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!

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!

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. 

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.

Real Estate IRA Key Strategies

Many self directed IRA investors have purchased real estate and for good reasons. Real estate is a tangible asset that most people have had experience with, either through purchasing their own home or working as a real estate professional. Real estate is also an asset which rarely loses its entire value, unlike some investments which have that potential downside.  While real estate is a very accessible asset, investors do need to be mindful of the various strategies when it comes to investing with their retirement funds. Knowing these strategies can help you achieve your retirement goals.

IRAs can invest in many types of real estate, from commercial office buildings to single-family residences to farm land. Deciding what type of real estate you want to invest in is the first step to forming your real estate strategy. Your personal expertise, along with your ultimate goal for your IRA-owned real estate can help you make this determination. For example, an account holder with experience in owning rental property wants to retire in Hawaii. This investor may decide to use their IRA to purchase and rent out a single-family home in Hawaii with the goal of taking the property as a distribution upon reaching retirement age. 

After deciding what type of real estate to purchase, the account holder will need to decide how to fund the purchase. The most straightforward method of purchasing property is for the IRA to pay for the property outright, however if the account does not have the full purchase price there are options. The IRA can decide to partner with another IRA, with the IRA holder personally, with another person, or with an entity such as an LLC. If a partnership is not an attractive strategy for you, your IRA can apply for a non-recourse loan to fund the purchase. These loans are not personally guaranteed and, as such, often have higher interest rates and require a larger down payment than loans that have a personal guarantee. A real estate purchase can also be made through investing in an entity. This strategy usually sees multiple IRAs and/or other investors buying into an entity which then purchases a property.

Another strategy involves how the property will generate returns for the IRA. The real estate may be rented out with the IRA collecting monthly rental income, or the property may simply be left to appreciate in value. While the real estate is in the account, the IRA holder and their disqualified persons cannot personally use or perform any improvements on the property.

Once you reach age 59.5, you are able to take distributions from your IRA without the 10% penalty. This milestone presents the opportunity to strategize how the real estate will be distributed from your account. One option allows the account holder to distribute the entire property in-kind by retitling the deed from the IRA to the account holder personally. At this point, you are free to use the real estate as a primary residence or vacation home, or you can choose instead to continue renting the property and personally collect the rental income. If the property was purchased with a Roth IRA, you will be able to make a qualified distribution of the property without having to pay taxes on that distribution.

You may elect instead to take cash distributions out of the IRA. If the property is rented it can be left in the IRA and the account holder may instead distribute the rental income as needed. Another option is to sell the property and take the cash proceeds of the sale as a distribution.

Self directed IRA real estate investing is becoming more and more popular. While real estate is an asset that many account holders are familiar with, knowing and understanding the many strategies associated with this investment can help you make the most of your retirement.