Types of Real Estate you can Invest in with a Self-Directed IRA

Learn how your IRA can invest in residential real estate

Single-family homes and multi-family units (such as apartments or condo complexes) are the most common type of real estate found in self-directed IRAs. Investors can fix and flip homes or hold on to rental properties for a flow of passive income with a Real Estate IRA — it's up to you! But be sure to pay close attention to the rules regarding disqualified persons and prohibited transactions to avoid Real Estate IRA penalties.

Three very important factors to consider when purchasing in an IRA:

1. Due Diligence for your property

When buying residential real estate, research the seller or auctioneer and consider all of the variables involved in managing your new asset. Examples of due diligence include walking the property, researching its claims history, confirming the quality of tenants past and present, and reading all documents associated with the property, such as leases, HOA (Homeowner's Association) documents, and insurance policies.

2. Conducting property management

As the IRA holder, you cannot be the property manager, nor can you perform the maintenance on the property. Review our section on Property Management for information on how to navigate the day-to-day operations of owning residential real estate.

3. How expenses work on your property

Because the IRA is the owner of the real estate, not the IRA holder, all purchase and maintenance costs are paid by the IRA, and all income (e.g., rent) goes back to the IRA. You must use IRA funds to address any maintenance costs or other expenses related to the property. For more information, see Income and Expenses.

Disclaimer: Before you invest in this business sector using your IRA, it is best to consult with your investment, legal and tax advisor. Entrust does not endorse or recommend any of these investments. Proper due diligence by you the IRA holder is recommended before entering into any transaction.

Invest in all types of commercial properties with your Real Estate IRA

From retail to office buildings—it’s all possible. If your IRA doesn’t have enough cash for these types of investments, your IRA can apply for a non-recourse loan or partner with other funding sources. Commercial property is a broad category of real estate investments that includes anything from a grocery store or an office building or a baseball field. This type of investment is another way to generate rental income over the long term.

Four very important factors to consider when purchasing commercial real estate in an IRA:

1. Due diligence for your property

Commercial real estate properties are different from residential properties in terms of assessing value. Before signing a contract, allow yourself ample time to perform the necessary due diligence on the property. Make sure the seller understands what you are asking for and verify the true property value. Examples of due diligence include researching any claim history on the property, confirming the quality of tenants, and reading all documents associated with the property, such as leases, insurance policies, and permits.

2. How expenses work on your property

The IRA is the owner of the real estate, not the IRA holder. This means the IRA pays all purchase and maintenance costs, and all income (e.g., rent) goes back to the IRA. You must use IRA funds for all maintenance costs or other expenses related to the property. For more information, see Income and Expenses.

3. Non-recourse loans for real estate purchases

Non-recourse debt or a non-recourse loan is a loan secured by pledge of collateral, typically property, but for which the borrower is not liable. The difference between recourse and non-recourse loans is that if the borrower defaults on a non-recourse loan, the lender/issuer can seize only the collateral. To facilitate a property purchase under a self-directed Real Estate IRA, you must use a non-recourse loan for all real estate purchases. To learn more, read our section on non-recourse loans.

4. UBIT and UDFI taxes on your property

If you use your IRA to purchase real estate using a non-recourse loan, the debt-financed portion of the property’s profits may be subject to UBIT. UBIT, or Unrelated Business Income Tax, is the tax assessed on profits derived from certain assets of IRAs or other plans. It is mostly associated with an IRA running an active business. The Unrelated Debt-Financed Income (UDFI) tax is a subset of UBIT. Learn more and read about real-life examples of UBIT and UDFI.

Disclaimer: Before you invest in this business sector using your IRA, it is best to consult with your investment, legal, and tax advisor. Entrust does not endorse or recommend any of these investments. Proper due diligence by you the IRA holder is recommended before entering into any transaction.

Invest in real estate on your own terms with secured or unsecured mortgage notes

If you don’t want to be burdened with maintenance costs or rental vacancies, you can invest in mortgage notes in your self-directed IRA. You can also be a real estate lender with your IRA funds and help others purchase new properties. You set the terms of the loan, including time frames and interest rates. The payments will go to your retirement account.

There are two types of notes:

1. Secured notes, deeds of trust, and mortgage notes are basically the same thing, depending on the state that you reside in.
2. Unsecured notes are not backed by collateral and thus often pose a higher risk than a secured note. Because of this increased risk, unsecured notes are generally structured at a higher interest rate.
   
   

What are Secured Notes?

