For Self-Directed IRA investors, having a rental property like a single-family home is a powerful way to put aside money for retirement. For example, an investor can purchase a single-family home within a Self-Directed IRA, which will then collect the funds generated by consistent rent. But there are other things that investors will have to think about before getting started.
A long time ago, MarketWatch published an article about what it’s like to take on a property like this within a Self-Directed IRA. Noted the article: “Buying rental property with IRA funds can be a rewarding investment for both income and capital gains. It just comes with its own set of rules.”
That is true. Buying a rental property with the funds in an IRA can be a rewarding investment for a number of reasons. It can also be financially rewarding, given that the Self-Directed IRA affords the investor certain tax protections that make it even more lucrative when a good investment is made.
But the post also notes that there are some other things that Self-Directed IRA holders will want to consider, such as:
- Property management. Hiring a property manager is a fast way to ensure that an investor avoids “prohibited transactions.” After all, an investor will want to avoid any risk of prohibited transactions with retirement accounts, which can lead the IRS to strip away the protections that the investor was counting on.
- Choosing a custodian. When you invest in a Self-Directed IRA, you will be working with an administration firm that acts as the custodian on the account. Says the article at MarketWatch: “Custodians handle the paperwork with title companies, and the deed will read in the custodian’s name “for the benefit of” the accountholder.” That is a good way to think about this relationship. As a Self-Directed IRA investor, you will have a lot of control, but don’t forget that there is an intermediary that you do have to be conscious of.
What You Should Think About Before a Self-Directed Real Estate IRA
First, for clarification’s sake: a “Real Estate IRA” is not a unique account type, but simply refers to holding real estate within a Self-Directed IRA. And for many people, this is an interesting way to invest for retirement, because it means they will have access to an entirely different way of investing while enjoying the powerful protections of a retirement account.
What should you think about before getting started? The first thing to think about is your experience. Do you have experience in real estate investing? This is what makes many people a good match for a Real Estate IRA—they are able to leverage previously-acquired experience in a new way. For them, they know how to do the homework as to investment properties, and that makes life easier for them when they invest in real estate through a retirement account.
You should also put a lot of consideration into which Self-Directed IRA administration firm you work with. You will want to find a firm with a lot of talent and experience. Look for firms that have people who have been working for a long time, because it demonstrates not only that experience, but a firm commitment to being the best possible administration firm. This helps give you confidence as well—that you are working with the right people.
Think about these things before investing, because it will help you get a good grounding for where to go from there.