Investing in real estate can feel like a big venture. And it is. But that’s no reason to sit on the sidelines and watch as other investors use smart strategies like Self-Directed IRA real estate investing to build themselves a nest egg. If you’re a new investor who wants the same retirement benefits with real estate investing, there’s no reason you have to sit on the sidelines, either. Let’s look at some of the tips new investors can use to build confidence, learn Self-Directed IRA investing, and get started.

Tip #1: Understand the Rules and Restrictions of Self-Directed IRA Real Estate Investing

The first step to a successful Self-Directed IRA real estate investment is understanding the rules. Self-Directed IRAs offer flexibility in asset selection, but they come with specific restrictions set by the IRS. For example, you’re prohibited from engaging in “self-dealing,” which means that the property you invest in can’t be for personal use. Neither you nor close family members can live in or directly benefit from the property while it’s owned by your IRA.

Additionally, all expenses and income related to the property must go through the IRA itself. For example, maintenance costs, property taxes, and any revenue from renting out the property should be paid into and from the Self-Directed IRA account—not your personal accounts. Breaking these rules can lead to penalties or even disqualification of the IRA, so it’s crucial to understand them before making any investments.

Tip #2: Choose the Right Type of Real Estate for Your Investment Goals

Not all real estate investments work the same way within a Self-Directed IRA. That’s why it’s essential to align the property type with your long-term financial goals. Looking for steady income? A rental property might be ideal. Rental properties can generate regular cash flow, which grows tax-deferred (in a traditional IRA) or tax-free (in a Roth IRA). You can also reinvest this cash flow, potentially adding to your returns.

On the other hand, if you’re looking for a higher return in a shorter time frame, you might consider fix-and-flip properties. These involve purchasing undervalued homes, making improvements, and selling them at a profit. However, fix-and-flip investments require more involvement on your end. They often come with higher costs. They’ll have to be managed within the IRA’s rules, which makes them better suited for investors comfortable with some additional complexity.

Tip #3: Be Prepared for Financing Challenges with a Self-Directed IRA

When buying property within a Self-Directed IRA, financing can be more complex than purchasing it personally. Traditional mortgages aren’t an option for IRA-owned properties, as the IRA itself—not you personally—has to be the buyer. Need financing? It typically requires a non-recourse loan, meaning that the lender has a claim only on the property itself and not on other assets in the event of default.

While non-recourse loans provide a way to leverage your investment, they often come with higher interest rates. For similar reasons, they often require a larger down payment than traditional loans, too. Weigh the costs and potential returns of such financing carefully and consider whether purchasing the property outright with IRA funds might be more advantageous for your specific situation.

Tip #4: Work with Experienced Professionals to Guide Your Investments

Because Self-Directed IRAs and real estate investing both come with unique rules, working with knowledgeable professionals can make a big difference in your success. Consider partnering with a reputable Self-Directed IRA custodian. They can handle account administration and compliance while guiding you through the complexities of managing real estate within an IRA.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.