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For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.

When a Roth IRA Meets Real Estate Investing

When a Roth IRA Meets Real Estate Investing

Reading time: 5 minutes

Imagine combining the benefits of real estate with the potential for tax-free growth. Thousands of Entrust clients have done exactly that by investing through their Roth IRA.

In this blog post, we’ll explore benefits of this investment strategy and a few potential drawbacks to consider. Keep reading to find a step-by-step process for you to build out your real estate portfolio and set yourself up for tax-free withdrawals in retirement.


Table of Contents


What is a Self-Directed Roth IRA?

Established in 1997, Roth IRAs quickly became a pivotal part of retirement savings strategies across the United States.

While traditional IRAs offer the potential for tax-deductible contributions and tax-deferred growth, Roth IRAs provide tax-free growth and withdrawals during retirement. This feature is particularly appealing to investors anticipating higher tax rates in their future.

Many investors believe these accounts can only hold stocks, bonds, and mutual funds. In fact, Roth IRAs can hold any asset the IRS allows, including residential and commercial real estate.

All you need is a self-directed Roth IRA (Roth SDIRA).

This type of investment account empowers you to channel your retirement funds into alternative assets like real estate. This approach combines real estate’s potential for substantial returns with the tax-free growth that comes with a Roth IRA.


Roth SDIRA Real Estate Investment Options

With a self-directed Roth IRA, you have the flexibility to invest in a wide variety of real estate types. Here are a few of the most common:

  • Residential Properties: Single-family homes, condos, townhouses, or multifamily units can be rented out to generate regular income.
  • Commercial Real Estate: Think office buildings, retail spaces, warehouses, and industrial properties. These investments can offer higher rental income but might come with more complex management needs.
  • Undeveloped Land: Investing in undeveloped or raw land offers potential for long-term appreciation. This category can include farmland, lots designated for future development, and more speculative investments in undeveloped areas.
  • Real Estate Investment Trusts (REITs): Though not direct real estate investment, REITs are companies that own or finance income-producing real estate across various sectors. Investing in REITs through a self-directed Roth IRA allows for exposure to real estate with more liquidity than direct property ownership.
  • Vacation and Rental Properties: Properties in popular vacation destinations can be rented out on a short-term basis. This can potentially provide higher rental yields but might also involve higher management effort and costs.
  • Real Estate Notes and Mortgages: You can invest in the financing side of real estate by holding mortgages or notes. This way, you act as the lender, earning interest on the loan secured by real estate.

Many investors choose to invest in real estate that they have unique expertise in. For example, if you know your local residential real estate market like the back of your hand, you may be able to achieve greater returns than those available with a target-date retirement fund.


Rules for Investing in Real Estate with a Roth SDIRA

In order to benefit from this investment strategy, it’s imperative that you become familiar with the IRS rules and follow them to the letter. 

Here are a few crucial regulations to consider before you open a Roth SDIRA:

  • Avoiding Disqualified Persons: The IRS prohibits certain transactions within IRAs, such as using the property for personal use or transacting with disqualified persons.
  • Maintaining Arm’s Length: As the SDIRA holder, it's crucial to maintain an “arm’s length” relationship with your investments. For instance, using your free time and personal funds to clean, repair, or renovate the property would violate the arm’s length relationship. By maintaining a clear separation between yourself and the IRA-owned real estate, you can ensure it’s only being used for its intended purpose. While it's not mandatory to hire a property manager, some may find it helpful for maintaining an arm’s length relationship.
  • Paying Expenses: All property-related expenses must be paid from the Roth IRA, and all income generated by the property must return to the IRA.

If you break the rules, you run the risk of disqualifying your entire Roth IRA.


Benefits of Investment Properties Held in a Roth IRA

Here are four of the most common benefits of investing in real estate with a Roth IRA cited by Entrust investors:


Tax-Free Growth Potential

As long as you abide by the IRS rules, both the appreciation and any rental income generated from the property can grow tax-free within the Roth IRA. When these funds are withdrawn in retirement, following Roth IRA rules, they may be distributed tax-free, providing a substantial benefit over taxable investment accounts. 


Portfolio Diversification

Including real estate in your Roth IRA may contribute to a well-rounded investment portfolio, potentially reducing risk through diversification. Real estate often moves independently of the stock market, providing a buffer against market volatility and inflation. This can protect your retirement savings from eroding purchasing power over time.


Leverage Your Expertise

If you have experience or knowledge in the real estate market, a self-directed Roth IRA allows you to leverage this expertise directly. By actively selecting properties, you can potentially achieve higher returns compared to passively managed investments, making the most of your insights into local markets, property values, and rental income potential.


Expand Your Purchasing Power

Want to invest in a real estate asset outside of your IRA budget? You may still be able to purchase that asset, whether through partnering or non-recourse loans.

A non-recourse loan is a type of financing where the lender's only recourse in case of default is to seize the original collateral (the property itself), and not the borrower's other assets. This allows the Roth IRA to invest in larger or more valuable properties, potentially enhancing growth potential.

Another boost to boost your purchasing power is through partnering. On the initial purchase of an investment property, your Roth IRA can pool funds with other investors, including your own personal funds. 

Note: Partnering does not combine all of the funds from each purchasing party into a single account. All accounts remain individually-owned and the funds are not commingled. This is why your IRA is able to “pool funds” with normally disqualified persons on the initial purchase.


