With confidence in traditional investment assets like stocks and bonds in a lull, many investors are looking into alternative asset types. If you are looking for alternative assets in which to invest, it may be time to consider using a self-directed IRA to invest in real estate.

Investing in Real Estate

Though commonly called a real estate IRA, a self-directed IRA that counts real estate as one of its assets is actually able to hold other types of assets as well. This is one of the many draws that lead investors to open a self-directed IRA. Unlike traditional IRAs managed by banks or brokers, a self-directed IRA can hold many different types of alternative assets. The key is to find a custodian that is willing to administer to all the types of assets you want to hold in your self-directed IRA.

Investors aren’t limited to just physical real estate when they invest with a self-directed IRA. They can also invest in real estate related assets like REITs, private mortgages, property rights, and many more. A savvy real estate investor can take advantage of the various types of real estate assets allowed by a self-directed IRA.

If your self-directed IRA doesn’t have enough funds to purchase a property outright, there is also the option of financing your investment property with a non-recourse mortgage. The upside of this type of financing is that lenders can only recoup the pledged collateral, usually the property. They cannot go after the IRA or the individual’s personal assets.

Taxes on an IRA-owned property can be substantially lower than the rest of the market in some cases, as they can be taxed at the trust rate. While each situation is different, this can be a great boon to investors looking to minimize taxes on their investments. Of course, consult your preferred tax professional to determine what your situation’s tax liabilities would be.

Things to Keep in Mind

Though the investor is the one making final decisions on investments, the law requires that all transactions go through a custodian who administers your account.

This can lead to longer turnaround times for payment and moving on a property. All the paperwork and processing must be done by your chosen custodian. In most cases, this is to prevent you from incidentally participating in a prohibited transaction that can threaten the tax status of your IRA.

If you are used to living in or working on your real estate investments, there is another point that may give you pause. Because the investor (along with others outlined by the IRC) is considered a disqualified person, she cannot interact with the physical property in which she invests. All management, repairs, and anyone inhabiting the property must not be a disqualified person to prevent prohibited transactions.

A final point to keep in mind is that no funding can come directly from you as the IRA beneficiary or any other disqualified person. This means that all money contributed to the IRA must be done through the custodian. Also, investors cannot use any of their personal assets or funds to pay for anything involving the investment property. All expenses must be sustained by the IRA itself.

Final Thoughts

Though there are some additional rules to be careful of when using a self-directed IRA, the freedom and flexibility afforded to the investor makes it a worthwhile investment to make. 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.