The 2018 Real Estate IRA Beginner's Guide

Real estate holdings in IRAs are a favored strategy individuals use to build wealth for retirement. We know that there are experts out there that can invest in real estate while blindfolded, but most people only have experience buying their personal home and are unsure how to get started with real estate investing. 

If you fit into the latter category, this article’s just for you. 

This is a beginner’s guide to learn how you can invest in real estate with an IRA and earn tax-sheltered income for your retirement.

The term “Real Estate IRA” is commonly used to describe self-directed retirement plans that hold real estate assets.

A self-directed account gives you the control to choose your own investments. You don’t have to rely on a third party to make decisions for you. You are not limited to the volatile world of stocks and trying to time your entry and exit. You are free to invest in alternative options like real estate, which has a value that never goes to zero.

Additionally, this asset class covers an incredibly broad spectrum. Residential and commercial property, rehabs, rentals, private lending, land, and even tax liens are common examples.

TOP 3 WAYS TO INVEST IN REAL ESTATE WITH AN IRA

Rehab-and-flips are at the forefront. Many people enjoy today’s reality TV shows that give real-life examples of how rehabs work—and the process is nearly identical when you invest with your IRA. The only difference is your IRA owns the property and must pay for all expenses of the rehab. One expense is hiring third-parties to perform the renovations. As the IRA owner, you cannot personally perform repairs on the property. This is considered sweat equity, which is prohibited in an IRA. Upon the sale of the property, all proceeds are deposited directly into your account without incurring capital gains or other taxation.

Rental property is a favorite to achieve a steady flow of income over time. Monthly rent payments are deposited into the IRA, tax-free. Here again, expenses must be paid with IRA funds. You also have the option to sell later when the property has hopefully appreciated, presenting another boost of tax-sheltered income.

Private lending creates diversity and earns income on interest payments. This is an ideal transaction for borrowers seeking mortgage financing. Your IRA plays the part a bank would in extending loans to borrowers that you fully vet. Principal and interest payments are made to the IRA, but you call the shots on the terms of the security of the loan and the repayment details. The property is held as collateral in case of default, and can then be sold for additional profit.

HOW TO GET STARTED INVESTING IN REAL ESTATE TODAY

Choose a plan administrator. Make sure you work with an administrator who has experience in dealing with real estate transactions and ensuring the administrative details comply with IRS rules. (Suggestion: Find a company that pairs you with a specific client account manager who provides concierge-style service and guides you through the investing process.)

Open your account. You can self-direct a Traditional IRA, Roth IRA, SEP and SIMPLE IRAs, Solo 401(k), HSA, and education savings accounts. (Tip: Using a company that allows you to open your account online via a secure portal can make the process faster.)

Fund your account. Transfer or rollover funds from an existing IRA or 401(k). You can also make a cash contribution, keeping in mind you can’t exceed the annual contribution limits of your plan. You can also move funds from a 401(k) that’s still housed with an old employer into a self-directed account.

Start investing. Now that you’ve gotten everything in place, you can begin looking for real estate to invest in. It’s that easy.

Here's a bonus!

If you find a promising asset but lack adequate funds in your plan make the purchase, your IRA can partner funds to invest.

This is an excellent strategy to score more lucrative holdings and also to offset expenses related to your asset. You can partner self-directed IRA funds with your personal funds, and/or with another person or entity to invest in real estate. Ownership is assigned based on the percentage of the buy-in each investor contributes. Expenses are divvied up in the same manner.

Good luck and let us know if we can help!