Real Estate Investing with a Self-Directed IRA: What You Need to Know

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Introduction

Most IRAs stick to stocks, bonds, and mutual funds. But self-directed IRAs (SDIRAs) let you grow your retirement savings with different stuff like private equity, precious metals, and yes, real estate.

In this article, we'll show you how to use self-directed IRAs for real estate investing. People often call this a "Real Estate IRA".

We'll walk you through the whole process: from picking an account to buying property and everything in between.

Then we'll list the paperwork and steps you need to hold real estate in your retirement account.

Lastly, we'll give you some key tips if you're thinking about investing in a rental property with your self-directed account.

You'll also find answers to common questions about real estate investing at the end of this article.

 How Does a Self-Directed IRA for Real Estate Work?

When you buy real estate through your retirement account, you can invest in any kind of real estate. This includes places people rent, empty land, and even business properties. You can also invest through real estate investment trusts (REITs) or by lending money for mortgages.

Steps to Invest in Real Estate Using a Self-Directed IRA

Buying real estate with your IRA is a lot like buying it normally, but there are a few important differences. Here's how to do it:

1. Get Started

Open a Real Estate IRA
Before you start looking for property, make sure you have your self-directed retirement account ready. We make it easy for you to set up your account online in just a few minutes. Once it's open and has money in it, you're ready to start investing in different things.

Pick your self-directed retirement account

You can buy real estate through different types of self-directed accounts, like a traditional IRA, Roth IRA, or Individual 401(k).

• Traditional IRAs use money you haven't paid taxes on yet. You pay taxes when you take money out later. This is good if you think you'll pay less taxes when you're older.

• Roth IRAs use money you've already paid taxes on. You don't pay taxes when you take money out after age 59 ½ if the account is over five years old.

• Individual 401(k)s are for small business owners who don't have employees (except maybe a spouse or business partner). They work like traditional IRAs for taxes. This account has some perks for real estate investing.

Not sure which one to pick? Ask your IRA company for help understanding the tax benefits of each.

Put Money in Your New Account
There are three ways to fund your self-directed IRA:

• Move money from one account to another of the same type (like from an old IRA to a self-directed IRA)

• Roll over money between different types of accounts (like from an old job's 401(k) to an SDIRA)

• Put in new money each year, up to the limits set by the IRS.

To learn more about each way, get our SDIRA Funding Guide.

Know the Real Estate IRA Rules
Make sure you understand the rules for investing in real estate with an SDIRA. Learn about what you can't do and who you can't involve to make sure you follow IRS rules. This helps protect your retirement savings by keeping the tax benefits.

People often ask if they can use a property owned by their IRA for themselves. The answer is no. Anyone considered "too close" to you can't benefit from a property owned by the IRA. This includes your spouse, parents, kids, and anyone who provides services for the IRA, like the IRA company.

Another important thing to remember is that since your self-directed IRA owns the property, all the money coming in and going out must go through it. As someone with an IRA, it's super important to keep these rules in mind.

Do Your Homework

Many investors get pumped about adding different stuff to their traditional or Roth IRA. Check out our Self-Directed IRA Homework Guide for a list of questions to ask before you jump in.

How to Invest in Real Estate Using a Self-Directed IRA

There are five common ways to invest in real estate using your retirement savings. No matter which way you choose, holding these different investments in your retirement account can have tax perks over buying real estate with your own money.

Buy Real Estate Directly with Cash

If your new SDIRA has enough cash, it can buy the property outright. This is called a direct purchase. If your SDIRA doesn't have enough money for a direct purchase, don't worry, you have other options.

Team Up Your Funds

You can join forces with other IRAs, your own money, or money from other investors. Your SDIRA can team up with anyone for the initial purchase, including your own cash. After the deal is done, the IRA can't do business with anyone too close to you. Ownership, costs, and profits are split based on how much each investor put in.

Use a Special Loan

For your real estate investments to be owned by your SDIRA, you can't use a mortgage based on your personal credit. Instead, you can use a non-recourse loan. This means if your IRA can't pay, the lender can only take the real estate used as collateral.

Use an LLC

While setting up an LLC usually takes more work, it has some key benefits. You get more control over your money and don't have to rely on your IRA company as much. The money in your LLC's checking account is ready to use. Your deals become as simple as writing a check. It also lets you buy and sell the LLC's investments without involving your SDIRA provider, saving you money and time.

