Diversification is the key when it comes to a healthy financial portfolio. Your Individual Retirement Account (IRA) should also have the flexibility of investing in different asset classes. Traditionally, an IRA holds assets like stocks, bonds, and mutual funds.
A Self-Directed IRA, on the other hand, lets you invest in real estate, precious metals, cryptocurrencies, and other private entities. Buying through self directed IRA custodian real estate would be an ideal choice.
The IRS has a set of rules to be followed when investing in these asset classes. A custodian is required with whom you will be parking your assets for record-keeping and security purposes. The custodian is a financial institution responsible for keeping your books in order and reporting back to the IRS.
Real Estate with IRA
Real estate has always been considered a good investment option, and it provides you with an avenue to diversify your retirement portfolio. The demand for rental real estate in the market is high, and investing in such a property can get you good returns.
One of the main benefits of holding rental real estate in your IRA account is there are no taxes to be paid unless the property is distributed to the IRA owner. If you are paying for the property’s purchase with IRA cash, then there are no taxes on rental income or even when the property is sold.
You can buy different types of real estate with an IRA:
- Single Family Homes
- Commercial Property
- Apartment Building
- Mineral-based Property
- Timber based Property
- Unimproved Land
Rules to Follow When Buying Real Estate with IRA
1. Any property you buy under the IRA should strictly be for investment purposes only. You cannot occupy a second home if the property does not have renters for the moment.
2. You cannot put the house you already own under the IRA.
3. You cannot buy the property from yourself or other family members to leverage the benefits under IRA.
4. All income will directly go to the IRA, and also, the expenses have to be paid directly by the IRA.
How to Finance your Real Estate Purchase with IRA?
If you have the cash available in your IRA for buying the property, then cash would be the ideal option.
If you do not have enough money in the IRA to purchase real estate, then you could transfer money from other IRAs or rollover funds from other plans. As per the IRS rules, you can make only one rollover from an IRA to another in 12 months. You could sell other assets in your IRA like 401 (k) or 403 (b).
You could partner with others and make the allowable contributions towards the property.
You could obtain a non-recourse loan. You would be taking a loan on behalf of the IRA, so for some reason, if you are not able to make payments, the lender cannot go after any other assets owned by you, except the property owned by the IRA.
How to Invest in Real Estate with a Self Directed Custodian?
Buying real estate with a self directed IRA custodian is a straightforward process. The custodian will be responsible for managing the purchase transaction on your behalf. Do remember, a custodian is not your financial advisor.
With the IRA being self directed, you choose what property you want to invest in. The custodian will not offer any advice on the investment quality. Instead, they will take care of the back-office operations.
Steps for buying Self directed IRA Custodian Real Estate:
- Set up and fund the account with a custodian of your choice.
- Research and select the real estate property you want to invest in.
- Provide your custodian with a purchase authorization and contract.
Once the custodian receives your purchase authorization, they will work with the document closing agents to purchase the property on behalf of your IRA. Once the documents are verified and approved, the custodian will direct the funds for closing, and then your IRA becomes the property owner.
Once the property is closed, you can either flip it or rent it out for additional income. In the case of rental property, renters will have to make the cheque out to the custodian on behalf of your IRA. As the IRA is the property owner, all incomes will be directed back to the IRA account, and all expenses also need to be paid from the IRA account.
Do your due diligence before selecting a company in the self directed IRA custodian in real estate sector. Real estate offers good long-term returns. If you have a property in mind, contact your custodian and let them handle the purchase formalities while you relax.