Financial Poise
Invest in real estate with a self-directed IRA

5 Steps to Investing in Real Estate with a Self-Directed IRA

A Beginner Guide to Using a Self-Directed IRA to Invest in Real Estate

Retirement is a daunting process for most people because they don’t know how much retirement living expenses will be and for how long their retirement fund will last. Investing in a real estate with a self-directed 401(k) or self-directed IRA during your senior years makes sense, because it serves as an additional revenue stream—a passive income that you can enjoy with certain tax benefits.

Using a self-directed IRA to invest in real estate also helps in diversifying your investment portfolio. Generally, investments are limited to buying stocks and bonds, but a real estate investment gives you another source of income and provides financial protection during economic fluctuations.

What is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA)  is an individual retirement account that gives you the freedom of investing in alternative assets beyond stocks and bonds, including real estate, precious metals, franchises and private equity. The IRS regulations state that either a custodian or a qualified trustee has to hold the IRA assets on behalf of the IRA account holder.

The first step to investing in real estate with an IRA is to set up a self-directed IRA.

Due to the complex nature of self-directed IRAs, you might want to consult with a financial advisor who has the experience of managing investment deals for self-directed IRAs.

Brokerage firms serve as custodians for several types of IRAs, but not all offer self-directed IRAs.

Self-directed IRA custodians are mostly banks and trust companies. However, they differ from each other,depending on the type of investments they manage. So you’ll need to shop around.

Keep in mind:

  • Some IRA custodians have complicated fee structures. Therefore, before you select the custodian, ensure that you do your homework and determine the potential fees and expenses that will impact on your investment.
  • Once you find a custodian, you can open an account and contribute money to it, just as you would with any other IRA.

Get started with a self-directed IRA in 5 steps

1. Identify Investment Potential

Consult with your financial advisor to figure out if using a self-directed IRA to invest in real estate is the right way to go about it. The financial advisor will perform due diligence on all alternative assets to make sure you are making the right choice.

2. Request Funds from the IRA and Direct Your Investment

Before you invest in real estate, you have to fill out a Direction of Investment (DOI) form.

3. Process the Investment Through the Custodian

Your IRA custodian will process the investment as per the instructions outlined in the DOI form. Once the purchase is finalized and closed, the IRA will become the title owner of the asset.

4. Manage Your New Investment

You have to remember that all IRA-owned investment expenses have to be paid from the IRA. Also, all income generated by the investment has to be returned to the IRA.

5. Plan Your Next Move and Your Exit Strategy

You are in control of how you move ahead with your account. If you want to sell or lease your asset, you can instruct your custodian to carry out the process. If you choose to sell the asset, the asset will be taken off from the self-directed IRA and replaced with the proceeds of the sale.

Benefits of Using a Self-Directed IRA to Invest in Real Estate

Increased Potential for Growth

A self-directed IRA allows you to invest in alternative assets. This means you have increased flexibility in terms of the amount of risk you can take and the potential for a higher ROI.

Control of your own financial future

With a self-directed IRA, you are in charge of your own financial future. With a little help from your trusted accountant, you can make the right financial decisions to meet your retirement needs and goals.

Minimize risk

Investments in stocks are great, but the market can be volatile. The best way to minimize risk is by diversifying your portfolio. The ability to invest in real estate can help create a well-balanced portfolio while capitalizing on investment opportunities.

Key Takeaways

Here are a few key takeaway points that you should consider before investing in real estate with a self-directed IRA:

  • A self-directed IRA has numerous tax benefits with the freedom to invest in alternative assets.
  • A self-directed IRA can be complicated, especially when it comes to the rules and taxes. Therefore, take the help of a trusted financial advisor.
  • With a self-directed IRA, you can increase the potential for growth, take control of your financial future, and protect against economic fluctuations.
  • If a self-directed IRA is the right retirement account for you, begin your journey towards increased wealth, cost savings and tax benefits with your trusted financial advisor.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinar series: Real Estate Investing 101.]

©All Rights Reserved. October, 2020.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

Like what you just read?

Then sign up to receive our weekly Financial Poise newsletter, our take on the most relevant and topical business, financial and legal issues affecting investors and small business owners.

Always Plain English. Always Objective. Always FREE.

About Rick Pendykoski

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.

View all articles by Rick »

>