Ask most personal finance gurus about opening a Self-Directed IRA for the purposes of investing in real estate, and they’ll tell you one thing: experience is essential. But is it essential in every case, or are there situations in which it might be appropriate to start out your real estate investing career with a Self-Directed IRA? To answer that, we’ll examine the particulars of the Self-Directed Real Estate IRA, how it can be used, and whether or not someone without experience in real estate investing should consider opening one:
Understanding the Self-Directed Real Estate IRA
Before you get started, it’s always a good idea to review our reading section on the Real Estate IRA. There you’ll learn plenty about what a Self-Directed IRA for the purposes of investing in real estate can do for you, including:
- It’s possible to borrow money for real estate investing. By using “non-recourse loans,” which separate your IRA from your personal funds, it’s possible for your IRA to take out a loan that can then be used to purchase real estate, such as an investment property.
- You’ll work through a property manager. It’s the property manager in a Real Estate IRA who will handle issues like paying expenses and collecting income, making real estate a highly passive style of investing.
- You can buy and sell property within the Self-Directed Real Estate IRA. That means that you’ll have the tax protections associated with an IRA (tax-free growth within the account), meaning that you won’t pay capital gains taxes on actions taken with your IRA. Done properly, this can give you a lot of incentive to make great real estate investments.
One important issue to note: The Self-Directed IRA known as a “real estate IRA” isn’t technically its own account type. It’s simply a Self-Directed IRA that you choose to use for the purposes of investing in real estate.
Should Investors Look to Real Estate Without Any Investing Experience?
At some point, retirement investing requires dipping your toes in the water without any experience. That’s true of any asset class—precious metals, real estate, stocks, bonds, and more. And while it’s always a good idea to leverage your real estate investing experience when you start a Self-Directed IRA, what’s more important is that you practice due diligence, approach each step carefully, and make sure you know what you’re getting into before you start. This process can be much simpler than you might imagine.
For example, you might read a book about retirement investing before you settle on investing in something like a stock market index fund. Those types of funds are relatively low risk, but it doesn’t mean they’re without risk. Any type of investment inherently carries some risk with it. A smart investor understands that diversification is a key to manage this risk by spreading money across multiple asset classes, thus reducing the chances that they lose out overall.
Does that mean you should immediately set up a Self-Directed Real Estate IRA and get to work without any real estate investing experience? No. Any investor should approach the process carefully. It doesn’t hurt to have more real estate knowledge and experience at the start, either. However, there’s no requirement that says every investor has to plunge their entire net worth into retirement real estate, either. It’s possible to develop experience as you learn, focusing on lower-risk properties and low-cost opportunities, before making real estate a far more significant investment for your own retirement plans.
Ultimately, we’re not an investment advisor and we can’t tell you what to do with your money. But we can help clarify the process of setting up a Self-Directed IRA.