Did you know you can buy investment property using your IRA? In this article I’ll show you how to use a Self Directed IRA to invest in real estate using money you already have in your retirement account. I’ll give you insights on my own personal experience investing in real estate with my Self directed IRA that I set up a few years ago.
I’ll also hook you up with some good resources to find out more, and even set up your own Self Directed IRA.
I Wanted an Alternative Investment
If you’re like me, your investments didn’t do well because the stock market crashed. Then it took years to get back to where it once was. I also had the difficulty of my income getting slashed almost in half during that time along while also paying cash for my wife’s two college degrees.
It was very difficult to put any new money into my investments during those years. And with stocks doing poorly I wanted to find alternate ways to invest money I already had.
I had wanted to get into real estate investing for a long time but didn’t know how. I didn’t want to go into debt to buy real estate, but also didn’t have the cash available to just go out and buy a house.
After doing some research, I found out about Self Directed IRA’s.
What is a Self-Directed IRA?
Here's what Wikipedia has to say about it: “A self-directed Individual Retirement Account is an Individual Retirement Account (IRA), provided by some financial institutions in the United States, which allows alternative investments for retirement savings. Some examples of these alternative investments are: real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property.”
How Does a Self Directed IRA Work?
A Self Directed IRA is simply a different way of setting up your IRA retirement account that converts your existing account into an LLC (a Limited Liability Company). Once your LLC is set up, you purchase investments through the LLC.
Setting up your IRA as an LLC allows you to invest in alternative investments such as real estate, businesses, franchises, tax liens, private placement stock, loans, mortgages, cryptocurrencies, and other investments that are usually prohibited under traditional IRA rules.
The vast majority of people who have a self directed IRA use it to invest in real estate.
By the way, you can also set up a Self Directed Roth IRA or Self Directed 401k in much the same way.
What Are The Advantages of Buying Real Estate With a Self Directed IRA?
Converting your standard IRA to a Self Directed IRA account works to your advantage because it allows you to diversify your investments beyond the usual limited choices of stocks, bonds, and mutual funds.
You can invest in real estate that appreciates over time, plus collect rental income that feeds directly back into your IRA account to be used for additional investing.
The biggest advantage though, is that you have more control over your investment destiny. You have myriad more investment options than the typical list of stock or bond funds within your average retirement account. Best of all, you have total control to choose the investments you want!
Whether you invest in real estate, gold, tax liens, businesses, cryptocurrencies, mortgages, loans, or whatever else, you have the freedom to choose how to invest your money.
Disadvantages of a Self Directed IRA
Just like a typical IRA retirement account you can’t take money out for your present benefit without paying taxes and penalties (Your tax rate + 10% penalty). And just like a regular IRA, you can’t start taking money out without penalty until age 59 ½.
Another disadvantage is that Self-Directed accounts can be a little complicated to understand. There are a lot of rules you need to be aware of. If you violate any of these rules, the result will be taxes, penalties, and probable dissolution of your account.
When I opened my account, it took me a while to wrap my brain around all the rules. However, now that I understand them, it's not too hard to stay out of trouble.
No Self Dealing
You cannot use your investments to your immediate advantage. For instance, if you buy real estate through your Self-Directed investment account, you can't live in the home yourself or rent it out to an immediated family member.
If you invest in an income generating asset such as real estate or dividend paying stocks, you can't use thatrental or dividend income. It has to stay inside the investment account.
For instance, I have a rental property in my Self-Directed IRA. My tenant pays her rent every month, and it gets deposited into my account. I cannot use that rental income for my personal expenses.
However, I can use that money to maintain the rental property and pay all expenses associated with it through the account. I also reinvest the monthly rent into stocks and mutual funds. Eventually, I plan to buy more real estate as the money in my account continues to increase.
Some Investments are Off Limits
Even though you have the freedom to invest in alternative assets, there are still a few that are off limits. The IRS prohibits investments in life insurance, collectibles (artwork, antiques, rugs, beanie babies, etc.), gems, stamps, most coins, most metals, alcoholic beverages, and most types of tangible personal property.
How to Set Up a Self Directed Retirement Account
Setting up a Self Directed IRA account can be a bit complicated. It’s probably not the best fit if you're disorganized or not willing to gain total understanding of how it works.
Setting it up is not cheap, either. The typical fee for setting up a Self Directed account usually range from a few hundred to a few thousand dollars. Prices for setting it up vary from company to company, and it's becoming cheaper and easier to do as time goes on.
This is due to the amount of paperwork and fees involved in setting up the LLC. There is also time spent consulting with the professionals that set everything up for you. They spend a lot of time guiding you through the process to make sure you understand every detail.
There are a lot of rules you have to be aware of with a Self Directed IRA. But once you understand what kinds of transactions you should avoid, it’s not that complicated.
My Self Directed IRA Experience
My own experience with a Self Directed IRA so far has been a very positive one. A few years ago , I used my Self Directed IRA to purchase and flip a property for a nice profit. Not long after that flip, I bought another house and have been renting it out for the last few years.
My rental house brings in steady income that I reinvest in mutual funds to get more return on my money. You can learn more about my real estate investing experiences at the links below:
Building My Real Estate Empire
As the rental income builds up my investment account over time, my goal is to buy a second rental house. It'll take a few years to build up enough cash to buy my next house, but I’m definitely willing to wait!
Once I have two rental houses bringing in a steady income, it will take a shorter amount of time to save enough to by the next one. Over time that investment cycle speeds up even faster until I’ve built a real estate empire using cash only!
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Debt Free Real Estate Investing
In my situation I could not have invested in real estate any other way. I didn’t want to take out a mortgage to make an investment, because I wanted to remain debt free. I didn’t have enough free cash outside of my retirement accounts to invest in real estate. But I did have enough cash in my IRA to pay cash for the rental house that I currently own.
If you choose, you can use your Self Directed IRA together with a mortgage loan to do the same thing. However, I believe using cash to invest in real estate is the best route by far.
I Took Control With a Self Directed Retirement Account
So, in the end, I believe that a Self Directed IRA has been a great advantage for me. I was able to start taking control of my destiny (for better or worse) and start building my future one house at a time.
A Self Directed IRA is certainly not for everybody. But if you want more control over your investing destiny, it can be a good alternative to the traditional IRA.
If you’re interested in learning more about Self Directed IRA accounts, just Google “Self Directed IRA” and you will find sites for many specialists that deal specifically with these types of accounts and whom I’ve found are ready and willing to answer any questions you might have.
Happy Investing!
Great article! Good news about changes in the self-directed IRA industry, though: It no longer costs several thousand dollars to get started. In fact, many of them charge establishment fees of under $100 at this time, as competition has been the friend of consumers again. Thanks for a great post!
Bryan Ellis
https://SelfDirected.org
Thanks Bryan, it’s good to know that it’s not so expensive to get started these days. I may have to convert some of my other accounts to Self Directed now that I know that!