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Investing in Real Estate with Retirement Funds

residential real estate

Investing in residential real estate has become quite popular with retirement investors. Not only is using an IRA or 401(k) to invest in real estate legal, it’s a great way to better diversify your retirement portfolio. However, the only way you can use your retirement funds to invest in “alternative assets”, like real estate, is to have the right account with the right company. In the following, we’ll touch on the basics of using IRA funds to invest in real estate, along with the different types of residential real estate investments you can make.

The Basics of Real Estate Investing with an IRA

With a Self-Directed IRA you can invest in many types of real estate. This can help diversify your portfolio beyond traditional stocks, bonds, and funds, and may allow greater protection against volatility. You can consider rental properties, investment opportunities, office buildings, and more, investing in what you know best and are most interested in.

Your investments can grow tax-free, depending on the type of account you hold and what your strategy is. And if you plan on retiring in the home you’ve purchased, you can rent it out and then distribute it from your Self-Directed IRA according to your plans. Remember, you will owe taxes on any distributions from the plan. Distributing your house in one shot will come with a big tax hit. Alternatively, you can distribute a little out of your IRA at a time. However, you cannot utilize the house until it is fully distributed from your plan.

If you are self-employed, you also have the option to invest in real estate with a Solo 401k.

Real Estate Investing & The New Normal

Recent studies show that real estate investments are more popular and more favored than investing in the stock market among younger U.S. adults. According to data from Realty Shares, 55% of Millennials want to invest (or are investing) in real estate. Furthermore, Fannie Mae reports that 85% of Millennials view real estate as a “good investment.” While only 2-3% of American retirement account holders are invested in real estate and the alternative market, there is a strong sense among bank and financial institution executives that the self-directed IRA real estate market will have an adverse effect on their business.

Many also believe that real estate is a good hedge against inflation. However, few know that you can use retirement funds to invest in real estate. With over 50 million IRAS and $9 trillion in retirement funds, the retirement industry is very lucrative to banks. Banks and traditional financial institutions, such as Bank of America and Vanguard, make money when you invest in their financial products and keep your money there for a long time, whether through highly profitable trading commissions or by leveraging the power of your savings. They do not make money when you use your money to invest in alternative or nontraditional investments such as real estate or cryptocurrency. They get no commissions, and they lose access to your money.

Accordingly, it does not make any financial sense for traditional banks or financial institutions, such as Fidelity, to offer you the ability to make real estate investments and other alternative investments with your IRA funds. It just comes down to dollars and cents, which is the reason that banks and financial institutions do not advertise the fact that the IRS allows you to do a wide range of investments with your IRA, such as real estate. Why would they inform you, then, that such a strategy was permissible and possibly even preferable depending on the circumstances? Yet, such nontraditional or alternative retirement asset investments are perfectly legal. The IRS has permitted them since 1974. It says so right on the IRS website. And the best way to make those investments is through the self-directed IRA.

While banks may not tell you that you can use your IRA or retirement funds to invest in real estate, you do have that ability. Real Estate remains one of the most popular alternative investments pursued by IRA Financial customers. However, not all Self-Directed IRA custodians allow you to invest in real estate. Furthermore, main charge asset valuation fees. IRA Financial is one of the few Self-Directed IRA custodians that allows you to invest in real estate for a low, flat fee. You will never have to worry about paying asset or account valuation fees with one of our Self-Directed real estate retirement accounts.

Related: Real Estate IRAs

Types of Residential Real Estate Investments

Of course, residential real estate is defined as “an area developed for people to live on.” As opposed to commercial real estate, which is zoned for businesses. In the following, we’ll list different types of residential real estate investing and how to utilize a Self-Directed IRA for each.

House Flipping

The “Fix and Flip” is, arguably, the most popular type of real estate investment. Houses in need of renovations are usually cheaper to buy, which allows more room for profits. In a matter of months you can buy, fix and flip a house. The key to flips is finding the right property for the right price. You should have enough leeway in your budget to make the necessary renovations, but still have room to make a nice profit.

If you’re using your IRA to invest in a fixer upper, you must make sure all the funds come from the IRA itself. This not only includes the price of the house, but anything related to the renovation. For example, all materials, laborers, inspections, etc., should be paid by the IRA, and not by you personally. It’s never smart to mix personal funds with IRA funds in an investments. Therefore, you’re better off being safe than sorry, so make sure your IRA has the necessary cash for the entire project.

Rental Property

Rental properties are great investments since they provide a steady stream of income. They may be a single- or multi-family home, an apartment building or a vacation house.

