I have an investor-client that has purchased several properties with me. He’s from out of state and bought a couple of properties for his college age kids to live in while in Boston. He’s been talking about buying real estate with his IRA for years. Recently, my teammates and I helped him purchase a property for his IRA. Aside from the logistics of moving the money around and an extra layer of paperwork for authorizations, the process was pretty straightforward and very similar to any other cash deal.
This was the first time that we have represented an IRA as a client. I will share my experience and observations with you. Please understand that this discussion is about buying investment property with an IRA and does not work for a primary residence or a second home.
Why buy real estate with an IRA?
Financing for investment properties can be challenging and expensive, depending on the property or the buyer. It appears that using an IRA to purchase a property for cash eliminates the expense and challenges of financing and also allows the investor to take any profits tax-free later, after age 59 ½.
The disadvantages of buying investement property with an IRA include:
– loss of all tax benefits. (The IRA can not deduct mortgage interest, property taxes, condo fees, maintenance or take depreciation.)
– The IRA must have enough cash to purchase the property.
– The IRA must have enough cash on hand or positive cash flow from rental income to pay maintenance costs, taxes and management fees.
– All income and expenses must flow in and out of the IRA.
Not all IRAs can be used to purchase property:
To buy property with an IRA, you need a “self directed” IRA. To find one, search online for “buying real estate for an IRA”, “self directed IRA” or “IRA for real estate”.
As I see it, with current IRA investments being marginally profitable or risky, it might make sense for some knowlegable investors to divert the funds from an IRA into investment property, assuming that they know the business and can use it to generate tax savings. This might make sense for investors that are looking to buy low in the current market and resell the property at a profit within a few years, or sooner if they are renovating and flipping properties.
My research led me to several interesting articles on the subject:
There is a good article on the subject with an example of a contractor/investor who is using an IRA at Kiplinger.com. Another article at MarketWatch.com gave six reasons to consider using an IRA to buy real estate. These articles would probably make an interesting starting point for anyone interested in exploring the topic.
Source: Boston Real Estate Now