A Self-Directed Real Estate IRA—in other words, a Self-Directed IRA in which an investor holds real estate—can be a powerful way to build a retirement investment plan. Keeping real estate within one such account allows experienced real estate investors to leverage that experience into a long-term investment strategy. But how is that actually done? Let’s look at some tips that people can use to maximize their retirement nest egg:
Tip #1: Research
Finding great deals in real estate is rarely a case of opening the classifieds section and spotting a great deal. It takes homework. Even experienced real estate investors will tell you that it’s not always easy to find a great deal on your first go-around. Be willing to put in the research—perhaps more than you think. Do not just visit one or two potential deals. Multiply by that by 10. Make yourself an active part of your real estate acquisition process and learn to differentiate what separates a great deal from an okay deal.
Tip #2: Make the Profit on the Buy
There’s an old saying in real estate: the profit is made on the buy. In other words, it will be a lot easier to make money off of real estate if you buy it at a bargain in the first place. If you can identify a great deal, however, you may be able to buy the real estate for far less than it’s actually worth at resale value. Even if you think a property is of high value, paying a price much closer to that resale value means that there’s less margin of error for making the profit you seek.
Tip #3: Work with a Reputable Self-Directed IRA Custodian
Remember Tip #1? You will want to do your research before selecting a Self-Directed IRA custodian, too. A high-quality Self-Directed IRA administration firm will have plenty of experience working with investors who have adopted the strategy of keeping real estate within an IRA, which means they will help smoothen out the process. They can answer questions about the administrative paperwork that’s required, as well as the limitations of a Self-Directed IRA of which you will need to be aware.
Tip #4: Follow the Rules to the T
Whenever you do something that could yield penalties, you cut into the potential returns of your Self-Directed Real Estate IRA. That’s why it’s so important to be aware of the rules governing this type of retirement account. For example, when you get the hang of who a “disqualified person” within a Self-Directed IRA would include, you will understand that you cannot, for example, rent out a retirement property to someone you know, like a son or a daughter. That would be a “prohibited transaction,” as defined by IRS rules. Do not think of this as too limiting, however; as long as you use the Self-Directed IRA with strangers as tenants, you will find that it’s a rule of thumb that’s easy to stick to.
Tip #5: Use Non-Recourse Loans
This is not a tip so much as an explanation of how a Self-Directed Real Estate IRA works—you can use a non-recourse loan that separates your personal belongings from the belongings of your IRA. Because the IRA is considered a separate entity, this will help you divide your own portfolio more easily, distinguishing between personal funds and the funds you have set aside to help with retirement.
A Self-Directed Real Estate IRA can be a way to fast-forward the value of your retirement account—if you know how to use it.