Real Estate Investment Basics

Real estate property investment can be a lucrative way to use your IRA. An Individual Retirement Account Fund can be used to purchase assets such as real estate if you go about it the right way and form a self-directed IRA (SDI).

Because you or your family cannot profit from an IRA until you retire, there is a whole host of regulations involved. However you can forget these if you appoint an administrator to do it all for you.

Creating a Self-Directed IRA

The first step in real estate  property investment is to convert your IRA into an SDI. Having done that, you can purchase certain non-traded assets using the IRA.  Among these is property, or real estate. Excluded are stocks, life insurance and any other form of investment that is listed on the stock exchange. Another type of item you cannot use an SDI to purchase is antiques. However, real estate property investment is fine and it tends to appreciate.

Real Estate Property Investment and the SDI Custodian

You must first find an SDI custodian. This is a person who will be responsible for administering the SDI and purchases made using it. The term custodian is used because the self-directed IRA is an entity in its own right. It purchases real estate, and owns the funds it contains.  The SDI itself pays for any maintenance and insurance on the real estate it owns.

The custodian keeps an eye on it, but may not receive funds from it – and neither can you. A major function of the custodian is to make sure everything connected with the SDI and its transactions is legal. He or she can advise you but may not provide you with any advice on real estate property investment. It is purely an administrative position, not advisory.

Using SDI-Owned Real Estate

Neither you nor your extended family can live in any property owned by the SDI – even temporarily. It cannot be purchased from your family or from anybody else with any interest in your business or investments. The property bought by the SDI belongs to the SDI. However, while you cannot rent or lease the property, the self-directed IRA can.

The SDI is permitted to rent or lease any real estate it owns. However, all income must be put into the fund. Such rental income will be tax-deferred, and can be used by the self-directed IRA to maintain liquidity and pay for such expenses as insurances and maintenance on the properties.

Self-Directed IRA Liquidity and Funding

You will be responsible if the balance of funds in the SDI is too low to meet expenses when they become due for payment. Deferred tax can then become due, and you will also be responsible for any financial obligations of the SDI that it cannot pay. However, you cannot just pay cash into the fund to cover the shortfall!

What you can do is give the self-directed IRA a legal loan! You must then take an interest payment equivalent to the average loan interest rate, together with repayments of the principal sum from the fund. This is exactly what would happen were the SDI a person owing you money, and is a manifestation of the IRA as being an entity in its own right.  All of this is administered by the custodian.

SDI Investment and Non-Recourse Bank Loans

You can use liquid assets in the SDI to purchase more real estate. The custodian will do this at your request. The SDI can rent out the properties it owns, and then use that income to purchase more real estate – this is a very powerful way to accumulate properties.

The SDI can even take out non-recourse bank loans. The bank lends money to the SDI to purchase property on a non-recourse basis.  This means that the property being purchased is the security for the loan and not the self-directed IRA.

Your IRA, Roth IRA, 401K – whichever type you have – cannot be cashed until your retirement. However, they can be converted to a self-directed IRA and used for real estate property investment until your retirement.  You can then sell the property, live in it or rent/lease it for profit. Using an IRA to buy property makes sense. You can multiply its value several times – but keep in mind that the custodian is your best friend until you retire!

Menu