Tips For Investing In Real Estate With A Self-Directed IRA That Should Not Be Overlooked

Real estate is a popular and time-tested investment vehicle for retirement planning. Over a period of time, property investments generally can yield good returns. Traditional pension plans give …

Real estate is a popular and time-tested investment vehicle for retirement planning. Over a period of time, property investments generally can yield good returns.

Traditional pension plans give little control over how one’s money is being managed. The lack of control over investments, the poor economic scenario, less than satisfactory returns and market volatility have forced several investors to look for alternatives.

Successive governments have washed their hands of retirement, and now Americans are largely left to fend for themselves in their golden years. With proper planning, caution and discretion, however, it is not difficult to have a reasonably secure retirement.

Let’s look at the various ways in which you can plan your retirement, and how you can invest in real estate to diversify and maximize your portfolio.

Self-Directed IRAs

Self-directed Individual Retirement Accounts (IRA) have gained tremendous popularity over the past few years as the preferred retirement investment option, and they do not restrict your investments to real estate alone. You can choose from a variety of investment options, including publicly-traded stocks, bonds and mutual funds, commercial /residential property, LLC and private limited partnerships.

However, if you are looking for a quick buck, self-directed IRAs will not provide you with what you need. In fact, while planning for your retirement, you need to be conservative and cautious. Retirement planning is not a form of entertainment to give you an adrenaline high.

You should have a major chunk of your savings in safe, solid and maybe even boring investments, like blue chip stocks and government bonds. The rest can be used to dabble in alternatives where life experience and understanding the art of the deal play heavily in your success.

You can hope to strike it big and find a short-term investment that gives you sky-high returns, but those types of investments are very far and few between, unless you are skilled at identifying those opportunities, you are a skilled negotiator and you are lucky.

How Can You Invest in Real Estate through IRAs?

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At first blush, it may not appear that it is possible to invest in real property or other physical assets like precious metals or land parcels through standard retirement plans; however, IRAs do give you the freedom to do so. IRAs also give you the advantage of potential tax-deferred growth of your investments and income.

But operating an IRA account is not easy. There are several guidelines and rules you need to follow to keep your transactions legal and penalty-free. Unlike a 401(k) account that is opened for you by your company or employer, you have to set up the IRA account on your own. The account is to be maintained by a custodian, who oversees the transactions and does cursory due diligence. In order to be educated on all the IRA guidelines and to derive maximum benefits, you may have to seek professional help from an accountant and a lawyer.

You cannot buy real estate for self-use through an IRA. The property you buy cannot be owned, occupied or in any way utilized by your spouse, children, grandchildren or companies in which you have a substantial interest.

The IRA should finance the purchase, as well all other expenses like maintenance, insurance, taxes etc. Traditional mortgages are not allowed if you are buying real estate through the IRA, and you will have to pay high interest if you do go for a suitable mortgage. So investments should be only made when you have enough funds in your account to buy the real estate, and the IRA can also meet other operational expenses and contingencies.

If you run into a pinch, then here are some other ways to help you fund your real estate project.

Just keep in mind that if you partner with someone else, you must make sure they are not a disqualified party to your IRA. Also, if you decide to take on debt, make sure that you only apply for non-recourse loans. If you go the non-recourse route for part of your funding, then you also need to make sure to account for UBIT for the percentage of the transaction that is financed. Again, if you are not sure what to do, then hire someone who does know this terrain.

What Is the Best Real Estate to Buy through an IRA?

Treat your investment property like you would any other long-term investment. It should be self-sustaining, give you no headaches and also ensure a steady stream of income. Also, all your IRA eggs should not be in the real-estate basket. You need to have funds parked across diverse investment sectors.

A commercial property with well-established, long-term tenants is among the best bets. In most commercial buildings, the tenants would be responsible for property maintenance and payment of taxes. This will save you periodic outgo from the IRA account towards maintenance and other expenses.

Property management consultants are also ideal if you are planning to invest in fairly big commercial ventures. They will oversee advertising activities and help you in finding reliable tenants, as well as deal with other niggling issues, like a leaking AC duct or delay in rental payments.

The IRA account needs to be flush enough to dole out the consultant fee, any backup insurance payment and the mortgage, if you have opted for any.

Residential apartments, condominiums and single-family homes are also great options if you manage to find a good deal in a hot or a potentially-hot market. Good rental income is a prerequisite for the property you are opting to buy, so make sure you understand your numbers.

Roth-IRA or Regular IRA?

In a Roth-IRA all the money that you put in is taxed ahead of time, but what you get from it in the end is tax-free. So, your savings grow tax-deferred, and when you start making withdrawals you need not worry about taxes either. All the assets you hold in the account are tax-deferred.

Though there are no tax breaks for contributions, a Roth is recommended if you expect to be in a similar or a higher tax bracket when you retire. A Roth account also gives the holder more flexibility allowing for the withdrawal of contributions without attracting a penalty.

In a traditional IRA, it is the other way around. Your contributions are tax-deductible, but the withdrawals during retirement are taxed at the respective income tax rates. If you expect to be in a lower tax bracket when you retire, then a traditional IRA is the way to go. Also, if you expect to have high medical expenses during your retirement period, they will offset your withdrawals from the IRA and bring down your taxes.

With a tax-deferred IRA account, your monetary gains will enjoy compounded growth as well. Real estate investments and the income from them grow at a compounded rate while the asset is held in the IRA.


Retirement planning should start when you land your first job. Money when held in an IRA account grows at a compounded rate, without taxes nibbling away at it. Individual Retirement Accounts also offer you the freedom to diversify your investments into real estate, which is a solid asset and grows in value with each passing year. This ensures that when you retire you have a reasonably tax-deferred hoard of assets to depend on in the golden period of your life.


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