The Real Estate Developer Guide to Creative Real Estate IRA Investing

While many people want to use the power of a self-directed IRA for real estate investing, they often feel they can’t get started because they don’t have enough money in their plan. Thankfully, there are several creative ways to bring your real estate transaction to fruition even when your situation is less than perfect. Even if you are low on funds in your self-directed IRA you can still become a real estate investor. You just need to use some creative real estate investing techniques. While the IRS does have strict rules for self-directed IRA’s, it still allows for considerable flexibility in growing the plan’s assets.

Partner Up Instead of Going Alone

There is nothing to stop you from partnering with someone else when making self-directed IRA real estate investments. While you on your own may not be ready to become a real estate developer, there are many opportunities waiting for your investment. You can go in jointly with other IRA plans, investors, or even invest with companies that in turn invest in real estate. You can even partner with disqualified persons that you otherwise could not perform transactions with. Together you can jointly own property. Creative real estate tactics like partnering with others also gives you the chance to learn from more experienced investors. The rules governing IRAs require that you only pay fees and costs of the investment in proportion with the plan’s percentage of ownership in the property and receive the same percentage of the profits. If you are a 10% owner, your self-directed IRA must pay 10% of the fees and costs and receive only 10% of the profits.

Leveraging the Property

If you find yourself with a cash shortfall and no partners, you IRA could potentially take out a mortgage to increase purchasing power.  The IRS does allow you to leverage plan assets so long as it is not for personal use and the money is used to acquire further investments for your self-directed IRA. The best practice is to get a non-recourse loan, one that uses the property as collateral and keeps the lender from coming after you, your other assets, or the assets of the IRA in case of default. While these loans are more difficult to locate and acquire, for the creative real estate investor, they are still available.  It is important to note additional taxes may apply on the portion of profits derived from using leverage. 

Conclusion

Don’t let the idea that you don’t have enough money in your self-directed IRA keep you from starting your path as a real estate developer; you have options. Creative real estate investors can even transfer money from old 401(k) plans as well as employ other strategies such as investing in real estate related notes to grow their portfolios.  Start getting creative! 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 Investing and IRA Prohibited Transactions

Using your self-directed IRA to hold your real estate investments can be an excellent way of both sheltering the investment from taxes and funding your retirement. The IRS gives some tremendous tax advantages IRAs; however, because of the advantages given they do ask you to follow their rules. The most common danger is inadvertently executing a prohibited transaction.  By learning what to avoid, you can safely and efficiently use real estate to grow your retirement account.

Disqualified Persons

A disqualified person is simply a person or entity the IRS doesn’t allow your self-directed IRA to have transactions with. The most common examples of a disqualified person are you, the IRA holder, your spouse, your parents, your grandparents, your children, your grandchildren or spouses of your children or grandchildren.  A disqualified person can also be a company or partnership that is owned or controlled by a disqualified person.  If you or another disqualified person will directly or indirectly benefit from the investment property you wish to hold in your self-directed IRA, you may want to reconsider the investment as a prohibited transaction is more likely to occur.

Types of Real Estate Prohibited Transactions

Common examples:

·         Holding a second home or vacation property within your self-directed IRA that is personally used by a disqualified person for any length of time.

·         Purchasing a rental property for a disqualified person to live in even if they pay rent to the IRA.

·         Using real estate in your IRA to secure a personal loan for you or another disqualified person.  

·         Lending money from the IRA to a disqualified person for a down payment on a home or other home expense.

·         Buying or selling a property between the IRA and a disqualified person.

·         A disqualified person performing maintenance, repairs or providing other ‘sweat equity’ on property owned by the IRA.

·         Paying an expense incurred by the IRA owned property out of personal funds.  Applies to all disqualified persons.

·         Personally collecting rents on behalf of the IRA and then ‘reimbursing’ the IRA.  All income needs to go directly to the IRA.

Conclusion

A self-directed IRA is a powerful tool for real estate investors. If the rules are followed you will benefit from the traditional tax advantages IRAs offer.  Understanding the rules regarding prohibited transactions and disqualified persons will allow you to avoid making a costly mistake and be able to grow your investments in a tax efficient manner.  If you have questions about a specific scenario, please reach out to a member of the New Direction IRA staff for clarification.

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 Investing with a Self-Directed IRA Custodian

Once an investor considers holding real estate in his or her IRA, it is important to take the first step and discover whether or not the current IRA custodian will even allow real estate to be held as an investment. Often, investors must move to a self-directed IRA custodian because their current provider either will not work with real estate or has little experience with holding real estate in an IRA. The name self-directed IRA can be a little confusing because many traditional brokerage custodians offer a “self directed IRA” for investing. The trick to comparing providers is finding out if their plans are only eligible for investments into securities like stocks, bonds, and mutual funds. The key is to find an IRA custodian that will handle real estate and other alternative investments. New Direction IRA provides real estate investors with plan options that make real estate ira investing easier than most. 

It is incredibly important for any self-directed IRA real estate investor to understand that choosing an experienced IRA custodian, large or small, can have a major impact on investment outcomes. Some qualities to look for in a capable self-directed IRA custodian:

• Size does not always matter. When it comes to self-directed IRA custodians, working with a large investment company does not mean that company has any experience managing self-directed IRA real estate assets. Look for a company that specializes in what you’re looking to accomplish.
• They have a firm understanding of IRS rules and are willing to educate you. As an example, a capable self-directed IRA custodian should be willing and able to explain IRS guidelines and help you learn about the processes, timelines, and tax implications of making real estate investments in a variety of structures. 
• Client Service is more than just a sales hook. Real estate investing with a self-directed IRA custodian is generally a do-it-yourself approach, requiring that you make decisions and execute actions. Finding a self directed ira custodian that offers great client service can make a world of difference because your investment instructions to the custodian may be processed slowly or not at all if client service isn’t up to par. Find out if you receive a dedicated representative when opening your self-directed ira for real estate investing. 
• Technology is important but not common. The self-directed IRA industry has historically been behind the times from a technology perspective and many still use paper forms to complete administrative actions such as paying real estate related expenses. Finding an IRA custodian that offers competent technology is an important consideration. Do they offer online form processing, free online bill pay, or real time communications for pending transactions? The paperwork process involved in real estate investing is intensive and it’s important that technology be leveraged to make sure all parties are constantly on the same page. 
• Will they save you from yourself? Self-directed IRA real estate investing comes with an entire playbook of rules. Sometimes investors make decisions that unwittingly go against these rules and are hit with penalties if audited by the IRS. Choosing a self-directed IRA custodian that will recognize prohibited transactions before they happen is incredibly beneficial.

At New Direction IRA, we encourage anyone considering a real estate investment within a self-directed IRA to reach out and discuss any questions with our knowledgeable staff. We’re happy to take the time if you call us at 877-742-1270.

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.

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.