Real Estate IRA Wholesaling: the Simplest and Least-Expensive Way to Invest in Real Estate

Patricia McCrystal

October 7, 2015

Whether you’re a seasoned wholesale real estate investor or are simply interested in trying your hand in the market, using your IRA account to fund wholesale real estate investments has more than a few advantages. Real estate IRA wholesaling takes the pressure off your personal checkbook, and provides an alternative funding source for your investments – one that offers tax-deferred or tax-exempt growth on your investments until distribution.

The role of a real estate wholesaler is to put property under contract, and then assign or resell the property to another investor for a profit. Wholesalers put properties under contract with a contingency in place, and then work to quickly flip the property for a higher return. Investors pay wholesalers with cash, lines of credit, or hard money loans. If a real estate wholesaler isn’t able to resell the property before the date of closing, they can utilize said contingency to walk from the contract.

Real estate wholesaling is touted as being the simplest and least expensive way to invest in real estate, largely for the fact that very little money is needed for the wholesaler to put a property under contract. An additional bonus is not having to repair the property before selling it to another investor – in other words no fixing-and-flipping, just flipping!

Real estate IRA wholesaling looks similar to the typical real estate wholesaling process; the only real difference is that the investor can use his or her IRA or qualified retirement plan to fund the entire investment, or they can partner their IRA account with another IRA or qualified entity to make the purchase (beware ofdisqualified persons rules). Click here to learn more about the different types of IRA accounts.

In order to invest your IRA in real estate, you’ll need to hold an account with an administrator that allows you to invest your account funds in alternative assets (such as real estate, land, precious metals, private equity, private lending, and more). Once you’ve found a self-directed IRA administrator such as New Direction IRA, you can begin the journey of real estate IRA wholesaling. Call New Direction IRA toll free today at 877-742-1270 to start your new adventure as in real estate IRA wholesaling, and as always, happy investing!

Increase Cash Flow and Equity in Retirement by Leveraging Real Estate in Your IRA!

Patricia McCrystal

October 7th, 2015

Many real estate investors turn to self-directed IRAs to fund their investments with tax-advantaged retirement savings. Self-directed IRAs grant investors more freedom and control over their real estate investments, as they allow account holders to purchase nearly any asset type they desire to bring balance and diversity to their retirement portfolio (excluding life insurance and collectibles, per IRS rules). Any IRA account type can be self-directed, as long as you hold your IRA with a self-directed IRA provider like New Direction IRA.

There are several strategies real estate investors can utilize when investing their IRA funds. Investors are free to buy properties outright with IRA cash if they have the funds to do so. However, real estate investors may also consider purchasing two or three properties using leverage (a non-recourse loan) for the same amount of cash it would otherwise take to purchase a single property. Multiple properties can potentially award IRA real estate investors with more cash flow.

In order for a self-directed IRA to acquire a mortgage, the account holder must take out a non-recourse loan with their IRA. IRA non-recourse loans are not reported on investor’s credit records, because the loan is in the name of the IRA rather than the IRA account holder. A non-recourse loan stands to offer a great incentive for real estate investors who are interested in financing a multi-property portfolio. Keep in mind, with non-recourse financing, the bank’s only recourse is the property itself.

Reasons IRA Real Estate investors may use leverage to purchase multiple properties:

• After expenses, an investor can potentially accrue more net profits on a monthly basis with three properties rather than just one.
• The tenants of each property will be paying your mortgage through rent payments, in addition to building equity for you.
• You can use your properties’ cash flow to reduce your debt and therefore accelerate the payoff of your IRA’s loan.
• If the property value of each investment appreciates, you can gain three times the income flow that you would with only one property.
• If you are able to pay off any of your mortgage loans completely, your monthly cash flow in retirement increases dramatically.

Reasons that may hinder a real estate investor from debt-leveraging multiple properties with their IRA funds include the desire to avoid debt, the desire to avoid UBIT (Unrelated Business Income Tax ), and the hassle of managing three rental properties. Investors may also worry that there is a bigger chance of one of their tenants damaging their IRA properties and costing the investor money. Exercising due diligence when finding potential renters can help investors avoid long term damage or eviction costs.

Successful real estate investors are always conscious of current and projected market trends before making investments. When considering purchasing multiple properties, a real estate investor may be concerned about losing money if the real estate market turns, and they can no longer afford their mortgage payments.

One possible strategy for avoiding market woes: When considered a mortgage with your IRA, create a plan to pay off your mortgage before you retire. How large of a down payment can you afford? How quickly can you pay down the mortgage every month or year? If you can come up with logical solutions to these questions, you can potentially wind up with more cash flow from your real estate investments, sending more tax-advantaged savings back into your IRA and making retirement that much easier! Feel free to contact NewDirection IRA toll free at 877-742-1270 to learn more about leveraging your IRA real estate investments, and as always, happy investing!