A Real Estate Note is secured by real property. The documents required by Entrust for notes secured by real estate vary by the type of note you are requesting:

• If you are issuing a new note or seller carry-back note, simply submit a copy of the original note, deed of trust or mortgage, and a copy of the lender’s title report.
• If you are buying an existing note, you will need to submit a copy of the original note, recorded deed of trust or mortgage, title policy, deed of trust or mortgage assignment, note endorsement, and note purchase agreement, if applicable.
• If a borrower cannot pay the balance on a note, the property can be sold to satisfy the debt.
  
  

What are Deeds of Trust?

Trust deeds, deeds of trust, and mortgage notes are basically the same thing, depending on the state that you reside in. In a trust deed, the investor loans money to a borrower using real estate as collateral. The loan is secured with a Trust Deed, which is recorded in county land records against the collateral. The terms of the loan are detailed in the Promissory Note.

You will want to define the type of real estate you feel comfortable lending against. Working with a local real estate broker who specializes in trust deed investments is a good start. Perform your due diligence by asking for references, requesting a schedule of loans that have funded, and confirm the status of the broker’s license.

It is advisable to order a third-party appraisal or valuation of the property you intend to invest in. You will want to verify that the value of the collateral is sufficient to return the principal on your loan. Additionally, obtain a Title Policy from a reputable title insurer that insures your trust deed on the property. Lastly, verify that the borrower has property insurance on the property and request verification that it names you as a "Mortgagee.” Seek legal and financial advice from trusted representatives.

How do I invest with Mortgage Notes?

Sellers looking to offer financing to potential buyers can have a real estate note created for the transaction. It is important to have your note drawn up by a real estate attorney and that you understand the terms of the note:

1. Open and fund your Entrust self-directed IRA.

2. Find an individual or entity interested in borrowing money from your IRA. The loan must be secured by real estate.

3. Complete and submit a Real Estate Note Buy Direction Letter to Entrust to request funds. You must include supporting documents. The documents required are based on the type of note (Secured Note):

1. Issuing new note or seller carry-back note.
2. Buying an existing note.
   
   

If you are partnering your IRA with personal funds, both you and your IRA are the lenders. In this case, you need to add the percentages of an ownership interest to the title.

For example, The Entrust Group, Inc. FBO John Smith Account #12345, [Percentage of ownership] % undivided interest.

4. When you have submitted the required documents, Entrust will process the investment and remit funds to the borrower or to the entity responsible for closing the transaction. Normal processing takes approximately three business days with funding happening on the fourth business day unless corrections are required. A special handling fee applies to expedited processing requests.

5. Assignment of Deed of Trust: The Deed of Trust or mortgage is owned by your self-directed IRA.

6. Send all documents related to the promissory notes to The Entrust Group for recordkeeping. Entrust must receive all documents signed by all parties for IRS audit purposes.

Entrust must sign investment documents on behalf of your IRA. You will note “read and approved” with your signature and date on each page of the investment documents. If the borrower is an entity, Entrust must see the entity formation documents to verify that the transaction is not prohibited under IRC 4975.

After the investment is completed, all payments made according to the terms of the note must be submitted to Entrust using a Deposit Coupon form.

For specific account questions, please contact an Entrust representative.

Disclaimer: Before you invest in this business sector using your IRA, it is best to consult with your investment, legal, and tax advisor. Entrust does not endorse or recommend any of these investments. Proper due diligence by you the IRA holder is recommended before entering into any transaction.

Take advantage of the international real estate market and incorporate it into your investments

There are many benefits to investing offshore with an IRA.  There are also things to consider such as performing the proper due diligence and educating yourself not only on the tax laws in the United States, but the tax implications, and transaction process in the country where you are investing. Examples of things to ask before seeking out an offshore investment property could include:

• Can the property title be held in the name of an IRA? Laws differ from country to country. For example, some countries only allow IRA-owned corporations to hold a title.
• Who will manage the property or collect rents?
• Are there any internal issues within the country, or civil unrest?
• Are there any ecological concerns or societal shifts occuring? 
• Have you established the proper legal channels to move your money into the country? 
  
  

Due Diligence for your offshore property

When investing in properties outside the United States, you typically need to establish a bank account in the asset country (where you are buying) to pay expenses and collect income. Investing overseas may also have certain tax benefits for investors. Tax implications vary by country and in complexity. In light of growing popularity of this strategy, the U.S. government has created laws regarding offshore investing. For more information, consult a financial professional or tax advisor about real estate transactions and banking outside of the U.S.

For a more in-depth look at Offshore Investing, read Hubert Bromma's book, "How to Invest In Offshore Real Estate and Pay Little or No Taxes", available for purchase.

Disclaimer: Before you invest in this business sector using your IRA, it is best to consult with your investment, legal and tax advisor.  Entrust does not endorse or recommend any of these investments.  Proper due diligence by you the IRA holder is recommended before entering into any transaction.