Using Your IRA to Buy Real Estate

Posted By: Lisa Schoen ICOR Blog & News,

Many of our ancestors immigrated to chase the American Dream; which for many meant owning land. Today that dream extends beyond owning the land we live on. My clients and I want to own the land others live on. Our dream is to have tenants who pay down our debt and increase our net worth over time.

Purchasing investment real estate requires an increased down payment to cover the amplified risk (20% for single-family and 25% for multifamily properties). Many of us don’t have large amounts of money laying around, but what we may have is a 401k from an old job. That money can be rolled over into an IRA and used towards your own dream!

While we believe it’s one of the best options available, it’s not as easy as purchasing a few hundred shares of stock. If you want to plunge into property purchases through your IRA, you first need to know the rules— and there are a lot of them:

  • You can hold real estate in your IRA, but it needs to be a self-directed IRA.
  • Any real estate property purchased must be strictly for investment purposes; you and family members cannot use it.
  • You cannot manage it. All ownership expenses must be paid by the IRA.
  • Holding real estate in your IRA can be tricky, so seek legal advice when getting started.
  • The tax laws that make it tricky, can also be incredibly beneficial. For example: after you own the property out-right for a year and a day, the capital gains are completely forgiven!

To get started, the IRA has to be self-directed. The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian, the financial institution, or company responsible for record-keeping and IRS reporting requirements. I personally use New Direction Trust. Everything goes through them as custodian to keep you from violating the strict rules regarding these types of real estate transactions. To reiterate, you and your IRA are two separate entities. Your IRA owns the property—you don’t.

Since all expenses must be paid within the IRA, you will also need a great management company. I happen to know one. At Atlas, we can help you find the right property, connect you with the few lenders who do this type of loan and manage the asset to ensure both positive cash flow and preservation of your asset. We know investment real estate inside and out because we are owners ourselves. My personal goal is to own 10 properties in 10 years. I have done cash-out refinances, pulled a HELOC, and even asked my parents for a gift letter all to purchase real estate. I have even gone as far as moving three times in 18 months. My next move is purchasing property inside my IRA, while I save for the next down payment and build up the lazy equity in the three investments I already own. I’m transparent about my strategy, because I know you can do it too. It’s all about understanding and executing all of the opportunities that are available to us to achieve that American Dream.