How to invest in real estate using your IRA

Introduction

Many investors will set up a traditional or Roth IRA as a means of saving for retirement. Currently, investors under the age of 50 can contribute up to $6,000 per year into an IRA and those over the age of 50 can contribute up to $6,600 per year. Those who have been investing in an IRA for years, even decades, may find themselves with hundreds of thousands of dollars that is invested in a traditional portfolio of stocks, bonds and mutual funds.

Investors often do not realize that, by moving their IRA funds into a self-directed IRA, they can diversify their retirement portfolios by investing in alternative asset classes, including but not limited to real estate. Those who have been pumping cash into retirement accounts and therefore do not have cash on hand to invest in real estate deals will find this is an attractive way to invest in real estate. What is more, there are significant tax benefits associated with investing in real estate using your SDIRA.

Read on to learn more about how to invest in real estate using your IRA—an often overlooked vehicle for investing in real estate.

What is a Self-Directed IRA?

A self-directed IRA is an umbrella term used for a type of IRA that allows investors to self-select how investments will be made. Unlike traditional and Roth IRAs, in which a financial advisor or wealth manager makes the allocation on investors’ behalf, an SDIRA gives investors total control of how to invest. The investments available to those using an SDIRA also tend to be more encompassing than those made available by traditional IRA custodians. Using an SDIRA, an investor can self-direct retirement funds into alternative investments such as real estate. Any income generated by investing in alternative investments is returned back to the SDIRA and continues to grow tax-deferred just as it would in a traditional or Roth IRA.

The Benefits of Investing in Real Estate through a Self-Directed IRA

There are many reasons why someone would want to roll their traditional or Roth IRA into a self-directed IRA with an alternative asset custodian. Namely, doing so allows the investor to take control over how their investments are directed, which in turn, allows them to invest in a range of alternative assets, including real estate.

Here is a more detailed look at the many benefits associated with investing in real estate through a self-directed IRA.

The Ability to Take Control of Your Investments

Typically, both traditional and Roth IRAs are managed by a company or plan provider who, with some investor input, decides which stocks, bonds and mutual funds to invest in on behalf of that investor. The investment options are generally limited to “traditional” investments, like publicly traded equities. Few offer the ability to invest in alternative investments, such as precious metals, oil and gas limited partnerships, intellectual property and real estate.

Self-directed IRAs are more flexible and provide investors with greater control over their investment portfolios. With a self-directed IRA, the investor can decide exactly how to allocate their capital which may include investments in traditional equities but can also include alternative investments like real estate. Rather than the IRA custodian dictating how investments are made, the investor guides the IRA custodian and indicates how he or she wants their portfolio invested.

For someone looking to invest in real estate, a self-directed IRA allows them to be as hands-on or hands-off as they choose. They can use their SDIRA to buy and renovate property with their retirement savings, and then rent or sell for a profit, in which the returns are then directed back into the IRA. Someone who wants to take a more passive approach to real estate investing can use their SDIRA to invest in a syndicate, real estate partnership or non-traded real estate investment trust (REIT). Using an SDIRA provides extreme flexibility for those looking to invest in real estate.

The Step-by-Step Process to Investing in Real Estate with Your IRA

• Step 1. Identify an SDIRA Custodian. Someone who wants to invest in real estate using their IRA will need to roll those funds into an SDIRA account with an SDIRA custodian. Some SDIRA custodians are specifically set up to manage investments in alternative assets. Some of these will have specific platforms in place to make investing in real estate especially easy. Identify various SDIRA custodians, compare them, and then determine which is right for your specific investment objectives.
• Step 2. Facilitate the Roll-Over from Traditional Account to SDIRA. The step that has the longest lead time (usually 3-5 business days) is transferring funds from your existing IRA account to the custodian of your new SDIRA account. The SDIRA custodian will be able to help facilitate this process. Note: for someone pursuing a specific real estate investment, and who may need to move quickly, it is important to begin this step ASAP in order to ensure the funds have been moved and area available to invest by the real estate offering’s deadline.
• Step 3. Determine How SDIRA Funds will be Allocated. There are a few ways to allocate funds when moving from a regular IRA to an SDIRA. Someone might choose to liquidate all assets prior to moving funds from one account to another, particularly if they plan to reinvest a substantial portion of those funds in real estate immediately after transfer.

Another option is to roll funds from one account into another, while maintaining the investments as-is (i.e., not liquidating but rather just moving, while maintaining existing positions). This strategy is best for someone who is interested in investing in real estate but who has not yet identified a specific opportunity and wants their funds to remain invested in the interim.

Once funds have been rolled over, the investor will then want to decide what portion, if any, of their funds to invest in alternative investments like real estate.

• Step 4. Identify Real Estate Investment. Once the funds have been transferred to an SDIRA, they are available to invest in real estate. If the investor has not done so already, this is the right time to start doing due diligence on sponsors and various deal opportunities.
• Step 5. Have the SDIRA Custodian Facilitate the Transaction. After deciding which real estate investment you want to make, the SDIRA will request copies of all pertinent paperwork including the subscription agreement, private placement memorandum and other legal documentation. The sponsor will have provided all of this to the investor. The investor then makes the request to the SDIRA custodian to invest cash from their SDIRA into that deal. The process usually takes less than a few hours for the transaction to be complete.
• Step 6. Manage and Monitor Your Investment. Most SDIRA custodians have an online portal that makes it easy for investors to log-in and track their investments – including real estate investments. This portal will allow you to see the value of your asset, payments coming back into the account (i.e., cash flow distributions), and metrics pertaining to rate of return. At this point, all an investor needs to do is manage and monitor their investment. The rest has already been done.