Buying Real Estate with a Self-Directed IRA

can be a mystery to most but a retirement goldmine to a select few. Are you a real estate investor, do-it-yourselfer, independent mind, control freak or entrepreneur? If so, you should definitely consider taking advantage of a self-directed IRA to purchase real estate.

What is a Self-Directed IRA?

A self-directed IRA is an individual retirement account held by a trustee or custodian that permits investments in a broader set of assets typically permitted by most IRA custodians. Custodians and trustees for self-directed IRAs can allow their clients to invest in a wide array of asset types such as real estate, promissory notes, tax lien certificates and private securities. This is in addition to what is normally provided by a Roth IRA or traditional IRA custodian or trustee. Essentially, the individual investor has full control and choice of what they invest their money as long as they comply with the law.

How do I Create a Self-Directed IRA?

1. Find a local, reputable Self-Directed IRA Custodian. – Try Midland IRA in Chicago
2. Fund the account by making a contribution through a transfer or rolling over of funds from an existing retirement account. You don’t have to transfer all of the funds, only enough to make your desired investment. This is just as easy as rolling a 401k or IRA from a old job to a new job – same idea.

How do I Purchase Real Estate in the Self-Directed IRA?

1. First be sure to have enough funds in your Self-Directed IRA account to cover the cost of the purchase in cash plus closing costs and emergency reserves.
2. Hire a Real Estate Broker such as myself who specializes in investment property and can provide pro-formas and market insights.
3. Provide your broker with a recent account balance printout of your self-directed IRA account and let him/her know you are purchasing in a self-directed IRA. This is your proof of funds that your broker will need when submitting offers on your behalf.
4. Search for the appropriate real estate investment with your broker that matches your return expectations.
5. Find the property you plan to purchase and make an offer. The property MUST BE an investment property.
6. Provide the accepted offer, disclosures and other related paperwork to your custodian. Fill out your custodians required forms if applicable and put them in touch with the title company the closing is taking place at.
7. Complete the purchase and provide the closing documents to your custodian. Custodian will hold title.

How Do I Manage My Property?

There are some similarities and some differences with property management in a Self-Directed IRA. As the owner of the property, you will either self-manage or pay a professional property manager to manage the building as you usually would. However, when you receive rents they must be made out to and deposited into your IRA account to remain tax-deferred. In addition to the rents, your expenses must come from the IRA as well. So when you want to pay bills, you must coordinate with the custodian of your IRA to ensure the bills are paid accurately and on time. You won’t have a checkbook to your IRA account where you can simply write expense checks when you need to. You must request the bills to be paid. Keep this fact in mind when choosing your custodian. A custodian that makes receiving rents and paying expenses in your self-directed IRA account easy will save a lot of headache. No matter what, you cannot choose to occupy the building or one of the units. If you do, you risk losing your tax-exempt status.

What does the Custodian Do or Not Do?

1. Receives Rents and pays expenses (at your direction with your IRA money)
2. Ensures you comply with federal laws and keep your money tax free.
3. Provides administrative services for the IRA. This includes tax reporting, account statements, and processing transactions.
4. The custodian does not sell investments.
5. The custodian does not offer investment advice.
6. Charges you for their services. Fees are very minimal from what I’ve seen such as less than $500 per year per property regardless of the value. After all, you’re doing most of the work.

What are the Benefits of a Self-Directed IRA invested in Real Estate?

Have you ever been hired at a company, been really excited about all of the benefits, salary and employee match only to find their 401k or retirement investment options are severely lacking and narrow-minded? Well, that’s pretty much 100% of all companies.

With a self-directed IRA, you can take the money in your retirement account that you really have little control over and move it into real estate. You can choose the location, type of real estate class, growth profile, tenant profile, condition, etc. You can get exactly what you are searching for and then control it’s performance through active property management. By actively managing your property, you will be able to directly affect your return and thus your increase your retirement balance. When you invest in stocks, bonds, index funds etc., you are basically entrusting your money to a collection of corporate entities of which you know little or nothing about. Furthermore, you cannot effect their performance or stock prices as an individual. In my opinion, you’re essentially gambling. This may work for a passive investments, but if you really care where your hard-earned tax-deferred money is going and want to affect the return of that money, then a self-directed IRA is the way to go. Wake up!

When you invest your money in real estate through a self-directed IRA, you have multiple ways of improving your retirement balance. First, through the monthly cash flows from simply holding the asset and renting it over time. Next, if you are able to carry a mortgage note on the property, then your tenant(s) will slowly pay down your note and you will gain equity. Then finally, down the road when you’re planning to retire, you may be able to see some gains in the value of your property. Perhaps you bought your first retirement property when you were 40 years old and sold it at age 70. By the time you sold, it’s value could have grown quite significantly and would be a great chunk of change to then live off of in retirement. Or instead, you could simply take the property out of your retirement account and start living off of the profits it provides monthly. It could also be held in trust to be passed down to your children or family some day and help them retire as well.

In summary, a self-directed IRA should benefit those who understand real estate investment, who want to maximize retirement income, or who want to control their investments. I will write in more detail about self-directed IRA’s in posts to come as there are other types of real estate investments that can be made through a self-directed IRA. Contact me if you want an introduction to some capable custodians or are ready to look at potential real estate investments!

Learn more at my website, www.chicagoREinvestment.com.