Can I use a self directed IRA for real estate to buy an investment property is a common question for those with retirement accounts and especially the ones who have savings plans that are not producing like they should. The answer is yes, as long as it’s converted into a Self Directed IRA or Self Directed 401k.
A self directed IRA or 401k is not that much different from a traditional IRA or 401k in terms of growing your retirement savings other than a self directed IRA allows you to invest in a wider variety of instruments such as real estate, tax lien certificates, mortgages, notes, franchises, and more. With a self directed IRA, you are also able to invest in real estate tax free which is why this is considered one of the best self directed IRA real estate investments.
Self Directed IRA Real Estate Rules
Once you’ve converted your IRA or 401k to a Self-Directed IRA, there are certain IRA real estate investments the government allows you to invest in… one of those is residential real estate – which includes apartments, single family homes and duplexes. Most people don’t realize they can invest in real estate through their retirement plans because financial planners primarily focus on stocks and cds. (for more info on this you can check out IRS Publication 590)
So if you’ve ever thought about owning IRA real estate investment properties, doing so through your retirement account is perfect, especially if you don’t have time to manage or take care of the property. It’s not hard to invest in rental properties, however there are a few things you are prohibited from doing. The following are Self-Directed IRA Rules:
- All investments must be arms length, meaning the buyer and seller are acting in their own self-interest and there is no influence from other parties.
- You cannot sell or buy property from a disqualified individual. Disqualified individuals include you, your spouse, your parents, your kids and/or their spouses, grandchildren, grandparents, investment advisors, fiduciaries and entities where the disqualified individual owns 50% or more interest.
- You cannot receive immediate benefit from a property owned by your IRA. No vacation homes, personal residences or office spaces because these would benefit you in some way.
- You cannot lend yourself money to perform rehab work or cosmetic work on the home purchased by your IRA. You can’t perform any maintenance on the home or even furnish the home. It’s all done via a property management company, which is nice because then you don’t have to deal with tenants. All income or rental profits generated from your investment must go back to your self-directed IRA and all expenses like improvements, property taxes and bills directly related to the investment property must be paid from your IRA account.
Just remember the main purpose of your IRA or 401k savings plan is to benefit you in the future. It’s not intended for personal use today. Your goal is to get the highest rate of return as possible. Just a 1% increase over 10 years or more is a substantial amount of money. Unfortunately, retirement plans haven’t been performing very well over the past few years.
More and more we are seeing IRA’s and 401k’s converted into Self Directed IRA’s and Self Directed 401k’s because the person can now invest in real estate which is on sale right now and in the best markets people are seeing 20% or better returns.
Choosing the Right Self Directed IRA Investment Property
Because the Self-Directed IRA Real Estate Rules are strict when investing, it’s very important to choose the right IRA real estate investment property that is “self sustaining” or cash flowing each month because you can’t subsidize it either. In certain parts of U.S. like St. Louis MO, Indianapolis IN, Dayton OH, and others, it’s not uncommon to find properties for $30K – $40K and rent for as much as $750 a month. Those are the type of real estate investments that will produce 20% returns or more every year for the rest of your life.