New Direction CEO Bill Humphrey Talks Real Estate Investing for Retirement on RE/MAX of Boulder Podcast

Patricia McCrystal

July 14, 2015

Monday, July 13^th 2015 – In a podcast hosted by RE/MAX of Boulder, New Direction IRA’s CEO Bill Humphrey gave a rundown of the history of self-directed IRAs, and the benefits investors can glean from real estate investing for retirement. Podcast host Duane Duggan is a Broker Associate with Boulder Property Network, and was one of the attendees at New Direction IRA’s very first public continuing education meeting in Denver back in 2003. There was a familiar air between Humphrey and Duggan that allowed dialogue to flow easily and remain accessible for viewers and listeners of all knowledge bases.

Left to Right: Duane Duggan and Bill Humphrey

Duggan kicked off the podcast with a nod to New Direction’s growth since its conception in 2003, as the company now boasts $1.14 billion in account assets under its roof. Humphrey explained this number is indicative of self-directed IRA account growth in general, as more investors become disenchanted with the securities market and seek to invest their retirement savings into a more tangible asset market that they know and understand – such as real estate. In fact, Humphrey pointed out, “self-directed IRAs are the fastest growing segment of the retirement industry as a whole”.

So what kind of IRA does one need to take advantage of real estate investing for retirement? One that you’re in control of (Humphrey). Employer-provided retirement accounts such as 401(k)s typically only allow for securities investments. However, a Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Individual 401(k) and Checkbook IRA can be self-directed. With a self-directed IRA, investors can capitalize on their personal knowledge and experience of the real estate market to purchase real estate, fund fix-and-flip projects, purchase notes, deeds, and partner with other IRA accounts to finance a real estate purchase. You can even use self-directed Health Savings Account (HSA) to invest in real estate.

“Real Estate investors are finding that the IRS doesn’t define what account holders can invest in,” Humphrey explained, “the IRA administrator does.” In other words, the scope of investments your IRA is legally allowed to make is nearly limitless – the only investing limits an account holder may run up against are those exacted by the account administrator. A self-directed IRA administrator like New Direction IRA specializes in the bookkeeping for alternative asset investing so that account holders can invest in anything they desire, as long as it follows IRS guidelines (no life insurance or collectibles). “Any investment you’ve ever made is probably one that you can make through your IRA” (Humphrey). In fact, New Direction IRA was conceived because Co-founder and President Catherine Wynne was interested in investing retirement funds in real estate, and believed there should be a better market for self-directed IRA administrators.

What are the advantages of investing IRA money? Humphrey explained that the IRS made a deal with IRA holders – you can save money in your account and watch your IRA’s real estate investments grow on a tax deferred basis, as long as you as the account holder (along with other disqualified persons) don’t directly benefit from the funds or assets while they’re in the account. Once the account holder reaches legal distribution age, they can access their tax-deferred funds and/or take possession of their assets as a distribution.

“One of the aspects that turns real estate investors to self-directed IRAs is the spectacular market growth" (Humphrey). Your IRA can buy real estate and take advantage of market appreciation – something many Coloradans (particularly those living in the Boulder area for the past 20 years) can appreciate. Tenants from rental properties can send cash directly to your IRA account, which you can direct New Direction to either save in your account, or put toward more investments for your IRA. As far as depreciation goes, your IRA can benefit from depreciation as long as the property is debt leveraged. However, depreciation will not effect your personal finances, because the IRA owns the property, not the IRA account owner.

What is New Direction IRA’s role as a self-directed IRA administrator? New Direction does all the bookkeeping and administrative services for your IRA that is required by the IRS in order to keep a buffer between the IRA account holder and the IRA’s funds/assets. Because your IRA is the owner of all real estate investments made with the IRA funds, New Direction signs all contracts on behalf of your IRA, and sends checks from your account at the direction of the account holder. New Direction does not endorse or recommend any assets or asset providers: “We’re not here to tell people to not buy ocean front property in Arizona,” Humphrey joked, “we’re just here to make sure the paperwork is done right.”

You can watch the full podcast on Boulder Property Network’s YouTube site, and read RE/MAX of Boulder's blog about the podcast here. Visit New Direction IRA.com to learn more about how to start investing in real estate with your self-directed IRA today!

Become a First-Time Homeowner, Thanks to Your IRA (Even if You’ve Owned a Home Before)

Patricia McCrystal

July 10th, 2015

There’s no time like this summer to buy your first home. The market is booming, and you’re ready to stop shelling out cash to your landlord and invest in a long-term asset that will belong to you. Plus, you’ll finally be able to paint the walls!