Mortgage Notes

These are promises to pay used only in real estate deals. They represent a borrower's promise to pay the holder. Mortgage notes can be secured or unsecured and are often seen as a way to invest in real estate without being a landlord.

If you're new to real estate investing, you might try out different real estate assets to find what works best for you. You can use this experience to find investment options that fit your goals better, while also enjoying the tax benefits of an IRA investment.

Buying a Property

Find a Property and Make an Offer

This is the fun part where you find an investment for your SDIRA. Make sure the contract has your SDIRA as the buyer. For example, "The Entrust Group FBO Client Name Account X #555555." Entrust signs the purchase contract and you sign as "read and approved."

After Your Offer is Accepted

Your SDIRA provider sends your earnest money deposit (EMD) to the title company after getting the signed Purchase Contract agreement and the Buy Direction Letter form.

After getting the signed Purchase Contract agreement, your SDIRA provider funds your EMD, if needed. Now, you can start any inspections or appraisals. You'll also need your SDIRA provider to send money to cover costs for any inspections.

Open Escrow

Once escrow is open, you'll need these papers:

• Warranty Deed or Grant Deed

• Title Insurance Commitment or Preliminary Title Report (provide closing instructions)

• Settlement or Closing Statement

• Title Company Wiring Instructions

• Escrow Closing Instructions (if needed)

• Loan Documents (if needed)

• Seller's Entity Formation Documents (if needed)

• Any closing documents buyer needs to sign at closing (other than listed above)

Closing Escrow

After inspection and once you've met any conditions, you're ready to close. After sending in the documents listed above, your SDIRA provider checks the paperwork and sends the remaining balance.

Congrats! Your self-directed IRA now owns real estate.

Renting Your Property

Once the purchase is done, you can start interviewing potential tenants. Remember to follow all rental laws in the Fair Housing Act when picking tenants.

For a long-term tenant, you'll need to make a rental agreement. Your IRA company will sign the rental agreement for the SDIRA. All rent payments must be paid to the self-directed IRA.

Benefits of Self-Directed IRAs for Real Estate

Some perks of buying real estate in your retirement account include:

Investing in real estate with your retirement savings can be pretty cool. It might give you better returns than regular investments and protect your money from market ups and downs. Plus, if you do it right, you might not have to pay taxes on the growth. That's a win-win!

One neat thing about real estate investing for beginners is that you can boost your retirement income through rental properties. If you're good with numbers and know your stuff about real estate, you might spot a great deal before others do.

But hey, it's not all sunshine and rainbows. There are some risks to watch out for when investing in real estate with your retirement account:

• The real estate market can be unpredictable

• You might end up with a property in a bad spot

• The property might not make as much money as you hoped

• You could have trouble finding tenants

• Tenants might cause problems

• Unexpected repairs could pop up

• Natural disasters could damage the property

Also, remember that real estate isn't like cash. It can take a while to sell a property and get your money back. Sometimes, you might even have to sell at a loss.

If you're interested in getting into real estate investing, The Entrust Group has been helping folks like you since 1975. They've got a step-by-step guide you can download to learn more about buying property with your retirement account.

If you're ready to jump in, you can open a self-directed IRA online in just 10 minutes. Or, if you've got questions, you can chat with their team.

Here are some common questions people ask about real estate investments and self-directed IRAs:

Can I use the property myself?
Nope, that's not allowed.

Can I rent it to my family?
Probably not. There are rules about who you can rent to.

Can I manage the property myself?
You can, but it's tricky. Most people hire a property manager to avoid any issues.

Who pays for stuff like repairs and taxes?
Your retirement account does. It owns the property, after all.

Can I get the rent money personally?
No, it has to go back into your retirement account.

How do I sell the property?
It's similar to a regular sale, but The Entrust Group handles the paperwork.

Remember, investing in real estate with your retirement account can be a great way to build wealth, but it's important to understand the rules and risks. Do your homework, ask questions, and consider working with a professional to make sure you're on the right track.

Whether you're just starting out or you're a seasoned pro, passive real estate investing through your retirement account could be a smart move. It's all about finding the right strategy that works for you and your financial goals.

So, if you're wondering how to get into real estate investing, using your retirement account might be worth looking into. Just remember to take it slow, learn as much as you can, and don't be afraid to ask for help along the way. Happy investing!

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