It is one of the most popular nontraditional retirement assets there is: real estate. Real estate is a limited resource, which means that it has the potential to serve as a hedge against all sorts of economic turmoil. And people like owning land, especially when it comes to building a long-term portfolio. But what is the actual mechanism through which investors can invest in real estate in an IRA? How does the process work? Let us take a closer look at what it means to buy real estate within an IRA.
How Buying Real Estate Within an IRA Works
You will first have to have a Self-Directed IRA, which will open up the opportunities you need to invest retirement money in real estate. Opening up a Self-Directed IRA can be a relatively simple and straight-forward process. At American IRA, for example, we include a wide variety of Self-Directed IRA application kits so you can get started.
To fund a Self-Directed IRA, you may have a few different options. One option is a transfer, while another is a rollover. You can see more about these options in our blog post which looks at potential funding options for Self-Directed IRAs.
But that is not what this article is about. Let us assume you already have a Self-Directed IRA that has some funds in it; now you are wondering how a piece of real estate can possibly be purchased within a retirement account. Or maybe you simply want to know more about it works before you open an account yourself. Let us zoom in to the nitty-gritty details to explain.
Real Estate Investment within a Self-Directed IRA
The most obvious difference between buying real estate through a Self-Directed IRA and with your personal funds is that with a Self-Directed IRA, you will work through a custodian. This requires the paperwork to go through your custodian; at this point, you will discover much about how the process works.
For example, you can find on our Real estate Instructions PDF that there’s plenty of information for how this might look. There are three distinct steps here:
- Contract / Earnest Money Package: This includes the paperwork required in step one, such as submitting an offer through the proper channels. When a contract is available to sign (and both parties agree), an investor can sign, notating “Read and Approved” below your signature. The Earnest Money Request Form needs to be submitted to ensure the proper payment goes through.
- Closing Package: Here, American IRA includes a real estate investment form to help handle documents for closing. And a Closing Agent may also prepare the proper titling of the documents so that you can sign and initial. We note in our package that you do not sign as the BUYER in this case, because it will technically be your IRA doing the buying. At this point, you will receive a copy of the deed, the copy of the HUD-1 settlement statement/closing disclosure, and any other documents the buyer is required to sign at the closing, as well as potential wiring instructions.
- Once ready, you will submit your package to American IRA for the proper administration of everything involved.
Once you see that these instructions fit on a single page, it may help demystify the entire process. You will not feel like this is entirely overwhelming, but instead see that buying real estate through a Self-Directed IRA can be a powerful way to invest—and maybe even a simple way, too.