Make Money in Real Estate Using a Self-Directed Real Estate IRA

Have you ever wondered how people make money in real estate? While late night TV is filled with dozens of “get rich quick” real estate schemes, each one of these “new real estate secrets” are actually variations on the two most common strategies professional real estate investors use to make their money. Savvy investors know how to produce returns but they also know how to protect their investments. Because of the powerful tax benefits, holding real estate investments within a self-directed IRA account has the potential to produce above market returns. 

Strategy One: Rental Income

The first way many investors make money in real estate is to own property and have others pay them for using it. This could be residential property like a rental home or an apartment building. This could be a commercial building like a strip mall or office building. Even undeveloped land can be “leased” in the sense that others pay to exploit certain rights like water or mineral rights.  Erecting a mobile phone tower on vacant land is another way to get income from property. The key is to make more money in rent that you have to pay out in costs like property taxes and mortgage payments. Self-directed IRA’s can hold property that is rented to others. This allows the money to grow on a tax-deferred basis.

Strategy Two: Appreciation

The second strategy to making money in real estate is appreciation. This is the oldest way to make money at anything, buy low and sell high. Of course, real estate doesn’t always keep growing in value. You need skill to spot bargains and possess the wisdom to see future trends. Once again, a self-directed IRA is an excellent way of allowing your investments to grow instead of getting slowly eaten away by taxes. You can buy and hold properties in your self-directed IRA and if you want or need to sell a property, you can defer the income taxes on the sale. Generally speaking, taxes are only paid when a distribution is taken from the IRA; although certain taxable situations may apply when real estate assets are leveraged. Feel free to call our office if you’d like to learn more about this unique situations. 

Conclusion

Many successful retirees have used a combination of both methods to make money in real estate through self-directed IRA’s. They have bought rental properties that paid for themselves. The IRA held the property while it gradually appreciated and the wise investors eventually sold the property for a big cash payout, all while the profits grew in a tax deferred self-directed IRA.  Find the strategy or combination of strategies that works best for you and start taking control of your retirement. 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.

Using a Real Estate Self Directed IRA to Make Real Estate Income

Creating real estate income is something many investors have come to view as a basic portfolio ingredient. Whether you are in the accumulation phase or retirement phase of your life, betting on the paltry bond market for income has become frustrating at best. Many investors do not want to expose their portfolios to the risk of a volatile stock market either, though. Thus, many turn to real estate as a source of retirement income and historical capital appreciation. What many investors do not understand is that by holding real estate in a self-directed IRA, investment returns can be sheltered under the tax-advantaged umbrella associated with retirement plans. A self directed IRA removes one major real estate profit loss – taxes on capital gains. 

However it also shelters rental income by allowing you to distribute funds on a more precise basis from year to year. Until the age of 70.5, you determine when and how much is distributed from your IRA. Here are a few questions to consider before purchasing rental property outright:

·         Am I able to manage the property myself and be “landlord”? It’s perfectly acceptable for an IRA holder to manage their own rental property however there are certain limitations that apply. You may act as “landlord” but only from a decision making capacity. Any repairs or improvements made to the property must be contracted to non-disqualified parties and paid for by the IRA in proportion to ownership. 

·         Does my IRA have a large pool of available liquidity? Many investors gravitate toward their IRAs as a way to tap a large amount of cash, which lends itself easily to cash purchases of real estate.  If your IRA is highly illiquid, or if the liquid portion isn’t sufficient to purchase property outright, you may need to consider other strategies such as financing through a non-recourse loan or partnering your IRA funds with another entity. 

·         Is my plan to rent or lease my real estate to the general public? If you intend to live in a rental property and directly benefit from the space or lease out your real estate to a close relative, the transaction is considered prohibited and cannot be executed in an IRA. Any real estate income received under the qualified umbrella of an IRA must be from a disinterested third party. 

Holding real estate in a self-directed IRA gives investors the ability to own all types of real estate. If all goes as planned, your ability to generate regular, long-term real estate income during retirement will be greatly enhanced by the substantial unrealized gains achieved through years of tax-deferred growth. 

Not all IRA providers are created equal and the vast majority have no experience whatsoever with self-directed IRA real estate transactions. New Direction IRA encourages any investor considering a self-directed IRA to increase real estate income during retirement to weigh all options carefully. Our team of IRA specialists are here to help and answer any questions you have.

Ways to invest in Real Estate with your IRA

When investors say they want their IRA to invest in real estate, that can mean many things. While most account holders think of real estate investing as purchasing rental homes, Self-Directed IRAs can participate in real estate in a number of different ways. Knowing and understanding the vast array of options can help you make the best decision possible for your retirement goals.

The most common means of investing in real estate with a SDIRA is for the account to purchase and own property outright. This is usually done by account holders who are able to fund the full purchase price of the real estate from their account or apply for a non-recourse loan. If your account does not have enough funds to purchase a property outright, and you do not wish for your IRA to take out a non-recourse loan, there are several options available. Your IRA can partner with other entities, such as other IRAs, the account holder’s personal finances, other individuals, or a company(LLC, C-Corp., etc.), to fund the purchase of the real estate. The IRA would then be considered a “tenant-in-common” with the other entity or entities.

SDIRAs can also invest in real estate indirectly. Your account can buy private stock in an entity which purchases and owns real estate. Another available option allows you to make real estate loans via promissory notes to individuals or entities to purchase property. SDIRAs allow you to use your expertise and experience to make the real estate investment that is right for you.

An SDIRA can offer the flexibility of investing in all different types of real estate. Your IRA can purchase residential real estate, from single-family homes to apartment buildings. If you are more familiar with commercial real estate, you can use your expertise to invest in office buildings and other properties. If your background lies in agriculture or development, your IRA can purchase farm land or raw land.

One of the final variables in real estate investing involves your overall strategy for the property once it is acquired. This is one more area in which you as the SDIRA holder have many options. The property can be acquired and rented to tenants to generate rental income for the IRA. The account holder may also buy real estate to fix-and-flip or fix-and-hold properties in need to improvements. Real estate can be purchased for wholesale, raw land may be developed, and properties can be held for appreciation in value.

For individuals who want to incorporate real estate investing into their retirement plan, a Self-Directed IRA can provide a wide range of possibilities. From purchasing rental property to developing raw land, your SDIRA allows you to use your expertise and decide which real estate strategies are the best for you. New Direction IRA is here to offer the education and resources that can help you make the best decisions for your retirement investing.