Investing in rental property through a self-directed IRA is one way to diversify your portfolio, and holds the potential to increase your return in several different ways.
First, through attaining rental income, and second, if you decide to sell the property, the profit made from the sale flows directly into your IRA, and is treated in the same non-tax favor that your IRA enjoys. An added benefit is that your investment is secure in a piece of real estate that may appreciate in value during the rental period. The following is an example of how you can make investing in rental property within your IRA easy and profitable.
For the past 10 years, Linda has vacationed in a condominium she rents on the beach on the east coast of Florida. Over the past few years, she has observed the property values dropping, and decides to explore the possibility of purchasing a rental property of her own. Her hope is to rent it out to other families during the weeks Linda’s family is not using it for their own vacations. Linda has a self-directed IRA with Advanta IRA, and knows that Advanta offers classes and other informational tools regarding how to invest within retirement accounts. She decides to attend a seminar that discusses how to purchase rental property within her IRA.
Linda learns in the seminar that while she is able to purchase rental property through her IRA, she is unable to use the rental property herself, as the property must be used for investment purposes only and she can receive no current personal benefit whatsoever. She discovers that she may not purchase from or sell the property to a disqualified person, such as a family member. She also finds out that even though all revenues made by the rental property must return to the IRA, the expenses are paid out of the IRA and not by her personally. After the seminar Linda understands the potential profit her IRA can make by owning a rental property and that it will increase the value and diversity of her investment portfolio. So, even though she is unable to use the property herself, she decides to go ahead and purchase a rental property through her IRA.
Since Linda has limited knowledge in purchasing investment properties, the first thing she does is find a reputable realtor with experience in beachfront rental properties, as well as an attorney who is familiar with purchasing rental properties within IRAs. The realtor begins sending her listings of potential properties that she can successfully rent to seasonal vacationers. She chooses a property to purchase and her offer is accepted. Linda forwards a Buy Direction Letter to Advanta, instructing Advanta to purchase the property with her IRA funds. Advanta works closely with the closing attorney to ensure all documents are vested in the name of the IRA. Once Linda has approved and signed the necessary documents, Advanta wires the appropriate funds to the closing.
Linda is not allowed to receive any compensation for managing the property, but she is able to screen tenants and collect rental checks made out to her IRA. She is required to hire contractors to perform maintenance and repairs, but those contractors are paid from her IRA account. The profit and appreciation of the property, as well as the expense of maintaining the rental property flows in and out of the IRA.
Linda’s IRA purchased a two bedroom condominium within walking distance to the beach for $289,000. During peak season, the property rents for $1,500 per week or $4,500 per month. In the off season, the weekly rate is $1,000 and the monthly rate is $3,000. She hires a management company that is confident the condominium can be rented for 30 weeks each year, with income exceeding $30,000. After paying the management company fees for its services, Linda’s IRA earns almost 10 percent of that as profit.
The benefits are rewarding, however, owning any type of real estate within your IRA has certain restrictions that every investor should be aware of, as well. As with any investment you make within your self-directed IRA, it is important that you are knowledgeable and familiar with the investments you choose. Knowledge is power, after all, and in the case of managing your self-directed IRA, the more informed you are the more successful you will be in taking control of your retirement plan’s growth to ensure stability in your golden years!