Why is Real Estate the Most Popular Investment in an IRA?

A real estate IRA is the common term for a self-directed retirement account that holds real estate as assets. While these assets have always been permissible in an IRA, many custodians don’t allow it. However, many others like Advanta IRA do allow it and our clients are able to acquire these investments to build tax-sheltered wealth for retirement.

Real estate investments are popular for various reasons.

Why is real estate the most popular investment in an IRAInvestors feel these are tangible assets. They can touch it, walk on or through it—something one cannot do with the elusive stock or mutual fund. Gains are made through long-term appreciation of property in buy-and-hold transactions or immediate returns that rehab-and-flips may present. Another avenue is through rental income and even interest paid on tax deed certificates or private mortgages. In the case of these last options, if a borrower defaults, the property ownership reverts to the IRA—giving the owner of that account the choice to sell it and the chance of even higher gains depending on the selling price.

The vast number of real estate-related assets is attractive to investors.

  • Single and multi-family homes
  • Rehab-and-flips
  • Commercial property
  • Foreign property
  • Farmland and timberland
  • Improved and unimproved land
  • Tax deed and lien certificates
  • Private mortgages

With all of these options and more, self-directed retirement plan owners like the control these accounts offer. The idea is to invest in what you know best, and investors who do so find a certain amount of security in doing just that.

Another attraction is the different ways an IRA can acquire real estate.

If an IRA doesn’t have enough capital on its own to purchase property, it can partner funds with another IRA or an individual (including you and your own personal funds).

Crowdfunding platforms and real estate investment trusts (REITs) are the choice of many and present ways to invest in more lucrative assets.

Financing is also an option in your IRA in the form of a non-recourse loan. However, doing so is somewhat complex and the IRA will be subject to owing unrelated business income tax (UBIT), so seek appropriate counsel before entering into these transactions.

Rules for real estate investing with retirement funds.

Before going helter-skelter and snapping up property, you must understand the rules and regulations set forth by the IRS for investments in IRAs. Any asset owned by your IRA is for retirement income-generating purposes only and you are not allowed to enjoy those benefits derived from the account until you retire. Doing so beforehand would be considered a distribution—which, when taken before retirement age, can cause the account to suffer heavy penalties, taxation, and disqualification of its tax-sheltered status.

For example, you are unable to vacation in or lease to yourself a rental property your account owns. You also may not purchase a property from or sell one to your IRA. Your account is unable to transact in this manner with disqualified persons who include: the IRA owner and his/her spouse, the IRA holder’s lineal descendants (children, grandchildren, etc.) and their spouses, the IRA holder’s lineal ascendants (parents, grandparents, etc.), investment advisers, managers, and fiduciaries, any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest, and anyone providing services to the IRA.

You must also ensure that all income and expenses associated with real estate in your IRA flow directly into and out of the account. The IRA receives tax-sheltered income because it owns the property—you do not. Make sure you have adequate funds in the account after purchasing an asset to maintain it as you need to.

With that being said, even though there are restrictions, real estate is still the top choice of assets in self-directed accounts. There are always risks with any investment. But, the right piece of property purchased at a good price has the potential to produce returns at a faster pace than CDs, bonds, and mutual funds. Many investors feel it does not carry the perils of investing in stocks. That’s the key element of self-direction, though: The investment choices are yours to make. With a self-directed retirement plan, you are able to find what you know best and invest.

If you have questions about this article or want to get started investing in real estate with an IRA today, please contact us. 

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.