Potential Drawbacks

This investment strategy isn’t without trade-offs. Here are three potential drawbacks to consider:


Liquidity Concerns

Real estate investments are inherently less liquid than stocks or bonds, presenting challenges if you need funds from the Roth IRA quickly. Selling real estate can be time-consuming and market-dependent, which might not align with the immediate financial needs of your retirement portfolio.


Property Management

All expenses related to the property, such as maintenance, taxes, and insurance, must be paid directly from the Roth IRA. Similarly, any income generated by the property, like rental income, must be deposited back into the Roth IRA. These transactions must be carefully managed to avoid prohibited transactions and maintain the tax-advantaged status of the Roth IRA.


Unrelated Debt-Financed Income 

If your Roth IRA purchases real estate using a non-recourse loan, any income derived from the financed portion of the property is considered unrelated debt-financed income (UDFI). This income is subject to unrelated business income tax (UBIT) rates, which can reach as high as 37%. 

If you’re considering taking out a non-recourse loan, consider how this may impact the overall return on investment.


Due Diligence is Paramount

Most investors don’t conduct due diligence on the assets held in their Roth 401(k) or Roth IRAs. After all, most publicly traded securities have already been vetted by hundreds or thousands of financial professionals.

This isn’t the case in the real estate market. So, if you invest in real estate with your Roth IRA, due diligence is paramount.


Tips for Conducting Due Diligence on Real Estate Investments

Here are a few tips for assessing new investment properties:

  • Property Inspection and Appraisal: Conduct a thorough property inspection to identify any potential issues and obtain an accurate appraisal to determine the property's market value.
  • Market Analysis: Research the property's location, including local real estate market trends, rental demand, and potential for appreciation or depreciation.
  • Title and Zoning Checks: Verify clear title to avoid legal complications. Understand zoning laws and any restrictions or allowances that could affect the property's use or future development.
  • Legal Compliance: Ensure the investment complies with IRS regulations for Roth IRAs, including prohibited transactions and disqualified persons rules.
  • Exit Strategy Planning: Have clear strategies for eventually selling or otherwise exiting the investment, considering the Roth IRA's timeline and the real estate market's cyclical nature.

Note: This list is certainly not meant to be exhaustive. It’s simply the tip of the iceberg.

Consider hiring real estate professionals, including agents, attorneys, and accountants familiar with the specifics of investing in real estate through a Roth IRA.

Want more real estate due diligence tips? Download our SDIRA Due Diligence Guide. Inside, we’ve included a real estate due diligence checklist and specific red flags to look out for as you’re evaluating investment properties.



Self-Directed IRA Due Diligence Guide

Download Now



5 Steps to Establish a Self-Directed Roth IRA for Real Estate 

By following the steps below, you can add investment properties to a Roth SDIRA, offering the potential for growth and diversification:

1. Open a Roth SDIRA: Opening an SDIRA at Entrust is simple and straightforward. All you need is 10 minutes of your time and a copy of a government-issued ID.

2. Fund Your IRA & Real Estate Investment By:
  1. Contributing personal savings directly into your new SDIRA, keeping in mind the Roth IRA contribution and income limits.
  2. Transferring funds from an existing IRA, without triggering taxes or penalties.
  3. Rolling over funds from a previous employer’s plan or another type of IRA.
    1. If the majority of your funds are in a current employer-sponsored plan, ask your plan administrator if they allow in-service withdrawals. If so, you may be able to complete a rollover.
    2. If you have funds in a traditional IRA or 401(k) but want to move these funds into a Roth IRA, you’ll need to complete a Roth conversion.
3. Consider Different Purchasing Strategies. You May:
  1. Purchase directly with IRA funds.
  2. Partner IRA funds with other personal or another person’s funds.
  3. Use a non-recourse loan for a leveraged purchase.
  4. Establish an IRA LLC for the investment.
4. Find the Right Investment and Direct Entrust to Purchase
  1. Consider your investment goals, budget, and confidence in the potential investment property.
  2. Submit an investment request and the purchase contract titled in your IRA’s name.
  3. Entrust signs the contract and uses IRA funds for the earnest money deposit.
5. Close Escrow
  1. Submit necessary closing documents to Entrust, including the deed, title report, closing cost statement, and any loan documents.
  2. Entrust reviews the documents, funds the purchase, and the property becomes part of your SDIRA.


Remember, all income and expenses related to the property must flow through the IRA. Rent checks and payments for services like property management or repairs must be made directly from the IRA. Ensure all agreements are in the IRA’s name.

For more in-depth information about the process of opening your Roth SDIRA, download our 5 Steps to Investing in Real Estate Guide.


5 Steps to investing in Real Estate with an SDIRA. Get your free copy now >


Consider Whether a Roth SDIRA is Right For You

Thousands of Entrust clients have already combined the benefits of real estate investing with tax-advantaged growth.

However, this investment strategy isn’t for everyone.

Navigating the complexities of real estate investing with a Roth IRA requires a thorough understanding of IRS regulations and careful financial planning. Further, if you’re not willing to conduct detailed due diligence, then you may want to steer clear of this investment strategy.

That said, if you’re an experienced investor seeking portfolio diversification and comfortable with a higher risk profile, a Roth SDIRA may be right up your alley.

Have more questions about investing in real estate with a Roth IRA? Consider talking to an SDIRA expert

Or, if you’re considering which real estate sectors are the most exciting, watch a replay of our webinar with the “Mad Scientist of Multifamily”, Neal Bawa. During the detailed session, Neal walked us through the top disruptive real estate trends he forecasts for 2024 and beyond.



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