Investing in Real Estate with a Self-Directed IRA

by Christopher Levarek

“After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit hole goes.”

- Neo, “The Matrix”

What if I told you that you could use your IRA to invest in apartments and vacation rentals? Would you believe me?

…Well you should!

It’s done through a SDIRA, a special purpose IRA that puts the control in your hands. This lets you invest into real estate all while deferring taxes on the income produced, just like a traditional 401k or IRA investment into stocks and mutual funds.

But, before, I give it all away though, let’s jump in to the finer points of this method of investing.

Let’s start at the top…

What is a Self-Directed IRA?

An individual retirement account (IRA) that is self-directed enables you to make investments in a wider selection of assets besides the usual equities, bonds, and mutual funds. You can invest in precious metals, private equity, real estate, and other alternative assets with a self-directed IRA. Self-directed IRAs provide you more control over your assets, more diversity, and the possibility for higher returns.

Investing in Real Estate with a Self-Directed IRA

To invest in real estate using a self-directed IRA, you need to follow a few simple steps:

Opening a Self-Directed IRA is the first step. Make sure the custodian you choose allows real estate investments. There are many IRA custodians that focus on self-directed accounts from which to pick.
Although there are numerous partners to select from, we choose Advanta IRA.
Your IRA must be funded after it has been opened, either by contributions or rollovers from other retirement accounts.
Find an Investment Property or Deal: The next step is to find an investment property or bargain. You can make investments in rental properties, vacant land, commercial or residential buildings.
Do Due Diligence: You should, of course, perform exhaustive due diligence on the asset or transaction before making an investment. The financials of the asset, the state of the market, and any potential risks or obligations are all reviewed in this process.
Buy or Invest in the Property or Deal: After performing your due diligence, you can use money from your self-directed IRA to buy or invest in the property.
Following your investment, your self-directed IRA will receive whatever income the property generates, such as rental revenue or sales proceeds. As a result, it is not a taxable event, and the IRA continues to operate as a non-taxable vehicle.

Tips for Investing in Real Estate with a Self-Directed IRA

Make the Proper Custodian Selection: When selecting a custodian for your self-directed IRA, be sure they have knowledge in real estate investments.
They must to be able to offer direction and assistance all the way through the investment process. One of the reasons we deal with Advanta IRA is that they have a lot of experience with real estate investments and syndications.
Take into account the Fees: Compared to standard IRA custodians, self-directed IRA custodians often charge greater costs. When selecting a custodian, you should think about the fees and incorporate them into your investment plan.
Follow the Rules: Self-directed IRA investments are governed by particular laws and rules. You cannot, for instance, utilize your IRA to buy a house that you or a member of your family will occupy. A personal loan cannot be used to make improvements to the property.
Invest with Experienced Firms: When investing with experienced firms, make sure to thoroughly investigate the deal and the investment group. Verify their background and experience with SDIRA investing while also following your gut instinct.
Diversify Your Investments: Despite the fact that real estate can be a fantastic investment, it's crucial to diversify your holdings. Think about making a variety of investments, such as stocks, bonds, and other non-traditional ones.

IN FINAL

Investing in real estate using a self-directed IRA can be a smart way to build long-term wealth. By following the steps outlined above and taking the time to research and understand the rules and regulations, you can make informed investment decisions that can provide significant returns over time.