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Self-Directed IRA Real Estate Considerations

Maybe you feel like your retirement funds have been stagnant of late and want to try something different. Or perhaps you’ve found yourself in the enviable position of having a good chunk of cash in your IRA to invest. No matter the reason, you feel like real estate is calling your name. The good news is that when you have a Self-Directed IRA, you have the freedom to purchase a variety of alternative investments like real estate.

 Real estate investing is attractive for a number of reasons. It provides added diversification to a portfolio chock-full of stocks, bonds, and mutual funds and potentially can protect it against market volatility and inflation. There also can be added return potential when investing in real estate, depending on the level of risk you’re willing to take. Add the tax advantages of Self -Directed IRAs to the mix, and real estate investing can be even more powerful in creating your wealth. There are a few things, however, that you should know before you invest.

What Type of Real Estate Do You Want?

With Self-Directed IRA real estate investing, you can purchase a variety of real estate asset classes. Physical property is the most common, including: condos and apartment complexes, office buildings and shopping plazas, mobile homes or storage facilities. Raw land and private entities are possible too.

Before you invest, it’s important to know what type of real estate you want and to do your research. Keep it simple.  Be clear on what you are investing in, and what your comfort zone is.  Do your due diligence along with your team of advisors, (such as a real estate attorney or CPA), and learn from the industry experts. Understand the property’s location, current market value and sales comparisons. These are some of the factors to consider when assessing the return potential, or risk in the investment. Getting a list of sales comparisons in the area can also help   you determine the after repair value, (ARV) for wholesaling or rehabbing.

If you want to avoid the added responsibilities associated with owning and maintaining physical property, you can make a more “passive†investment in assets, such as mortgage notes, trust deeds, and tax liens. These investments can provide an income stream without having to deal with property maintenance, rehabbing or landlord burdens.

What’s Your Objective?

Your real estate investment strategy starts with acquisition, but you must know what you’re going to do with your real estate and how you will eventually exit the investment.  As a Self-Directed IRA real estate investor, you have a few options. You can purchase a property solely for its capital appreciation, and ideally enjoy gains from its sale down the road. Or you may want to generate rental income, long or short-term. Tracking expenses like repairs and property taxes will offset that income.  This is where the iPlanGroup, as your Self-Directed IRA administrator, can ease your burden by administering the payment of expenses related to the investment, from your IRA funds, in accordance with IRS rules and regulations.

While real estate is typically a long-term investment, you might also purchase a property for short-term gain. For example, purchasing a foreclosed property or one listed below market value may turn a quick profit.  Having the funds on hand to rehab, or a strategy to borrow and repay needed rehab funds, is key to making the investment. Just remember that real estate is generally not a liquid investment. So if you’re not in it for the long haul, it may be difficult to produce cash when you really need it.

What are the Rules and Regulations?

Before you make a self-directed IRA real estate investment, you must familiarize yourself with the rules or open yourself up to costly consequences. The IRA Prohibited Transaction Rules define what you cannot do within a self-directed IRA. Primarily, disqualified persons, which include the IRA owner and certain family members, cannot benefit directly or indirectly from certain self-dealing transactions involving the IRA’s assets (refer to IRC § 4975).  Among other things, a disqualified person can’t buy property from or sell property to the IRA; nor could that person live in a house the IRA owns or even personally perform work on any of the IRA’s properties.

Knowing the rules could help prevent potential excise taxes or even the disqualification of your IRA.

Self-Directed IRA real estate investing can be a profitable opportunity, and can create tax-free or tax deferred wealth for investors. It’s important to keep in mind that it’s not for investing neophytes. Self-Directed IRA owners need to be knowledgeable and willing to educate themselves on the risks and requirements. A little due diligence, however, could pave the way to future wealth, not realized outside of a Self-Directed IRA investment.