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!

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!