Investing in Real Estate With a Self-Directed IRA

Investing in real estate is one of the most popular ways to build wealth in a self-directed IRA. Real estate investing is an excellent option for people who want to use their personal knowledge to diversify their retirement savings accounts. Diversification is one of the keys to protecting retirement assets, and property can be a particularly lucrative self-directed IRA business investment over the long run. CamaPlan is a trusted self-directed IRA administrator that was founded by investors, for investors. It is our mission to empower the individual investor to take control of his or her own financial future through the unmatched flexibility of a self-directed Roth IRA, self-directed Traditional IRA, or other individual retirement account. Savvy real estate investment can be one of the best ways to create a positive cash flow in your retirement plan, and this guide to real estate investing is designed to help account owners design a personalized investment strategy that will ensure that they can retire in comfort. Contact CamaPlan today to learn more about opening a self-directed IRA for real estate investments.

Why Invest in Real Estate?

So why invest in real estate with your self-directed IRA plan? For one thing, real estate is one of the time-tested ways to growth wealth over the long term. Like any other segment of the financial market, property may be a hot investment market at some times and cooler at others, but when viewed as a long term investment, real estate remains one of the most stable types of assets. It is an important class of asset to consider including in a well-diversified retirement portfolio. Self-directed real estate investors have also found that it can be one of the best ways to save tax-free money for retirement. These are some of the advantages of self-directed real estate IRAs:

  • When the real estate investment is made with a Roth IRA, all of the proceeds from rental income or the profits from the sale of the property go back into the account tax-free. This represents a tremendous advantage over buying investment property with funds from outside a Roth IRA. In addition, the power of compound interest is multiplied in tax-advantaged accounts such as IRAs.
  • Leverage your knowledge base: if you have ever bought a house or obtained a mortgage, you are already a real estate investor. Putting your experience to work for you is one of the most proven methods to convert your areas of expertise to high-yield returns.
  • You can invest in a wide range of properties, including residential, commercial, industrial, co-ops, condominiums, and unimproved land. It is up to the account owner to determine what strategy to take; you can buy low and rehabilitate a property to turn it over for quick sale, buy a home or retail space to lease out, or purchase a property to hold for decades while it appreciates. You have the control.
  • Self-directed IRAs and assets owned by an account are protected by statute from seizure by most creditors.
  • Rest easily knowing that you have secured your family’s financial future with estate planning that leaves valuable IRA assets to loved ones without the burden of taxes.

Types of Investment Options

Investing in real estate is not a “one size fits all” plan. There are actually a variety of different ways that you can use your self-directed IRA to directly or indirectly put money into the real estate market. Options for real estate investments include:

  • Buying physical residential or commercial property. Many investors like owning a tangible asset like a piece of real estate. The potential downfalls to purchasing property is that it may take longer to liquidate and there are upkeep costs such as property taxes, insurance, and maintenance.
  • Purchasing real estate like apartment buildings or retail space to hold and rent. Look for properties which already have long term tenants in place whenever possible. For commercial property, it is ideal to find sites with current tenants who have NNN leases in which the tenant pays or splits the insurance, property tax, and maintenance expenses. Keep in mind that you will either have to pay a property management company or handle all of the tenant issues yourself in a rental situation.
  • Investing in a real estate investment trust (REIT), which is a security that invests in either property or mortgages. The advantage of REITs is that they are traded on a market and are therefore much more liquid than real estate itself. However, the flip side is that REITs are also subject to more volatile fluctuations of the market, just like stocks.
  • Buying mortgages or secured notes backed by real estate.
  • Private lending – use your IRA funds like a mini-bank to make private loans to individuals, real estate businesses, or an investment group. The account owner can choose their borrower, decide on terms such as the length of the loan term, the interest rate, the size of the down payment, or even whether to accept a no money down offer. Private lending can be very lucrative, but it is also more risky than buying real estate, so it is essential to be thorough in performing due diligence.
  • Purchase tax liens from state or local governments. Because these investments often sell quickly, investors will typically form a self-directed IRA LLC with checkbook control so they have ready access to funds.

Investors may wish to consider using their real estate IRA to invest in a variety of these options to further diversify their retirement plans.

Disallowed Transactions

There is a common misconception that an IRA can only be used to buy stocks, bonds, and mutual funds. This myth has been perpetuated by the large brokerage firms that benefit directly from selling those types of financial products; however, it has never been true. Since the inception of the individual retirement account plan, both state and federal regulations have permitted retirement account funds to be used for a wide range of alternative assets with very few exceptions. IRS real estate investment rules prohibit self-dealing and transactions that benefit the account owner, their business (or subsidiaries thereof), or other certain disqualified persons. For instance, you cannot buy a house to rent to your children of any age, or purchase commercial property to use as the office for your small business. General rules about Traditional or Roth IRA real estate investment properties include:

  • Transactions with any disqualified persons (including yourself, your spouse, lineal descendants, fiduciaries, and business partners) are prohibited. This means that your self-directed IRA cannot be used to purchase property from, or sell or rent property to any disqualified person. To do so can cause the account to lose its tax exempt status.
  • Property expenses including taxes, insurance, and repairs must be paid by funds from the IRA or income generated by the property. That is one reason why a rental strategy can be a great way to use your retirement account to invest in real estate, as it generates a stream of cash that can be used to cover those costs.
  • Using personal labor (aka “sweat equity”) to improve the property is not permitted. All repairs must be performed by a non-disqualified individual and paid for by the IRA.
  • It is permissible – although considerably more complicated – to combine IRA funds with those obtained from a non-recourse loan or in partnership with others (including disqualified persons). However, earnings on the part of the property that is not financed by the IRA will be subject to taxes.

For more information on how self-directed IRA real estate rules apply to your particular situation, please consult your personal financial adviser or tax professional.

Committed to Investor Success

CamaPlan was founded by investors, for investors. At CamaPlan, we believe that investors should have the flexibility to use their self-directed IRAs to build wealth their own way. One of the most important IRA services provided by CamaPlan is investor education. The Cama Academy provides our investors with ongoing education opportunities through a series of articles, videos, webinars, and in-person seminars. We offer investors the tools they need to become informed and expand their personal knowledge about a wide range of topics, including alternative asset types, how to evaluate potential investments, state and federal guidelines for Traditional and Roth self-directed IRAs, and more. Call us today to open a CamaPlan self-directed IRA, and discover the path to a secure financial future through investing in real estate.

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