Mortgage demand ended 2023 on a sour note, despite a sharp drop in mortgage interest rates during December.  Applications to refinance a home loan ended the year 15% higher than the same period a year ago. Applications for a mortgage to purchase a home ended the year 12% lower.  The big dilemma in the real estate market in 2024 is that real estate investors are still contending with very little supply and very high, and rising, home prices. 

With interest rates expected to drop in 2024, real estate investors are preparing to re-enter the real estate market, and having cash will be key. With over 13 trillion dollars of IRA funds and over $500 billion of 401(k) rollovers each year, using one’s IRA funds to buy real estate is becoming a hot option for so many real estate investors.

What is a Self-Directed IRA?

In short, a Self-Directed IRA is a tax-advantaged retirement plan that gives savers the ultimate investment freedom. Not only can you invest in traditional assets, like stocks, bonds, and ETFs, you have the opportunity to invest in nontraditional, or alternative, investments, such as real estate.

Most IRA accounts opened at a local bank or online retailer limit your investment options. However, when you self-direct your account, your investment world opens up. When working with the right custodian, such as IRA Financial, you can invest in anything that is not prohibited by the IRS.

Real estate has always been the top dog among investors. The higher interest rate environment might have a positive impact on IRA investors…but only if you have cash.

The Self-Directed Option

The IRS has always permitted real estate to be held inside IRA retirement accounts. Investments with a Real Estate IRA are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). Real estate is one of the most popular self-directed IRA investments. IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.”

What type of IRA can be used to buy real estate?

All IRAs can be used to buy real estate with a self-directed IRA, including a traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA. In addition, even an HSA and Coverdell can invest in real estate and generate tax-deferred income and gains.

Self-Directed IRA Real Estate Tax Advantage

The primary advantage of using a Self-Directed IRA to make investments is that all income and gains associated with the IRA investment grow tax-deferred, or tax-free in the case of a Roth IRA.

With the IRA Financial Self-Directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States in a tax-advantaged account. Over the years, our real estate IRA clients have been able to use cash to find attractive real estate opportunities while gaining the opportunity to move quickly on a potential investment.

There are two types of IRAs you should be aware of – the custodian controlled IRA and the Checkbook Control IRA.

The Self-Directed IRA

A “regular” Self-Directed IRA offers an IRA investor more investment options than your typical IRA. A special IRA custodian, such as IRA Financial, will serve as the custodian of the IRA. Unlike a typical financial institution or brokerage firm, IRA Financial and other passive custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms.

The IRA funds are generally held with the IRA custodian and at the IRA holder’s sole direction, the custodian will use the plan funds to make the investment on your behalf. Generally, this is a good option for those with a lower frequency of transactions annually.

Checkbook Control IRA

A Self-Directed IRA LLC with “checkbook control” is the most popular vehicle for investments that have a high number of transactions. Included in that are many real estate dealings, including rentals and renovations. You have the freedom to use your IRA funds whenever you see fit. For example, paying a contractor or rental management company can be done without the need for custodial consent.

Under the Checkbook IRA format, a special purpose LLC is created which is funded and owned by the IRA and managed by the IRA holder. It offers the IRA investor with limited liability protection, which is especially important for real estate investments.

In addition, the structure allows the investor to act quickly when the right investment opportunity presents itself cost-effectively and without delay.  This is especially important in the case of a cash offer real estate investment.

Cash is King for Real Estate

With interest rates on the rise, it’s much better to have cash on hand (or in your retirement plan) to make real estate investments. No mortgage or other financing is the way to go. When you have the ability to offer cash for a property, you can quickly move on an investment opportunity.

Speed is essential to purchasing a property. When given the choice between a cash deal and 10% down, who do you think has the better chance of landing that property?

Plus, you don’t have to worry about taxes with an all-cash deal. This is because an IRA real estate investment that uses leverage is subject to the UBTI tax. If there’s no leverage, you won’t have to worry about taxes for as long as the property is held by the IRA.

Conclusion

Home prices have continued to stat strong in 2023 and the beginning of 2024. However, with interest rates expected to start dropping with interest rates on the rise, you can expect real estate investors to jump back in the market.  However, the major advantage of being a cash buyer is you can take advantage of an eager seller and offer a quick closing, which typically helps lock up the deal.  Having cash to make a real estate investment may be just thing you need to take advantage while the market is still prime.