How To Buy Real Estate With Your IRA



Purchasing a piece of property can be involved at times, but it can also be exhilarating. If you have a clear focus and understand how you can make the rules work in your favor, you can really come out ahead. You have many options at your disposal including buying real estate with your IRA. Depending on how you go about your process you may have a lot of these steps already in place. This type of deal is a bit more involved than overseeing a standard passive deal.

Having an IRA is a great vehicle and offers many options. One particular option is the use of a self-directed IRA. This option isn’t very well known to the masses and can be confusing. It has been covered a bit on some real estate tv shows. There are a couple of major requirements. The first is the account owner must be making active Investments towards the plan. The second involves having a trustee or custodian to hold the IRA asset, and they are responsible for administering all the documents to the IRS.

IRA accounts are set up in similar ways to investment accounts you’d use for the stock market. When you’re dealing with an investment portfolio for the stock market, you’ll use a stockbroker. It’s the same concept here only you’d use a custodian, and they manage everything, and therefore are responsible for all reporting.

With your IRA accounts, you can invest in stocks bonds and mutual funds, but they also have the flexibility to be used in other Investments. These can include things such as small business, parking lots, land, and real estate. Traditional investors may not offer these services, and this is why you’d use a custodian. A conventional investor may not be familiar with all the intricacies of the housing market. In fact, they may not understand details with HOA fees or feel comfortable with investing in real estate at all.

Using a self-directed IRA as a vehicle for real estate investing requires preparation, some understanding, and a bit of caution. It can make sense in a lot of circumstances, but you just need to know both the positives and the negatives of using this vehicle. Negatives might even be a strong word, in this case, a more fitting word might be restrictions.

Decide What You’re Going To Use This For

The first step will be deciding what you’re going to use this for because it will determine the structure of how you’ll set it up. This type of real estate purchase works very well with rental properties. However, single-family homes, mobile homes, commercial properties, wholesaling and even the process of rehabbing for fix and flips can work too.

Get Your IRA Money To A Self-Directed Custodian

The second step is to get your IRA money to a self-directed custodian. There are many places online where you can find one to use that will be a good fit. One important thing to note is that you want to have a custodian that is in the same state where you plan to purchase the property.

Set Up A Limited Liability Company

The third step is to set up a limited liability company or an LLC. Setting up a specific LLC isn’t required for every type of purchase, but it is good practice. There are some instances where you may have it in your own name for tax reasons, but that’s another discussion. The LLC should be set up correctly with all the IRSA and IRS provisions included. It’s something you don’t want to skip over. So this must be structured precisely because you’re going to have your IRA hold your LLC and your LLC will hold the property. You should get this setup with a proficient lawyer that does work in this area.

Acquisition Of The Real Estate And The Management

The fourth step includes the acquisition of the real estate and the management of the LLC. The LLC will have its own checkbook, and you can be the manager of that LLC. Some custodians may have different rules than the IRS or the IRSA. They may restrict you from signing the checkbook. If that is the case, you may want to shop around for another custodian.

Have A Third-Party Manage The Work

The fifth step is you must know you cannot provide Sweat Equity into the property. You will have to have a third-party manage the work on the property. Another restriction is you must use a realtor because you are not able to handle this part yourself.

So once you have your LLC funded, you can go out and make an offer using the checkbook you manage. At this point, you can start the closing process. However, you cannot cosign the loan or use your credit to get the loan. You have to use a non-recourse loan. You don’t have to pay cash for a property either. You can pool other people’s money together for the purchase. You just want to check with the lawyers and make sure you are very clear on your process. If you are flipping properties and are not using this for rentals, just be aware there is an unrelated business income tax or Ubi tax.

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Ian Manta is a successful business owner and lifetime investor in real estate. He has purchased numerous investment properties to grow assets, and develop passive income.