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Real Estate IRA Investing

Real Estate IRA

You can use the money in your IRA to invest in Florida real estate. You do not have to settle for bank CDs or risky stocks. Buy, sell or collect rent. No tax is due until you start making withdrawals.

Real Estate IRA

You can use your IRA, 401K, 403B or any qualified retirement plan to purchase real estate or buy a business. Tap into this hidden resource and turbocharge your retirement plan.

A Little Personal History

In addition to real estate, we run an insurance and financial planning business. For years I have been carefully helping my clients plan their retirement with life insurance, annuities, long term care and mutual funds.

But anyone who helps individuals deal with the financial realities of retirement can tell you that the average Baby Boomer is woefully unprepared to stop working. I don't mean that they do not have a desire to play golf, fish and sip martinis. I mean that they cannot afford to. They have not saved enough money. If they live too long they might end up bagging groceries and eating lunch at the senior center.

So, what do I tell a 55 year old couple who needs to save a million dollars in the next 10 years? Do I put them in a CD paying 2 percent? Perhaps gamble on a mutual fund that might, if we get lucky, return 5 percent (or lose 10 percent)? It just will not work.

That is why we are in the investment real estate business.

Real estate is the only investment that will give you a fighting chance of being able to retire and stay retired. The only way to accumulate a lot of money faster is to marry it.

Self Directed Real Estate IRA

What does ‘self-directed’ mean?

The term ‘self-directed’ does not actually have any legal connotation. It does not imply a different type of IRA, or a separate set of IRS rules. ‘Self-directed’ is simply an accepted industry term indicating that the IRA custodian is allowing the IRA owner greater control over their investment decisions. When an IRA account is self-directed, the IRA owner makes all investment decisions and instructs the custodian to act.

"But I already make all the decisions about what I invest in."

Yes, but it is highly unlikely that your current IRA administrator, bank, brokerage house, etc. would let you invest in real estate or buy a business. Generally, self-directed IRA and 401K plans can invest in real estate and other investments that would not be available to you in a non self-directed plan.

Types of Property Your IRA Can Own

In a self-directed IRA, you can own single family and multi-unit homes, apartment buildings, co-ops, condominiums, commercial property, improved or unimproved land, whether it's leveraged or unleveraged.

Your IRA can invest in a LLC that in turn invests in real estate. The LLC can have other IRA or individual investors as well.

The last two sentences should have been eye openers. I just told you that instead of buying a CD or gambling on the stock market, you can buy income producing property and get the bank to help you. Not only that, you can create an inexpensive LLC and invest in a property with other people.

Can I Borrow Money and Use My IRA?

The short answer is yes, you can. But, there are certain guidelines you must adhere to.

The loans made by banks to buy property with your IRA are non-recourse loans.

A non-recourse loan means that the property is the only collateral. They cannot come to you for payment or raid your IRA. That would be illegal.

If the banks have nothing more than the property itself, you can bet there will be a few rules.

There needs to be a cash flow and income that exceeds expenses by a certain margin. The lenders will treat the loan just as they treat a commercial non-recourse loan. For IRA's and 401K plans they generally lend with a 50% LTV. The net operating income must be at least 1.25 times the debt service. In other words, you got to be making money.

Don't be discouraged. I will not sell you property that does not make money. We have plenty of properties that will give you the income you need to use financing if you wish to.

Ensuring the Tax-Deferred Status of the Account

When you invest in real estate with your IRA, the entire transaction must flow through the tax-free or tax-deferred retirement account. The escrow must be opened by the account, and not in the name of the beneficial owner. Vesting is always in the name of the account. Only Qualified Plan or IRA funds may be used as good faith deposits, down payments, or purchase money.

In other words, the whole deal must be made with IRA funds.

Additional Requirements

When purchased, these properties become assets of your Plan or account. In addition:

You may not personally own property which you intend to purchase with Plan funds and you must ensure that your intended purchase is not a prohibited transaction
It must be for investment purposes only
Neither you, your spouse, nor your family members (other than siblings) may have owned the property prior to its purchase by your Plan
Neither you nor your family members (other than siblings) may live in or lease the property while it's in your Plan
Your business may not lease or be located in or on any part of the property while it's in your Plan
You may receive any property as a distribution from your Plan as a retirement benefit

What Does All of This Mean?

Let me break it down for you.

  1. You can use your IRA (or 401K) to invest in real estate.

  2. The entire transaction happens inside the IRA so you do not have to pay taxes on the income or gain when you sell the property. Only when you make your distributions.

  3. You can borrow money to use with your IRA funds. A $100,000 IRA can own $200,000 in real estate.

  4. You can buy land, a house, condo or commercial property.

  5. You can also purchase a business with and IRA (or 401K).

There are rules about buying property from certain family members or who could live in the property. We can help you understand these rules.

Some Words of Caution

We are one of the few real estate firms that have expertise in using self-directed IRA's for real estate investments. You can get quite sophisticated with the purchases. You can even buy a business with your retirement accounts.

But, there are special rules on what you can buy and how you must purchase it. There are also special tax considerations when using outside financing. We work with a few specialty firms that specialize in self-directed IRAs. Together, we can guide you and keep you out of trouble with the IRS.

Why Haven't I Heard About This Before?

Your stock broker or financial advisor will lose commissions if you purchase real estate as an investment. There is nothing in it for them. It is great for you, but only hurts their bottom line.

Financial magazines run large ads for brokerage firms and mutual funds. They are not inclined to alienate their advertisers.

Nevertheless, you can take your retirement plans to new heights or go into business for yourself with your qualified retirement money. I do it and so can you.

Solo 401K

What if I told you that if you are self employed you can set up your own 401K plan, put up to $98,000 a year into it and invest the money in real estate?

Interested? Ok, let me up the ante. What if I told you that you could defer the taxes on any gain you made with this money? No current tax on the gain. Do you have any idea how that improves your profit and wealth building potential?

If you are self-employed, spend 5 minutes and read my article on Solo 401k plans. Solo 401K for Self-Employed.