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4 Steps to Start Investing in Real Estate with Your Self-Directed IRA

start investing in real estate with your self-directed IRAEstimated reading time: 3 minutes

Self-directed IRAs are the only retirement accounts that allow for true diversification through alternative assets. Among all of the alternative investments allowed in a self-directed account, real estate remains the most popular.

Diverse investment options, tax advantages, and the potential for large, consistent returns continue to bring self-directed IRA investors to the real estate market. Follow these four steps to join their ranks:

  1. Open and Fund a Self-Directed IRA

 With a standard IRA offered by many banks and financial firms, or with a traditional 401(k), you will not be allowed to directly invest in real estate. Only a self-directed retirement account allows for these types of alternative investments.

Once your account is established, it must be funded with the amount necessary to move forward with your real estate investment of choice. If you have an account, you can transfer/rollover funds from an existing retirement account, or you can fund a new account through a contribution.

  1. Analyze Your Goals and Funding

Depending on your goals, there are several ways you can approach investing in real estate with your retirement funds. Here are a few examples:

  • Direct Purchase - Within a direct purchase transaction, your IRA pays cash for the investment property. The title to the property will therefore reflect the name of the IRA account.
  • Partnering - When the investment amount exceeds your investment funds, you are able to partner your self-directed IRA with either personal funds or with other IRA funds. You can also partner with another person’s funds, such as a spouse or parent. Once you decide to end the investment, you then divide costs and earnings according to the amount that each party initially contributed.
  • Leveraging - With leveraging, your IRA is able to use funds to purchase a property with a non-recourse loan and the leveraged property is then held in your retirement account.
  • LLC - Another investment option is to purchase ownership in a limited liability company, or LLC. An LLC provides further tax advantages while at the same time reducing the liability associated with individual partners. Once investing using an LLC, your IRA then holds interest in the LLC or land trust. The title of the property is also held in the name of the LLC. 
  1. Explore Your Investment Choices

Your real estate investment options are truly vast with a self-directed IRA. Taking the time to explore the range of options available to you and considering all of the necessary factors when moving forward with an investment is an important part of the process. Here are just a few choices:

  • Residential real estate - apartments, single- and multi-family homes, mobile homes, condos, etc.
  • Commercial property - office buildings, movie theaters, gas stations, etc.
  • Improved and unimproved land (leveraged or unleveraged)
  • Trust deeds and mortgage notes
  • Real estate options
  1. Direct Entrust to Make the Purchase

Once your account has been established, Entrust will be the third party administrator between you and the assets held within the account.  When you have chosen a real estate investment and investment strategy, you will need to submit a Buy Direction Letter informing Entrust to purchase the investment through your account.

Following the purchase, all expenses associated with the investment must be paid from self-directed IRA funds, and all profits stemming from the investment must flow directly into the IRA for your future use.

As you move forward, take the time to understand the benefits and rules of investing with your self-directed IRA. Make sure you understand the rules associated with your transaction in order to stay compliant with IRS rules. For more on prohibited transactions, click here.

If you have additional questions about real estate investing with a self-directed IRA, please contact us for a complimentary consultation with one of our knowledgable IRA representatives.

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