choices. You’ll have far more opportunities in deciding to pursue an SDIRA.

As we conclude, we’ll make a small — but essential— distinction between a traditional broker’s self-directed account and one that lets you invest in real estate.

Final Notes for Clarification

Many IRA custodians and banks will only approve conventional investments. If you approach a traditional bank and inquire about their self-directed accounts, they’ll usually show you available stock options instead of what you’re truly looking for, which is the freedom to invest in properties.

You’ll have to find an institution that provides SDIRAs, and more than that, you should choose an institution with experience in your field of investment. Do your research on your chosen custodian as you proceed, ensuring they have the expertise you need to navigate the subject.

SDIRA Real Estate Investment FAQ

With self-directed IRAs being a popular option, we are frequently asked questions pertaining to the topic. Here are a few of our most common inquiries:

1. Can a self-directed IRA invest in real estate?

You can purchase rental real estate through a self-directed individual retirement account as long as it’s strictly for investment purposes, the SDIRA holds the property title, all rental income is funneled back into the SDIRA, and there are no personal indirect benefits to the investor. Qualifying real estate includes, single and multi-family homes, townhomes/condos, commercial properties, raw land, real estate notes, and more. You can gain more knowledge on the topic by reading our latest article titled, Can You Use a Self-Directed IRA to Purchase Real Estate?

2. What are some additional self-directed IRA investment options?

For those who are new to self-directed IRAs, it’s wise to be informed on how this type of retirement account can help you diversify your portfolio with alternative investments. Branching out from traditional stocks and bonds can secure and grow your funds. To learn more on the subject, dive into our article, Why Investing in Real Estate vs Stocks is a Smart Decision.

Let’s take a look at a few options you have when it comes to SDIRA investments:

  • Single and Multi-Family Rental Real Estate
  • Commercial Properties such as Office Buildings
  • Raw Land
  • Trust Deeds and Mortgage Notes
  • Start-Up Businesses
  • Precious Metals
  • Digital Currencies
  • Oil and Gas
  • LLC Memberships
  • Promissory Notes
  • Tax Liens

3. What is a self-directed IRA custodian for real estate?

Whether you have a traditional or self-directed IRA, you will always have a custodian who manages and oversees the account for you. When your IRA is held with a traditional brokerage firm, such as Fidelity or Vanguard, they will limit you as to what you can invest your retirement funds into. Real Estate is typically not an option. You would be bound to more traditional investment options such as stocks and bonds. When you seek to use your IRA funds to invest in real estate, a custodian that specializes in self-directed IRAs is needed.

An SDIRA custodian is one in which you are not limited as to what you can invest in, and real estate purchases are welcome. A specialized custodian such as this will convert your traditional IRA into a self-directed account, as well as have the knowledge and experience to use your SDIRA funds to invest in a rental property.

4. How can I buy real estate inside a self-directed IRA?

Assuming you currently have a traditional IRA, the process for buying real estate within a self-directed IRA would be as follows:

Step 1: Select a Self-Directed IRA Custodian – To invest in rental real estate with your retirement funds, you will first need a specialized custodian that will convert your traditional IRA into a self-directed account. You should choose a custodian that has a portfolio that demonstrates their understanding of the complexities of investing in real estate with an SDIRA. Additionally, you can read more about the benefits of switching from a traditional to a self-directed IRA in our latest article on growing your retirement funds.

Step 2: Research and Choose Your Rental Property – You will want to fully vet any properties you are considering investing in with your self-directed IRA to make sure it will be a profitable deal. You can also quickly test out a property’s profitability by using the 1% rule. If you’re not familiar with how to do this, read through our article on the 1% Rule for Real Estate Investing; it can save you a lot of money and is worth checking out. When researching, you should take note of the condition of the property and the neighborhood, crime rate, how long the property has been on the market, as well as the rental market itself. Get up to date on what else you should be looking for with our article on the topic What Makes a Rental Real Estate Market Hot?

Step 3: Get Approval from Your Custodian – You will need to obtain approval from your custodian to move forward with purchasing the piece of real estate that you are interested in. However, if you incorporate and have a self-directed IRA, LLC setup, it will grant you check writing privileges and allow you to skip the approval process.

Step 4: Make an Offer on a Property – Once approved, an offer is made, just like it is with any rental property purchase. If the offer is accepted, and all goes as planned, you are able to move to the next step.

Step 5: Custodian Finalizes Paperwork – Your custodian must be the one to sign all the necessary documents on behalf of yourself directed individual retirement account for it to be legal and official. Once this is done, the real estate deal continues to move forward just as any property deal would.

An Alternative and More Simple Way to Buy Rental Properties with an SDIRA

It’s worth mentioning that there is also an additional way to invest in real estate where you can bypass the above steps and have all the details taken care of for you, making the whole process really simple. This is accomplished by contacting a full-service real estate company such as Morris Invest. We have worked with many clients over the years, getting them set up with a cash flowing rental property that is purchased through their SDIRA.

Morris Invest can do the traditional to self-directed IRA transfer for you in 10 minutes, conduct the market research to provide you with a lucrative rental property, assist with getting your real estate company incorporated so no custodian approval is needed, do all the property renovations, place a reliable tenant and a property manager. All you really need to do is schedule a complimentary call with Morris Invest to get the ball rolling, and expect to receive a rent check from your new tenant the very first month.

Additional Rental Real Estate Articles

Your Self-Directed IRA Real Estate Investing Opportunity Awaits!

If you want to retire with comfort and security, you will have few better options than an SDIRA. Investing in real estate is one of the most powerful ways to grow your wealth, and will allow you to enjoy financial stability well into your retirement years. Feel free to schedule a complimentary call to speak with a Morris Invest team member. We would love to help you achieve your real estate investing goals!

For more inspiration, dive into this awesome video on 5 Self-Directed IRA Tips that Will Make You Rich!


Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes. She’s passionate about staying on top of recent market trends.

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