Pros and Cons of Using IRA to invest in Real Estate?

[Account Closed]

I plan on using my Roth IRA to purchase my first rental property. I keep hearing both ends of the stick, good idea and not a good idea. Anyone knows if this is a good idea or not and what are the pros and cons?

[Chris Soignier]

A Roth IRA is a good vehicle for real estate investment, the bigger question is whether the particular investment you make is a good one and well-suited for it. Obviously, the tax-free nature of the Roth IRA is attractive, but consider the following factors ahead of time:

1) You can't get recourse financing, which will lower your cash on cash returns (b/c non-recourse financing typically carries a higher rate and lower LTV)

2) All funds for property taxes, maint., repairs, property management, insurance, etc. need to be paid out of the Roth IRA, meaning you need to have liquid funds set aside for these expenses

3) As rents accrue, it may be hard to re-invest relatively small amounts in your Roth IRA since most custodians won't enable purchase of market-based securities.

4) It needs to be totally passive, which means you can't work on the property yourself.