Almost every American working in the private sector knows the good old days of company pensions are permanently in the rearview mirror. That has resulted in the government taking several measures to encourage Americans to save for their retirement.
One of those is an individual retirement account (IRA), an investment where workers can put up to $5,000 of their annual pretax income to grow wealth by using that money to take advantage of various investment opportunities.
But, how can you properly increase your contribution amount, enhance your retirement income and use these investment options to better your retirement plan?
The Best Ways to Invest In Real Estate With Your Self-Directed IRA
The rules on self-dealing with IRAs are meant to be strict because this type of retirement account already has unique advantages. The government wants a solid firewall between the tax-deferred funds in your self-directed IRA and any money or real estate you already have access to. In addition to that, buying a property free and clear with your self-directed IRA funds is likely to cost six-figures even in an affordable real estate market. That could be a sizable chunk of your IRA funds. This is why your retirement plan could be derailed with just one real estate investment.
At the same time, your Roth IRA could buy into a certain type of real estate investment trust or fund that will offer quality returns. But, how do you rollover into an SDIRA, get the tax advantages you deserve and grow your retirement savings?
Luckily, there is a better, more efficient way to invest in real estate with your self-directed IRA than scouting properties and buying them with your self-directed IRA. The world of real estate crowdfunding has opened up a large variety of options, where you work with an investment advisor who offers a brokerage account targeting the real estate sector. As a result, numerous real estate investing platforms have offerings that will accept both traditional and self-directed IRA contributions.
Best for Beginner Real Estate Investors: Fundrise
Fundrise is one of the most popular and well-respected real estate crowdfunding platforms, put together by a team of established real estate professionals who wanted to make building a real estate portfolio simple. It’s a very good place to start investing your IRA into real estate because Fundrise has its own IRA to work with.
That’s right. You can roll some — or all — of your IRA into a fund that consists of a diverse portfolio of real estate assets chosen by the Fundrise braintrust. Plus, all of the assets in the fund were chosen for their unique combination of upside, the ability to resist market downturns and their projected ability to generate long-term investor profits. This is the best way to bring dividends back to you—the investor.
This is a simple way to set it and forget it, and the Fundrise IRA allows you to do exactly that, so that you can get back to your life instead of staring at your account all day, every day. Remember, you don’t have to worry about accidentally violating any provisions of self-dealing, and Fundrise will do the accounting, pay the distributions and issue the statements for you.
- You can roll over a portion of your IRA balance, allowing you to buy into the real estate market at your own pace
- Fundrise monitors these investments for you and carefully manages the portfolio.
- As you set it and forget it, you may not feel you have enough control over your investment
Best for Accredited Real Estate Investors: CalTier
CalTier is a widely respected real estate platform that comes with two basic fund options that accept IRA contributions. The multifamily fund is set up to seek out B- and C-rated multi-family properties in growing markets throughout the Southern and Western United States. These properties are easy to upgrade, and they can traditionally gain value over time while producing income from an improved tenant-base.
You can buy into the multifamily fund for as little as $500, and the fund is also projecting an annual 8% return for investors (however, these returns cannot be guaranteed). Investors will benefit both from the passive income on the total rent income potential of each property and the overall appreciation gained when CalTier sells the assets in the fund.
- You can buy in with a low $500 minimum investment
- The platform helps investors make money by both collecting rent and selling properties that have attained peak valuation
- Projected dividends are not guaranteed, and any real estate market could shift without warning
Best for Non-Accredited Real Estate Investors: CrowdStreet
CrowdStreet is a good way for you to invest when you want to take hold of all your investments, including where you invest your IRA’s cash.
The Crowdstreet Opportunistic Fund I LLC is accepting investor contributions to buy between 8 and 10 commercial properties that will have both high upside and long-term revenue potential. CrowdStreet plans to add assets to the portfolio that will be spread across several real estate sectors, including multi-family and industrial. It’s also possible that the fund might purchase office properties, lodging and retail units.
With a minimum buy-in of $100,000 and a hold period of 3 to 7 years, there’s a projected internal rate of return of 18% to 22%. Remember, distributions will be made to your self-directed IRA on a quarterly basis, so you need to be a little more patient, knowing that your money is coming even 3 months.
- A focus on commercial properties means that the firm is focused less on rents and more on total income potential
- The internal rate of return is projected to be very high
- When the fund is investing, it could stray from the offerings that you preferred when you signed up
- The minimum buy-in is very high for this space
What Is A Self-Directed IRA?
One simple way to invest in real estate with an IRA is through a self-directed IRA. A self-directed IRA functions just like any other IRA account with a few notable exceptions. Under a standard IRA, you put your money into an IRA, and the fund manager grows your wealth by investing it in various traditional investment offerings such as securities and bonds. However, in a self-directed IRA, you make the decisions about your investment strategy.
