Many parents consider buying property in an area where their child attends college. They hold the property for the years their child attends school. They may rent out additional bedrooms to other students to produce income for the property and then hope to sell the property for a greater profit when their child graduates.
In this scenario, your IRA cannot buy property that your child lives in. That would be considered a prohibited transaction, since according to the IRS your IRA is disqualified from doing business with your children. However, other Collegiate Housing Investments have been found in the self-directed IRA arena. Investing in converted homes, small rental apartments or condos near a college or university can make sense for the Self-Directed IRA.
Most larger universities have a campus housing center with a list of students looking to rent rooms or buildings available. Property Management companies are readily available and many have waiting lists of students looking for housing. In most cases, landlords get extra security in the form of parents co-signing a lease. That way if the student defaults or trashes the unit at the end of the lease period, the parents are on the hook for the rent and/or damages.
We have clients who invest in student housing with their self-directed IRAs. One specializes in housing for law school students in his state. The law school has a rule that if the student misses his rental payment, he is thrown out of law school. The client feels secure knowing that the school, though not liable, will act if their student defaults.
As with a traditional Real Estate IRA transaction, due diligence is necessary in order to get a quality property in the right location that a property manager can easily rent on a continual basis. In addition, in most cases the parents guarantee the rent so investors and clients feel comfortable.
Cash flow could be greater since rents are by the bedroom. This entices investors looking for higher returns. In many cases, students will pay for an entire year of rent, thus securing their position even if they go home for the summer. This means that they rarely break their leases.
Some investors worry that potential damages could increase costs. To counteract this, perform your due diligence with the selection of the right property management company who has the experience in this area. Many companies only do student rentals.
The choice of investment type is always up to our clients. We at IRA Innovations do not give investment advice. We encourage you to seek guidance from your financial or legal professional before you decide what type of an investment is right for your self-directed IRA. For more information about using your self-directed IRA for alternative investments visit our website at www.irainnovations.