Multi-Family Rental Units: Last year, multi-family rentals turned out to be a lucrative investment. Since then, it hasn’t slowed down. Investors who wish for higher returns on single-family investments may want to look into investing in a triplex or duplexes. This type of investment also leads to a more diversified retirement portfolio.

High-end rentals have also shown to be increasingly popular. According to a recent Wall Street Journal article, about 19% of households with at least $100,000 annual income are renting homes.  This is substantially up from 2006, where about 12% of the same families rented. More and more high earners are renting properties instead of becoming homeowners.  There are a myriad of reasons for this.  Obviously, the number one reason is money.  Real estate prices have steadily grown since the housing market crash.  Homes are selling for a lot more and therefore; higher down payments are needed.  Many people are finding it hard to come up with a 20% down payment.  Another reason is time.  Many people looking at high end rentals don’t have the time to maintain a house.  They put in long hours at work and/or travel often for their job.  They can’t be bothered with mowing lawns and shoveling snow.  When you rent, whether it a single-family home or in a large apartment building, these services are generally done by the landlord. Further, if you want to live in or near a big city, or one with great schools and amenities, you’re being priced out.  Historically, these areas come with bigger price tags.  Instead of paying $500,000 to buy, many people would rather spend $2,500 in monthly rent. According to the article, high end rentals offer the investor security.  If a financial emergency arises, high earners are generally prepared.  Further, a rent increase won’t price them out of the space.  The same cannot be guaranteed for low- and middle-income renters.  The six-figure renter tends to stay longer at the property, too.  Therefore, there’s always income coming from the property.

Regardless of whether you pursue a high-end rental, multifamily rental, or single-family home, rental properties have multiple benefits for real estate investors. First, rental income is steady income. Many investors see real estate as a less volatile option than the stock market. Furthermore, it provides financial security on a long-term basis. The value of the property will likely increase overtime if you chose a good location. Finally, real estate investments act as a hedge against inflation. When inflation increases, as does your property value and rental income

Related: Residential Properties Best Hedge Against Inflation?

Short-Term Rentals

Typically, real estate investors look to rent out residential homes. Some will live in the house and rent out a portion of it. Others will rent out the entire house, either to one family or two or more to get the most income possible. However, short term rentals work a lot differently. Instead of renting out your property for years at a time, you rent it out for weeks or months at a time.

Popular sites like Airbnb and VBRO offer a different take on the rental market. This allows you to rent out a property you own anytime you wish. Don’t want to be stuck with an annoying tenant for a whole year? Rent your property out a week or month at a time. You may be able to earn more income this way than with an annual lessee. In my opinion, to make the most money, it comes down to three things: Location, Location, Location!

Not to sound like a broken record, but the same rules apply as above. Everything should be paid out from your IRA. This might include a cleaning service to get the place ready for each new tenant. There is another caveat that you should pay attention to. Airbnb rentals typically are homeowners who rent out their primary residence who are looking for some extra cash. However, you are never allowed to utilize an investment owned by your Self-Directed IRA. Further, lineal descendants and ascendants (parents, children, etc.) cannot either

Related: Property Managements & Self-Directed IRAs

Raw Land

One last popular investment opportunity is purchasing raw land. Buying vacant lots in up and coming neighborhoods is a great way to earn some money. Investors usually buy raw land for two reasons: to sell it later for a profit or develop it themselves. Generally, the only expense you need to worry about with land is property taxes. Further, you can even earn income while waiting to develop the land by leasing it out, allowing parking or billboards on it.

Raw land can be a tricky investment for your IRA. You must create your own income stream before selling or developing it yourself. On the plus side, there’s no house that requires maintenance, either. Investing in land can be a very hands-off investment, if that suits your needs better.


Ever wanted to invest in real estate but didn’t have the money?  How about being a part time real estate rental investor, without the responsibilities of being a landlord?  More and more companies are getting into the real estate rental business.  One of the newer ones, called RoofStock, will allow you to buy a stake in a rental property.  According to a recent Wall Street Journal article, RoofStock says you can see a 5-7% return on your investment (ROI).  Further, you can invest as little as 10% in a property, meaning you don’t need to make a large investment.

RoofStock is a service that allows you to invest in rental properties. You can buy and sell houses without ever disturbing the current tenant. Plus, it allows you to buy a stake in one, or several properties. You can make an offer on a property, and if it’s accepted, RoofStock earns a minimum of $500 on the transaction.

According to RoofStock data, the single family rental market is THREE TRILLION DOLLARS, with 16 million rentals. They expect that number to rise by 13 million by 2030. Investors have been stocking up on properties ever since the housing crash. Obviously, there’s a ton of money to be made by renting out properties.