If you have a Traditional IRA account, you may be able to use your retirement funds to finance the down payment of your first home. The distribution age of your Traditional IRA account normally isn’t until you reach 59.5 years of age; withdrawing assets or capital gains before that age can result in taxation and a substantial penalty.

However, IRA account owners are permitted to withdraw money before distribution age, penalty-free, in certain circumstances – in this case, IRA owners can withdraw up to $10,000 for qualified acquisition costs on a home, without paying the 10 percent penalty for early distribution. Qualified acquisition costs generally cover buying, building, or rebuilding your first home, as well as funding most settlement, financing and closing costs.

Since all contributions into your Traditional IRA account are deposited “pre-tax”, you will have to pay ordinary income taxes on the money you take as a distribution. This could potentially bump you up into a higher tax bracket. Additionally, you will no longer benefit from the compounding interest on your account’s lump sum.

Despite these caveats, there are more perks involved with this exemption: you can take distributions from your IRA account for home buyers other than yourself, including persons who are otherwise disqualified to interact with or benefit from your Traditional IRA in any way. Your distributions can be used to cover home buying/building expenses for your children, grandchildren, spouse, parents, mother in law, etc.

Additionally, you can qualify as a first-time home buyer even if you’ve owned a home before. As long as you haven’t owned a home dating back two years prior to (what will be) the closing date of your new home, according to the IRS you’re technically a first-time home buyer.

Using your Traditional IRA account to finance your first home (or in some cases, your second) can be a fabulous perk to regularly and sensibly investing in your IRA. Consult with your trusted financial adviser to weigh the costs and benefits of taking an early distribution to fund your first home. And as always, happy investing!

Titling Your IRA Real Estate Investment: Avoid Missteps to Save Time & Money

To Enjoy IRA Real Estate Tax Benefits, be Mindful of Costly Titling Mistakes.

Patricia McCrystal

June 25, 2015

That modest country cabin nestled down by the lake at your favorite vacation spot has finally been put on the market. It’s a regular fixer-upper, but you know a little love and hard work could transform the property into a beautiful modern getaway for renters year-round.

You plan to use your self-directed IRA to fund the investment so you can enjoy future gains on a tax-deferred basis. You understand this means you (and your family members who count as disqualified persons) will not be able to stay in the lake house; at least not unless you decide to keep the property after you reach the distribution age of your IRA account (for a Traditional and Roth IRA, that’s age 59.5), in addition to paying taxes on the property at distribution.

You contact your self-directed IRA administrator, New Direction IRA, to inform your client representative about your exciting investment opportunity, and to learn more about IRA real estate tax benefits. Although no disqualified people are allowed to be directly involved in the renovation process of the property, you have a friend from college who owns and operates a construction company who you think will be a perfect fit for the job.

In this fast paced market, you need to act soon before you’re outbid. But before you start signing papers, there are specific investment-titling rules that all real estate investors should keep at the forefront of their minds before initiating any transactions. Remaining conscious of the following guidelines will help you avoid common missteps and save yourself a lot of time and money when using your self-directed IRA to invest in real estate.

To start off, your self-directed IRA account must be opened and funded before a transaction can be initiated. You can fund the account with either a transfer, rollover, and/or a contribution. 

Always remember:  you and your IRA are NOT the same thing. Your IRA is a completely separate legal entity from you and your personal finances. By extension, you cannot pay any of the IRA’s expenses, and you cannot sign on behalf of your IRA.

When investing with retirement funds, all paperwork for that investment must reference the IRA as the buyer, not the IRA holder (you) as the buyer. If a form needs a signature, you should write “Read & Approved” in the margins, and then sign next to or beneath this note (also in the margins). You will then upload/email/fax the form to New Direction IRA, who will sign as the buyer or investor of the property. NDIRA also accepts e-signatures from companies like DocuSign and Adobe.

New Direction cannot fund your investment if these guidelines are not followed, and the investment ends up being titled under your personal name and/or social security number. You are a disqualified person, therefore trying to transfer the title of a contract from you to your IRA is a prohibited transaction. Once this mistake occurs, there is no way to change the titling from your name to your IRA, so be diligent in following the proper procedures for IRA investment-titling.

The IRA may partner with another person, entity, or IRA. In partnering, your IRA would own a percentage of the property, and the remaining portion would be owned by someone else. You may partner your IRA with personal funds and/or disqualified persons, but restrictions apply. See NDIRA's website for more details.

When partnering with disqualified persons, the ownership percentage must be kept constant throughout the life of the investment. All expenses and income must be split according to that ownership ratio, and each bill must be paid according to that ratio as well.

Unrelated Business Income Tax (UBIT) applies to profits made as a result of using leverage (loans) to invest in your property. It is your responsibility to calculate, report and pay this tax. However, your CPA or tax preparer may be able to help with the calculation. (Our sister company, IRA Tax Services, can assist as well. Visit www.irataxservices.com for more information on UBIT.)