IRAs have proven to be popular investment vehicles, but they have some restrictions as to what investments you can take advantage of. For a long time, many simple IRA custodians did not allow the accounts to take advantage of alternative investments like real estate. That also meant there were not a lot of real estate offerings for IRA holders.
However, that has changed, and there is a growing number of real estate offerings that accept self directed (by you) IRA contributions. You can also roll some (or all) of your traditional IRA into a self-directed IRA. Self directed IRAs offer investors the flexibility to invest in real estate, albeit with a few restrictions. Keep reading to find out more about how to boost your IRA returns with real estate investments.
Self-directed IRAs give you more freedom to put your money into alternative investments like real estate. Remember, though, that even with a self-directed IRA, you are still restricted to the investments your IRA’s custodian (account manager) allows. So, before you begin investing in real estate, make sure you roll your existing IRA (or start your IRA) into one with a custodian who allows real estate investments.
Options For Investing In Real Estate With Your Self-Directed IRA
Once you’ve started your self-directed IRA, the next step is to figure out what kind of real estate investment you want to make. Before you decide to buy an investment property, you must consider a few things. First, you will have to buy the property flat out. You cannot get a mortgage on a property bought by an IRA. You will have to purchase whatever piece of real estate you want in full without financing or with hard money loans (that come with high interest rates). You’re also at the mercy of current interest rates, energy costs, the tax rate on the property and cash flow issues that could arise. Then, you have a rental home you must manage, hoping to draw retirement income from the potential rental income your tenants will pay. In essence, you’re the property manager.
Why? It’s because of IRA rules that prevent self-dealing. Remember, IRAs are designed to help you stash your income on a pretax basis until retirement. Accordingly, they have prohibitions on what is known as self-dealing, which is using IRA funds for any immediate tangible benefit. Using your post-tax income to make mortgage payments on a property in your self-directed IRA counts as self-dealing under IRA rules.
Once the property is in your self-directed IRA, you can do one of the following three things:
- You can hold the property until it appreciates and sell it.
- You can upgrade a distressed or outdated property you bought for a low price and then resell it — a practice known as flipping.
- You can rent the property on a short- or long-term basis.
Bear in mind that regardless of how you choose to make money with your self-directed IRA real estate, you are prohibited from using anything but the funds in your IRA to make any needed improvements, repairs or pay other property-related expenses—and all while you’re at or above retirement age.
The same thing applies to any profits you make or rents you collect. All funds must come from or go directly into your self-directed IRA. This means that this part of your investment portfolio is still a little harder to access than normal.
Spending even a penny of your profits or putting a penny of your own money into expenses counts as self-dealing. If you violate this prohibition, the funds in your self-directed IRA will no longer be tax deferred, and you will be faced with a hefty tax bill.
Other Self-Dealing Prohibitions
Putting your own money into or spending non-IRA funds on the real estate in your self-directed IRA are not the only self-dealing violations you need to be mindful of. When in doubt, remember that you can never directly benefit from any transaction related to the property in your self-directed IRA.
That also means you can’t purchase the property from a disqualified person, which is any of the following:
- Your parents
- Your children
- Your spouse
- Any other family member
- The custodian of your self-directed IRA or any professional who provides services for the IRA such as your accountant, attorney or repair person
The title for the property in your self-directed IRA must list the self-directed IRA — not you — as the property owner. Your self-directed IRA cannot purchase a property you already own. You are also prohibited from functioning as a property manager — on or off site — if you use your self-directed IRA property for rental income. You must hire a third-party management company that’s not run by a disqualified person.
If you have any doubts about a specific transaction or expense related to your self-directed IRA, check with your custodian. It could keep you from making a costly mistake.
No Shortage of Options
As you can see, there is no shortage of quality options for self-directed IRA holders when it comes to real estate. You can pick your own individual properties for flipping or passive income. You can also choose from a large menu of funds and individual offerings from some of the many real estate crowdfunding platforms that are open to you.
No matter how you decide to go about adding real estate to your self-directed IRA or IRA, your equation as an investor remains the same. You need to carefully consider your investment goals and be as familiar with the potential risks of an investment as you are with the upside. Consult a financial advisr and your IRA’s custodian. Invest wisely. Hopefully, real estate will prove to be a perfect addition to your IRA.
Frequently Asked Questions
How do I hold real estate in a self-directed IRA?
When you want to hold real estate in a self-directed IRA, you must choose the custodian for those funds, fund your account, choose the real estate investment you prefer and go ahead with the purchase. Of course, you can also exit this position at any time.
Why use a self-directed IRA for real estate?
A self-directed IRA already has funds available that you can use to buy into real estate crowdfunding platforms, meaning that you can more easily connect with one of those accounts. Additionally, this means you are not making a traditional withdrawal to purchase the property yourself.
Where does income from real estate investments go when it is held by a self-directed IRA?
Income from a real estate investment that is held by your IRA goes back to your IRA, not directly in your pocket. You would need to make a withdrawal from your IRA if you wanted to use the cash for other purposes.
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