Using Your Self-Directed IRA for Real Estate Investing

Written by Posted On Wednesday, 05 July 2017 10:21

When it comes to real estate investing, there is a great way to use retirement funds through a vehicle called a self-directed IRA. With a such an IRA, you will be able to hold property, single-family homes, commercial buildings, and more. In fact, a self-directed IRA is a great way to invest in properties as long as you follow the rules. Let me share a few things you need to know, but as with any financial decision, be sure to talk with a financial professional before using retirement funds.

What Is A Self-Directed IRA?

With traditional IRAs, you put your money into your account and a fund manager determines where to invest that money. The best you can do is hunt for an IRA that invests in the type of funds you'd pick if you were doing it yourself. However, a self-directed IRA gives that control to you.

You get to decide where to invest, and that is not limited to stocks, bonds, and mutual funds. With a self-directed IRA, you can invest in other assets such as limited partnerships, coins, collections, and real estate.

It's easy to start a self-directed IRA. All you need to do is roll over your traditional or Roth IRA into the new plan without incurring penalties. You can turn dormant 401(k) plans to a self-directed IRA as well.

Benefits of a Self-Directed IRA

As you know, an IRA account can help you create tax advantages for retirement. But here are a few more advantages that are specific to the self-directed IRA:

  • Invest in a wide variety of assets
  • Ability to take more risk, if desired
  • Ability to get a higher rate of return
  • Full control using your own knowledge
  • More fully diversify your portfolio to hedge against inflation and fluctuations

Of course, in order to reap these benefits, you must follow the rules established for self-directed IRAs.

The Process of Investing

In order to begin investing using a self-directed IRA, you will need to open an account. This is done through a self-directed IRA custodian. Once the account is opened and has been funded, it is time to begin investing in much the same way you would using other funds.

Once you select a property, you can fund the purchase:

  • Directly, with cash from your IRA
  • With a partner
  • Through an LLC
  • By leveraging

If you fund the purchase directly from your IRA, the offer will be made in the name of your IRA. Once the offer is accepted, you will need to complete a direction letter that includes the purchase contract instructing your IRA custodian to write money for the earnest deposit as well as other fees such as an inspection or appraisal. Once you are ready to purchase the property, you will have your custodian wire the remaining funds. Unlike regular transactions, you will not sign the documents for the sale. Instead, the custodian of your IRA will sign on your behalf.

There is no limit to the number of properties you can hold with your self-directed IRA. That's why, when using this financing tool, you should always be on the lookout for more ways to grow your retirement income.

What About Rental Expenses and Income?

If you choose to use your property as a rental property, then you will need to find tenants as you would had you purchased the property outside your IRA. The big difference is that the rental agreement is signed by your custodian with the money going to your IRA. All money that is put into the IRA from rental income is tax deferred.

If the rental property has expenses, such as repairs or renovations, once again, the custodian will wire the needed money to the appropriate contractors. This money, since it is being used for your investment, will not create a penalty situation.

Self-directed IRAs can be a great way to invest in real estate for your retirement. This unique funding opportunity can give you the freedom you need to put together real estate deals that make sense for your retirement goals. Feel free to contact me for more information about funding real estate investment deals. I'd be happy to share my knowledge with you.

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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