There are no restrictions on the types of real estate you invest in, where the property is located, or the price and/or market value of the property. In order to have sufficient time for required compliance review and processing, New Direction IRA needs to have all completed paperwork 3 full business days prior to funding.

Although these guidelines are a great introduction into the procedures every investor must follow when investing in real estate with their self-directed IRA, they are far from exhaustive. A complete comprehensive guide to these policies and more details about IRA real estate tax benefits can be found on New Direction IRA’s website. Happy investing!

Real Estate and Investments for Retirement – Your Options

Real estate investing for retirement is becoming more and more popular as housing markets continue to stabilize. But, as with everything involving real estate and investments, you have to do your homework. Not only do you need to do your due diligence in buying and selling properties, but you also need to understand your tax and retirement responsibilities when using real estate investing for retirement.

Holding Your Real Estate Portfolio

Anyone can begin buying and selling real estate and plan on using the money for their retirement. However, without proper tax planning, you can get stuck with large tax bills that eat into your profits. Even if you are only paying the lower capital gains tax rate, you could be growing your real estate investments more tax efficiently in your Traditional or Roth IRA.  Contrary to popular belief, your IRA can invest in almost anything with the exceptions of life insurance and collectables.  Many people utilize real estate as a retirement asset because they know and understand real estate better than they understand the stock or bond market.  However, for someone looking for current income, it may not make sense in all situations to utilize the IRA.  Speak with your financial and tax professionals to determine what is best for your situation and particular asset.

Types of Real Estate Investments

While there are many ways to invest in real estate, the two most common real estate investments for retirement are buying rental properties that produce income and flipping properties in hopes of appreciation. Each type of real estate investment has a legitimate place. It may take a lot more skill and risk tolerance to successfully flip real estate, especially if you are using all of your assets. The amount of risk an investor takes with real estate and investments typically depends on how far away they are from retirement, their experience with real estate and their current mix of retirement asset types. 

Conclusion

If you are just starting out with real estate investing for retirement it can potentially make sense to begin conservatively. Beginning with a rental property that slowly that can produce income and could appreciate in value over time can be a better approach to real estate investing over short-term or speculative real estate transactions. The key to real estate investments is to steadily build wealth while maximizing income potential and taking advantage of tax breaks where you can.  Keep in mind that if you try to get rich overnight you are just as likely to lose everything.  Lastly, remember to perform your due diligence with all investments and to consult your financial and tax professionals.

If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for a free consultation and links to great learning resources. 

Rental Real Estate Investment Education for IRA Investors

Is a rental real estate investment the best option for your self-directed IRA? The answer depends on each IRA investor’s unique circumstance. While some rental real estate investors appreciate they can “touch” their investment, others are stressed by the amount of responsibility that comes with being a landlord. Rental real estate investment education begins with understanding some of the finer points of the transaction before jumping in with both feet. Asking yourself some of the following questions can help you to gain a better understanding of whether or not rental real estate investing within a self-directed IRA is right for you.

·         What is my investment time horizon? Rental real estate is usually considered a long-term investment.  Unlike traditional stocks and bonds, rental real estate as an investment comes with maintenance expenses, taxes, and operating costs that can erode short-term returns.  

·         Does my IRA contain enough liquidity after I make my rental real estate investment? While real estate has the potential to increase in value over time and provide a steady income, certain economic times can make it difficult to rent or sell. Proper rental real estate education encourages investors to look beyond the initial property purchase price and take into account post-closing expenses when calculating necessary self-directed IRA account liquidity, especially if you are nearing the age when Required Minimum Distributions would be necessary.  As all expenses need to be paid directly by the IRA, cash shortfalls should be avoided.

·         Do I fully understand the local rental real estate market I intend to purchase from? Local rental real estate values often fluctuate. Rental real estate investment education for IRA investors often depends on local economic indicators of the specific region an intended investment is located. 

·         Am I prepared to become a more ‘hands off’ landlord?  Many rental real estate investors like the idea and/or the cost saving aspects of performing their own property maintenance and management.  When buying a property inside an IRA you are limited in the kind of services you can provide.  While you can still make managerial decisions (who to rent to, what color to paint the walls), you cannot provide any goods or services to the property which means no ‘sweat equity.’  

If you are considering rental real estate investments within your self-directed IRA, there is no right or wrong answer because it depends on your unique situation. Making time for real estate investment education can help you get started as a real estate investor or help you decide that type of investment isn’t suitable for you. It is always prudent to consult with your trusted tax, legal, and financial advisors to discuss all of your investment options before making a decision. If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for free consultation and links to great learning resources.