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.

Real Estate IRA Fees

One of the main reasons people think Self-Directed IRAs aren’t worthwhile is because of the fees associated with them. However, the fees associated with SDIRAs are usually favorable when compared to fees you’d be assessed on an IRA with publicly-traded securities and at any brokerage house.

At New Direction IRA, we disclose our fees up front so account holder know exactly what they will pay and what they are paying for.

Let’s look at our NDIRA real estate IRA fees, which includes FREE online bill pay:

Application Fee: $50 (One time only when an IRA is opened)
Transaction Fee: $250 (Per purchase/sale/exchange of real estate)
Annual Fee Per Property: $295 (Other fee options available)
Bank Wire: $30 (Per outgoing wire)
Overnight mail: $30 (Per mailing)
Outgoing check fee: $10 (Per check we print and mail.)

Compare that to what you’d pay at another IRA or SDIRA provider and you’ll find it’s lower than most and comparable to all. The reason we’re able to keep our fees low is because we base it on the actual work we do—not a percentage. Also, no one at NDIRA works on commission nor do we sell investments so we are really working for you.

Our fees are only assessed when  your account activity necessitates it. In addition, we offer free SDIRA education and our client representatives are on hand to answer your questions and make your IRA acquisition process a smooth one.

With an NDIRA account, you can also enjoy industry-best technology that gives you more bang for your buck with our online client portal, myDirection®. You can make free online bill payments and pay a low, flat annual fee while checking account activity through myDirection®.  There, you can easily and quickly make payments for things like taxes, insurance, HOA fees, and more for free.

Lastly we offer two separate annual fee schedules for you to choose which is most economical for you and your account. One option assesses fees based on how many assets you have in your account while the other bases fees on your total account value. For more information, visit http://www.newdirectionira.com/real_estate_ira.php.

Unrelated Business Income Tax (UBIT): What is it and Why you should embrace it

UBIT may be an indicator of investment profits

If there ever was a subject that will stop an accountant is his or her tracks it is UBIT, which stands for unrelated business income tax. Many investors shy away from certain IRA investments out of fear that UBIT will take out a big chunk of their earnings. But the truth is that these investors are misinformed about the tax.

To start, UBIT was initially placed on some taxpayers to “level the playing field” for certain businesses. The best example of how UBIT is used is for the competition between a non-profit and a for-profit enterprise. The college bookstore sells books to students and others within the structure of their “non-profit” umbrella. The college bookstore, because it is non-profit, is not taxed the same way as a for-profit enterprise. A non-profit does not pay taxes on most operations and therefore can afford to sell books at a lower cost than the for-profit store across the street. Since both the college bookstore and the for-profit bookstore are competing for the same customers, the college bookstore has the advantage of being treated differently for tax purposes and the advantage of this preferential tax treatment may allow the college bookstore to sell their books for less, thus attracting customers away from the for-profit store.

This is where UBIT comes into play. The government has placed a tax burden on the non-profit enterprise for running a business, i.e. selling books, under the main business of running a college. This same philosophy and set of rules is applied to an IRA’s investment in real estate when there is debt related to the purchase of that real estate. So what is bothering the accountants among us?

• The tax rate for UBIT is high, ranging from 26% to 34%.
• Calculation of this tax is, for those not familiar with the rules, complicated.

These issues are resolved, however, when the investor realizes that the tax allows for greater for overall gains because the account is allowed to use debt-leverage. A good Self-Directed IRA provider will be able to clear up any questions about calculating UBIT and make the process easy.

When debating the pros and cons of using leverage within an IRA to purchase an income property, the questions should never be “How do I avoid UBIT?” but rather “How much will the IRA grow using debt leverage and paying UBIT?” and “What is the resulting rate of return within my IRA?” The other due diligence items such as physical condition of the property as well as questions on the ability of the cash
stream to service the loan and pay expenses, including UBIT, should also be taken into consideration.

Dismissing an investment because of the potential payment of taxes should never be a deal killer. Consult with your legal and tax advisors regarding investments involving potential UBIT within your IRA.

For information or videos about UBIT and other self-directed IRA issues, visit www.newdirectionira.com.

Purchasing a vacation home with your IRA/401k plan

Summer vacations are the perfect time to find a dream home in the perfect location. Today’s investors sometimes need clever solutions for affordability, so it’s important to be aware of all of the available investment tools. One such tool is the self-directed IRA. Did you know that your IRA/401k funds can be used to buy real estate? Let’s look at some of the options available for purchasing a second home with IRA funds:

1.    Vacation home is purchased and held in a self-directed IRA for investment purposes only.

This scenario is the simplest. Existing IRA or 401k funds are used to fund the investment account. The IRA directly owns the property and receives special tax treatment by the IRS.

PROS:  If you love this home and this area, chances are others will too. Vacation homes in desirable locations can be valuable investments. The property may be rented out to vacationers and earned income grows tax-deferred or tax free in the IRA. Many investors also enjoy holding hard assets like real estate in addition to or instead of paper assets as part of their portfolio.

