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. I’ll also give you insights on my own personal experience investing in real estate with a Self directed IRA.
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 Alternate Investment
If you’re like me, your investment 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.
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.
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). 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.
However, there are some investments that are prohibited even under the Self Directed IRA account rules, such as collectibles (Art, Beanie Babies, coins, etc.), Life insurance contracts, as well as any investment that would be considered self dealing such as buying a house and renting it to yourself.
Here's a thorough guide to Self Directed IRA's with all the details.
By the way, you can also set up a Self Directed Roth IRA and Self Directed 401k in much the same way.
What Are The Advantages of Buying Real Estate Witha Self Directed IRA?
Converting your standard IRA to a Self Directed IRA account can work 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 more investing.
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). Also, you can’t start taking money out without penalty until age 59 ½.
The biggest advantage though, is that you have more control over your investment destiny. You'll have many more options than the typical list of stock or bond funds within your average IRA account.
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Setting Up a Self Directed Account
Setting up and administrating a Self Directed IRA account can be a bit complicated. It’s probably not the best fit if you're disorganized or you’re not willing to put in time to gain total understanding of the concept.
Setting it up is not cheap, either. The typical fee for setting up a Self Directed account usually comes to a few thousand dollars. 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 aproperty 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 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 IRA
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.
Self Directed IRA Resources: