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

Using a Self-Directed IRA to Invest in Real Estate

Most people find retirement daunting because they don’t know how much their living expenses will be or how long their retirement fund will last. Investing in 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 and passive income that you can enjoy with certain tax benefits.

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

What Is a Self-Directed IRA?

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

The first step to investing in real estate with an SDIRA is to set one up. Due to the complex nature of SDIRAs, you will want to consult with an experienced financial advisor. Brokerage firms serve as custodians for several types of IRAs, but not all offer SDIRAs.

 SDIRA custodians are primarily banks and trust companies. However, they differ from each other based 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, do your homework and determine the potential fees and expenses that will impact your investment. Once you find a custodian, you can open an account and contribute money like any other IRA.

Getting Started in 5 Steps

1. Identify Investment Potential

Consult with your financial advisor to determine whether using an SDIRA to invest in real estate is the right approach. The advisor will perform due diligence on all alternative assets to ensure you are making the right choice.

2. Request Funds from the IRA and Direct Your Investment

Before investing in real estate, you must fill out a Direction of Investment (DOI) form.

3. Process the Investment Through the Custodian

Your IRA custodian will process the investment 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 the investment generates must 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 removed from the SDIRA and replaced with the sale proceeds.

Benefits of Using an SDIRA to Invest in Real Estate

Increased Potential for Growth

An SDIRA allows you to invest in alternative assets. This means you have increased flexibility regarding the amount of risk you can take and the potential for a higher ROI.

Control of Your Financial Future

With an SDIRA, you are in charge of your financial future. With your trusted accountant’s help, 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

With an SDIRA, you can increase your growth potential, control your financial future, and protect against economic fluctuations. While an SDIRA has numerous tax benefits, with the freedom to invest in alternative assets, it can be a complicated investment tool, especially regarding regulations and taxes. Therefore, it is critical to consult a trusted financial advisor before making any changes.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Property/Business Interruption and Cyber Liability
2. Asset Sales in Receivership
3. Where Did All My Profits Go? Mastering the Concept of Working Capital

This is an updated version of an article originally published on October 15, 2020.] 

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