CONS:  You cannot personally use any real estate owned by your IRA account. This second home would be purely for investment purposes. The IRA must pay all expenses associated with the vacation home.

IMPORTANT CONSIDERATIONS:
Compare the return on investment for the vacation home, whether from rental or resale to the return on investments currently held by your retirement account. If cashflow and/or returns on the vacation home are higher, it is probably worth looking at the investment as a potential option for your IRA/401k plan. 

2.    Buy the property now and plan to live there after you retire.

Up to age 59 ½ this option would work identically to Option 1 above. At age 59 ½ you can elect to take a percentage (up to 100%) of ownership in the IRA-owned property in lieu of cash distributions from the IRA. Once you have distributed 100% ownership, you are permitted to use the property as a vacation or primary home.

PROS: Purchasing the property now protects your ability to own the property at retirement. As real estate in popular resort areas continues to rapidly rise, you will have locked in your price at today’s cost.

CONS:  This strategy requires patience. You cannot personally use the property until you have distributed 100% ownership after age 59 ½.

IMPORTANT CONSIDERATIONS:
Taking the property distributions can take time. Talk with your advisors and make sure that you are willing to wait the necessary time.


3.    Secure a mortgage using your IRA and make mortgage payments via IRA distributions using the 72t exemption, which eliminates the 10% early withdrawl penalty.

This scenario is the most complex and will require consulting with a team of professionals to execute properly.  Essentially, the IRA invests in an annuity or other investment with guaranteed payments or stable cashflow.  As money flows into the IRA account from the annuity or other investment, payments are received as a distribution (without penalty) by the IRA holder. These distributions are used to pay the mortgage on the second home, which is held directly by the individual, NOT by the IRA account. Contact our office for a follow-up consult or for a report on 72t exemptions or visit 72t.NewDirectionIRA.com

PROS: You can begin using the property immediately as it is owned directly by you. This strategy provides investment capital for investors with IRA balances that are larger than personal cash savings.

CONS: Investor must be 59 ½ or older in order to take advantage of a 72t exemption. Since the property is owned directly by you and not the IRA, you lose all of the tax advantages of IRA-owned properties.  As a result, taxes apply to the sale of the property as well as the rental income. Income tax is paid on the distributions used to pay the property mortgage.

IMPORTANT CONSIDERATIONS:
You must already have enough wealth to create the annuity providing guaranteed payouts substantial enough to pay the property mortgage.

Buying property using an IRA/401k not only provides critical investment capital, it also has associated tax advantages.

Land in an IRA

More and more investors have been turning to real estate as a way to diversify their retirement portfolios.  Everything from pre-construction condominiums and rental properties to rehabs and lease options are being held inside of IRAs and 401(k) plans. With larger contribution limits and more than $3 trillion currently in retirement plans, investors are now able to look outside the realm of stocks and mutual funds into assets such as real property. Though investors continue to become more sophisticated in their real estate transactions, undeveloped land remains a clear-cut favorite among IRAs and other retirement plans. The simplicity of raw land provides investors with the opportunity to diversify into real estate, without the headaches of upkeep. 

The obvious upside to adding real property to a retirement plan is diversification.  Real estate has long provided investors a way to offset fluctuations in the securities market.  Over the years, millions of investors have utilized this diversification strategy in their personal portfolios, yet only recently have they started implementing this method within their retirement plans.  One of the reasons why less than 3% of all retirement funds are being invested in real property is the “idea” that managing the asset is difficult.  An attractive attribute to land, is its simplicity.   Land truly provides investors with opportunity to take part in the real estate market, without the headaches of upkeep and unforeseen expenses. 

Keep in mind that when a retirement plan holds a piece of real property, all the expenses involved must be paid for by the plan. Simply put, if an IRA owns a rental property, then the IRA must pay for all of the repair and upkeep of that unit. Investors who self direct their retirement plans into assets like real estate will have to be more involved than those who just turn their accounts over to a Brokerage house. 

However, raw land offers a low maintenance way to invest in real estate.  Land has only one relatively predictable expense in annual property taxes. Of course you could lease out your land to a farmer or a timber company and there may be additional expenses.  But for most parcels of land, property taxes are the only expense.  An investor can diversify part of their retirement portfolio into a parcel of a land and not have to worry about any unexpected repairs or cost. 

Any economist or financial advisor will tell you appreciation is driven by supply and demand.  There is a simple truth when it comes to land—there is only so much. The supply is somewhat fixed, especially when it comes to desired land around mountains, waterways and growing metropolitans.

The goal of a retirement plan is to build up your own nest egg through wise investments.  Diversification is the key to any successful portfolio.  Understanding all of your investment choices will only make you a smarter investor.  When it comes to diversifying into real estate, raw land is about as close to a mutual fund as you will find.  It’s an asset that can be purchased and held for the long term, without the worry of unexpected repairs or expenses.  Whether it’s a lot in a planned development near Destin, Florida or a large track of farm land outside of Topeka, Kansas; land provides a simple way to diversify a stock heavy portfolio.