Single family homes, condos, commercial buildings, farm land, timber land. These types of real estate don’t typically come to mind when you think of your IRA, but they should.
More and more people are finding out that investing in real estate using their retirement accounts is possible. Depending on each individual situation, it can be a great option for many people.
The more traditional investments, such as mutual funds, ETFs, and stocks, are certainly still out there as other choices, but alternatives like real estate can help diversity assets and grow retirement funds in a way that removes many high risk factors. In many ways, investing in real estate also puts you more in control of your money.
So why don’t more people know about this option and take advantage of it? Banks and brokerage firms have done a great job in advertising their more traditional options. We estimate that 90% or more of people that invest with their IRAs are unaware that they can invest in all types of real estate, including anything that has a deed.
While some people may think this sounds too good to be true, the IRS does allow the use of self-directed IRAs to purchase real estate, so there are no legal or ethical concerns about this option. However, most brokerages and mutual fund companies are not well equipped to handle the administration of holding individual parcels of real estate in an IRA.
Let’s take a quick, simplistic look at what buying real estate with your IRA might look like.
Maybe you have a $68,000 IRA you want to use to purchase a $58,000 house. You set up your IRA with IRA Innovations and fund it. Once you find the property you’d like to purchase, you initiate a contract to purchase it in the name of your IRA. Then the contract is submitted to us to sign. We coordinate the closing with the title company. You review and approve the closing documents, and we sign the documents on behalf of the IRA. Lastly, the funds are wired from the IRA to the title company to finalize the closing.
Your IRA is now the owner of record on the warranty deed, and the process was simple – not much different than any other type of real estate purchase.
One important thing to note is that in this case, the additional $10,000 left in the IRA stays there to cover expenses. Since the IRA now 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.
Here are a few other factors to keep in mind about purchasing real estate with your IRA:
- The property will technically be an asset of your real estate IRA. You are a disqualified person and may not use it.
- Some transactions are prohibited, such as purchasing property that is owned by you, your spouse, or your descendants or ascendants.
- You and your family members cannot live in or lease the property while it’s in your IRA.
- Your business cannot lease or be located on the property.
- If you are leveraging the property, you cannot personally guarantee the loan.
In today’s real estate market, it is an optimal time to use your IRA to to invest in real estate as a way of building wealth for retirement.
IRA Innovations provides self-directed retirement account administration and education. As the experts when it comes to “alternative” investments including real estate, they can provide the necessary tools and information to get started with a real estate IRA.