investing in real estate with a Self-Directed IRA


One of the most popular choices many of our
IRA Innovations clients make is investing in real estate with their Self-Directed IRA. Purchasing income-generating rental properties, commercial buildings, doing rehabs, purchasing raw land, and more is a great way to build wealth for the future and diversity your portfolio with alternative assets.

You are in control of your Self-Directed IRA, so you are in the driver’s seat when it comes to choosing your real estate investments. IRA Innovations will work with you through a simple process to get your new Self-Directed IRA account opened and funded. You direct us, as your custodian, to facilitate your investment purchase in the name of the IRA and handle all the administration and bookkeeping. 

Since the IRA owns the property, all associated expenses must be paid by the IRA, and all income generated by the property must be deposited into the IRA.  Investing in real estate with your IRA is a great way to build wealth tax-deferred in a Self-Directed Traditional IRA and tax-free with a Self-Directed Roth IRA.

While there are many advantages and a world of options available in real estate, there are also many important considerations and best practices.

Real estate investment best practices

There are many benefits to investing your savings in real estate, not to mention countless options on how exactly to approach a real-estate oriented IRA. One benefit is that investors don’t have to limit themselves to physical real estate properties. There are also options for real estate related assets like REITs, private mortgages, mineral rights, and many more that wise investors can utilize for their retirement saving strategy.

Any real estate investment made with your Self-Directed IRA will start with your choosing a property. You decide what type of property you want to purchase.  Basically any asset that has a deed!

  • Single family homes, apartments, condos
  • Vacation properties
  • Commercial properties
  • Trust deeds, mortgage, or tax liens
  • Cemetery Lots
  • Parking Lots
  • Land

Which option you choose will depend on your plans for the property. Will you flip the home or rent it out? Do you want to be the landlord? Will you hire a property management company? Do you hope to eventually own many properties? Make sure you know the answers to these types of questions. Doing your own due diligence is among the most important best practices for investing in real estate with a Self-Directed IRA. 

Research everything about your potential property, then research more. With real estate, one factor requiring due diligence is location. Location is important for rentals and resale. Look at the surrounding area — is your property in the city, the suburbs, or in a more rural area? If your property will be a vacation rental, is it near tourist attractions? It may be a good idea to inspect the property yourself, in person. Don’t rely on internet listings or word of mouth. You will also need to know all you can about the market value of your investment. Placement, condition, required upkeep, and size determine what your property is worth. Make sure you are not investing in a property that will cost you more than it’s worth. Before you purchase a property, also gather information about any possible property expenses. Once you find the property you’d like to purchase, you will initiate a contract to purchase in the name of your IRA.

Keep a close eye on your property. Once you’ve made the investment and you own your property, don’t forget about it. There will be costs associated with your investment, and you want to make sure those don’t go too high. Keep an eye on these long-term expenses, such as taxes and those related to maintenance and upkeep. You will want to keep funds in your IRA to cover any expenses associated with the property.  

Make sure you monitor the market. As your property begins to profit, watch the market carefully. What’s going on with the housing market in the area? Is it a good time to sell? A good time to buy another property nearby? Pay attention to rental traffic spikes and when traffic fades, and adjust your rental fees accordingly. 

Familiarize yourself with the rules.  Self-Directed IRAs allow for a level of freedom you might not find with more traditional IRAs involving stocks, bonds, and mutual funds. But remember that there are rules in place around Self-Directed IRAs that you must follow as an investor. It is critical that you know and understand the rules before investing in your IRA.  

The IRS has a few important rules related to Self-Directed IRAs and real estate investments known as Prohibited Transactions.  First and foremost, remember that the property purchased with your IRA is owned by your Self-Directed IRA. All income the asset earns or any expenses and repairs the asset incurs must flow through the IRA itself. Also, as IRA owner, you and any disqualified individuals cannot use the property, cannot perform repairs on the property, or use it for personal gain in any way. You cannot personally profit from your property until you sell it or it’s no longer owned by your IRA. See section 4975 on the IRS.gov website for more information.  

Here are a few factors to keep in mind when considering real estate in your IRA:

  • The title of the real estate purchased must be in the name of the Self-Directed IRA.
  • The property becomes an asset of your Self-Directed IRA; you are a disqualified person and may not use it in any way. 
  • Disqualified persons, including you, your spouse, lineal ascendants or descendants and their spouses, cannot benefit from the property or perform any services while it’s owned by your IRA.
  • Be aware of and avoid prohibited transactions, such as making deals with a disqualified person
  • Your business cannot lease or be located on any part of the property.
  • If you are leveraging the property, you cannot personally guarantee the loan.

There are many options to consider when it comes to alternative assets. If properly researched and executed, it’s undeniable that investing your Self-Directed IRA in real estate properties can lead to a more secure future for your retirement savings. If you’re ready to open a Self-Directed IRA to take control of your retirement investing, IRA Innovations can help you make the switch.

Contact us to learn more about Self-Directed IRAs from IRA Innovations in Birmingham, AL, including how to maximize your real estate profits.

IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA. IRA Innovations does not endorse any products or sell any assets. IRA Innovations does not provide tax, legal, or investment advice. Please consult your legal, tax, or financial advisor for any advice you might require.