Using Your IRA for Real Estate Investments
It would most likely surprise many that it is perfectly legitimate and possible to use retirement accounts such as IRA (including not only the traditional IRA, but also accounts such as Roth IRA, SIMPLE IRA, Keogh, 401Ks, and SEPs) in your Real Estate investments.
Why bother? You ask. The answer is simple, Real Estate if invested in wisely, may be the most advantageous to yo in the long run. Some advantages include the ability of earning “sweat equity” through improving the properties your account invests in, or the benefit of US tax laws preferential to real property owners.
Most people do not think of their retirement accounts as an account or container for investments, but rather as an investment in itself. In fact what you choose to put in your retirement “portfolio”, so to speak, is up to you. If you ask your retirement account company whether you can add Real Estate investment, their answer may be no. The reason is that most companies that hold retirement accounts are not configured to be able to handle real estate. This however does not mean that can not be done as a rule.
In order to do so, you will first need to establish a self-directed retirement account with a company that specializes in real estate IRAs e-mail me for examples of such companies). This is an easy step. You set up a new account, or simply role over your existing accounts into the new one. (Before you do so however, make sure there are no surrender charges for rolling over your existing accounts).
Once you have done that you can direct your IRA to purchase real estate properties and make investments in your benefit. Notice the subtle point, you are not buying property, the IRA is. There are multiple implications to this. For example profits and expenses related to the real estate investment flow in, and out, of your retirement account directly. Another implication is that any profit you have made through renting or flipping a property is either tax deferred, or tax exempt in the case of a Roth IRA account. Another thing to realize is that while contributions to your IRA are capped at an annual amount, income from investment is not. So it is possible for an individual who has lost ground in their retirement account to catch up.
Not all implications are favorable, however. Since it is the IRA account that handles the investment, you must make sure you have enough liquidity in the account for operating expenses. You should also be aware of the fact you can not use this investment instrument in conjunction with any real estate property you or your family own or your business leases, etc. The investment has to remain completely separate from any other personal or business endeavors you or your family are involved in. For example, you can not buy yourself a vacation home as IRA investment, nor can you get the IRA account to buy your own house off, neither can you house your brother in an IRA investment property.
Another implication you should be aware of is that since the IRA owes the property any financing is bound to be “non- recourse”, or in other words the property is the sole security for the loan. Most lenders will not provide non-recourse loans, so you would have to resort to other means of financing such as sellers financing, or private loans.
All of this is not meant for everyone. If you are convinced this is the way to go you should first learn as much as possible about scouting good properties, cash flow, appreciation and depreciation, and their tax implications, ROI etc. Knowledge is your best friend. Most importantly consult a competent professional advisor before you take any steps.