How to Invest in Real Estate with an IRA: A Beginner’s Guide

Real estate IRAs are a favored strategy savvy individuals use to build wealth for retirement. There are sophisticated investors who can invest in these assets without hesitation, but many others are unsure how to invest in real estate with an IRA. If you fit into the latter category, this article’s just for you. It’s a beginner’s guide that explains popular investments, how these assets work in IRAs, and how you can get started using real estate to help secure a successful financial future.                        

What Is a Real Estate IRA?

The term “real estate IRA” is used to describe self-directed retirement plans that hold real estate assets. Self-directed accounts have several key benefits:

  • Account owners choose their own investments—you don’t rely on a third party to make these decisions for you.
  • You are not limited to the stressful world of stocks or the boring realm of bonds and mutual funds.
  • In addition to real estate, you can invest in alternative assets to the stock market—things like private equity, gold, cryptocurrency, renewable energy, and much more.

As mentioned, for the sake of this article, we’re going to focus on how to invest in real estate with an IRA.

What’s So Special about Real Estate Investments?

Real estate delivers diversity to your portfolio through tangible assets that have A small wooden house on a wooden table with 3 stacks of coins in front of it with small leaves growing out of them illustrating how to invest in real estate in an IRA.the potential to earn income at a faster pace than the typical stock, bond, or mutual fund.

Additionally, this asset class covers an incredibly broad spectrum. Common examples of real estate assets include:

Top 3 Popular Ways to Invest in Real Estate with an IRA

1. Rehab-and-flips are at the forefront for quick returns.

Many people enjoy today’s reality TV shows that give real-life examples of how rehabs work—and the process is nearly identical when you invest with your IRA. The only difference is your IRA owns the property and must pay for all expenses of the rehab. One expense is hiring third parties to perform the renovations. As the IRA owner, you cannot personally perform repairs on the property. This is considered sweat equity, which is prohibited in an IRA. Upon the sale of the property, all proceeds are deposited directly into your account without incurring capital gains or other taxation.

2. Rental property is a favorite to achieve a steady flow of income over time.

Especially in today’s tumultuous economic climate, with homes selling for far more than they are worth, rental income is soaring and that’s not predicted to change anytime soon. This is good news for investors who own multifamily housing or even single-family homes. From single family homes to multifamily units (condos, duplexes, and triplexes), there is great income opportunity here. Your IRA can also participate in real estate syndication crowdfunding assets, which present a more passive income stream potential. When you invest in rental property in your IRA, monthly rent payments are deposited into the IRA, tax free. Here again, expenses must be paid with IRA funds. You also have the option to sell later when the property has hopefully appreciated, presenting another boost of tax-sheltered income.

3. Private lending creates diversity and earns income on interest payments.

This is an ideal transaction for borrowers who desire (or need) unconventional mortgage financing. Recent mortgage rate hikes (that are expected to continue to rise) make private mortgages attractive to both the borrower and lender. In these transactions, your IRA is the bank and extends loans to borrowers that you fully vet. Principal and interest payments are made to the IRA, but you call the shots on the terms of the security of the loan and the repayment details. The property is held as collateral in case of default and can then be sold for additional tax-sheltered profit in your real estate IRA.

4 Steps to Get Started Investing in Real Estate Today

1. Choose a plan administrator. Make sure you work with a firm, such as Advanta IRA, who has experience with real estate transactions. Advanta IRA handles hundreds of real estate investments a year, ensuring the administrative details comply with IRS rules. You’re paired with a specific client account manager who provides concierge-style service and guides you through each investing process.

2. Open your account. You can self-direct a traditional or Roth IRA, a SEP IRA or a SIMPLE IRA, a solo 401(k), and even a health savings account and an education savings account. If you have a 401(k) with an old employer, you can move it into a self-directed plan. Advanta IRA makes it easy to open your account on our secure online portal, or you can download and mail completed forms to our office.

3. Fund your account. Transfer or rollover funds from an existing IRA or 401(k). You can also make a cash contribution that does not exceed the annual contribution limits of your plan. As mentioned above, you can also move funds from a 401(k) that’s still housed with an old employer into a self-directed account.

4. Start investing. Now that you’ve gotten everything in place, you can begin looking for real estate to invest in. It’s that easy.

Want a Beginner’s Bonus Strategy that Seasoned Investors Use?

If you find a promising asset but lack adequate funds in your plan to make the purchase, your IRA can partner funds to invest.

This is an excellent strategy to score more lucrative holdings and to offset expenses related to investments. You can partner self-directed funds with your personal funds, and/or with another person or entity to invest in real estate. Ownership is assigned based on the percentage of the buy-in each investor contributes. Expenses are divvied up in the same manner.

If you want to learn more about how to invest in real estate with an IRA, download this free eBook: Invest for Success: Real Estate in Your IRA. You’ll get in-depth information and a better grasp of how these assets can work for you.

Prefer to talk to a real person? Schedule a free consultation to discuss your options with Advanta IRA today.

This article was originally published in November 2017 and has been updated with current information.

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About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.