More and more investors are becoming aware of the benefits of real estate in their investment portfolios. They like the idea of generating wealth through the appreciation of their property, hedging inflation, building equity and providing a stream of rental income. This is where a Self-Directed IRA can come into play.
Real estate is also something tangible that is easier to understand than investments in the stock and bond markets. Because of that, a real estate investor is less likely to be defrauded. After all, one can inspect a property in person and run background checks on potential tenants. It’s also safer to leverage real estate than to buy stocks on margin.
All of these points show the positive aspects of investing in real estate but, as you have probably already guessed, there is a downside: Potential real estate investments often fall through because of a lack of funding. And it’s usually to an investor’s advantage to have the cash when bidding on a popular property anyway.
Those who have been frustrated in their quest to own investment property typically do not realize that they do have the funds they need to purchase real estate. It’s hidden in plain sight—right in their retirement accounts!
The secret is out
With a Self-Directed IRA, investors are using their retirement accounts to invest in a variety of alternative investments that include:
- Real estate
- Private stock
- Tax liens
- Precious metals
- Private lending
- Joint ventures and partnerships
These investments are in addition to the traditional stocks and bonds with which most investors are familiar.
In a self-directed account, funds in the IRA are used to invest in the asset, while the expenses and profits flow through the account, providing tax advantages such as tax-free or tax-deferred income and growth.
Why use your Self-Directed IRA to invest in real estate?
When you invest in real estate through a Self-Directed IRA, the property you buy will have the potential to appreciate, and any rental income you receive will be tax-deferred or even tax-free. Using your IRA is an excellent way to gain access to the funds you need to purchase a property and a way to diversify your retirement portfolio at the same time.
With all of these advantages, it’s not hard to understand why real estate has become such a popular option as an investment and why more retirement savers are using the balances in their Self-Directed IRAs—and other types of tax-advantaged accounts—investing in it.
Follow the rules to maintain the tax advantages of your retirement account
Of course, rules are governing the use of Self-Directed IRAs to invest in real estate and, as with any IRA investment, any attempt to circumvent them could have dire consequences. In other words, your IRA could be hit with a hefty excise tax—or worse.
Here are a few things to consider:
- You cannot use your Self-Directed IRA to purchase a second home or your personal The property you buy with your IRA funds is strictly for business purposes.
- You may not have a mortgage within the Self-Directed IRA, so you must use the cash in your account to purchase any property. If you do not have enough money in your IRA, however, you are allowed to partner with someone else.
- Self-Directed IRAs are set up for your retirement, so you cannot move into one of your investment properties now. Not only that, but no one that’s on a list of disqualified persons may live in one of your properties, either.
- Investing in real estate can be lucrative, but it takes patience. You will need to open the proper accounts and roll your assets over. Searching for the right property, making an offer, and waiting for it to be accepted involves some time, also. But your perseverance could pay off handsomely!
- Educate yourself on what transactions are not allowed within a Self-Directed IRA. These so-called prohibited transactions could jeopardize the tax-advantaged status of your IRA.
As with any other investment, due diligence is required before buying real estate. Consult with a tax, legal, or financial professional as your first step.