Since RoofStock allows one to buy a smaller stake in properties, you can spread your funds around to different areas of the countries. You don’t need to worry about collecting rent, making repairs, or anything else a typical landlord has to deal with.

*Did you know that Leasebacks are also popular among self-directed retirement investors?

Learn More: Residential Leasebacks

International Real Estate Investments

Some Self-Directed IRA Custodians only allow individuals to invest in national real estate. However, IRA Financials self-directed retirement plans allow

you to make either domestic or foreign real estate investments, and our tax attorneys have significant experience structuring real estate transactions in a number of foreign jurisdictions. These include:

  • Costa Rica
  • Panama
  • Belize
  • India
  • Hong Kong
  • France
  • Germany
  • Canada
  • Ecuador
  • UK
  • Brazil

Related: Seller Financing with a Real Estate IRA

Why Use an IRA to Invest in Real Estate?

With a Self-Directed IRA you can invest in many types of real estate. This can help diversify your portfolio beyond traditional stocks, bonds, and funds, and may allow greater protection against volatility. You can consider rental properties, investment opportunities, office buildings, and more, investing in what you know best and are most interested in.

Your investments can grow tax-free, depending on the type of account you hold and what your strategy is. And if you plan on retiring in the home you’ve purchased, you can rent it out and then distribute it from your Self-Directed IRA according to your plans. Remember, you will owe taxes on any distributions from the plan. Distributing your house in one shot will come with a big tax hit. Alternatively, you can distribute a little out of your IRA at a time. However, you cannot utilize the house until it is fully distributed from your plan.

Learn More: How to Complete a Self-Directed IRA Rollover

Another benefit of using your IRA to purchase real estate is money. Many people do not have large sums of cash on hand. By self-directing your retirement plan, you can use 401(k) or IRA funds to make alternative investments, like real estate.

While an IRA or 401(k) rollover can be attractive vehicle, there are other ways to fund your real estate IRA investment. For example, crowdfunding, or buying shares of real-estate are also attractive measures.

Read More: Crowdfunding Real Estate Investments

Pros and Cons of Using an IRA to Invest in Real Estate

Individuals should be aware of the pros and cons of opening a self-directed real estate IRA. The potential benefits and limitations of using a self-directed real-estate IRA include:

  • Tax Benefits (Pro): While there are notable tax benefits of opening a self-directed real estate IRA, these benefits will be contingent on whether you open a traditional self-directed IRA or a self-directed Roth IRA.
  • Potential for returns (Pro): Real estate has the potential to offer another stream of capital.
  • Diversification (Pro): Investing in alterative assets, including real estate IRAs, will allow individuals to diversify their existing assets. Many Self-Directed IRA investors also hold gold, cryptocurrency, hard-money loans, and other forms of alternative investments.
  • Checkbook Control (Pro): Individuals who open a self-directed IRA LLC can quickly access their funds by eliminating the need for a middleman.
  • Due Diligence (Con): Since self-directed IRAS have passive custodians, individuals need a better understanding of their investments.
  • Unrelated Business Income Tax (UBIT) (Con): Individuals need to understand how unrelated business income tax works and what steps they can pursue to avoid making prohibited transactions.
  • Liquid Capital (Con): Self-directed real estate IRAs can sometimes lack liquid capital when first established.

Read More: How Are Real Estate Titles Held in a Self-Directed IRA?

Buying Real Estate in Your IRA

Buying real estate in your IRA may not be for every retirement account holder. One needs to have sufficient funds in his or her IRA to be in a position to buy a piece of real estate. In addition, there are a number of other important items to consider before deciding:

1. Be Comfortable with the Investment

Real estate is generally a relatively large investment vis a vis the value of most Americans IRAs. Thus, it is important to make sure you have done your research and diligence on the real estate investment you are considering. It is good practice to look at multiple properties, research the market you are considering, speak to realtors or other real estate investors, and most importantly, be comfortable with allocating a sizable chunk of your retirement assets to a real estate investment property. As you will soon learn, you are not permitted to reside in the property, so don’t make your investment decision based on your personal preferences.

2. Understand the Economics of the Investment

It is important to have a good handle on the costs involved in owning the property. It is vital that you are realistic and objective when trying to learn the real numbers before closing. Look at previous years’ tax returns, property-tax bills, maintenance records, etc. to get a good idea of the real income and expenses. Also, it is important that you make sure to leave some extra funds in your IRA to cover any potential unforeseen property related expenses, since all expenses must be paid using IRA funds.

3. Understand the Prohibited Transaction Rules

The Internal Revenue Code (IRC) only states what one cannot invest in. IRC Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain types of transactions. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related parties, but generally includes the IRA owner, any lineal descendants, such as parents, children, spouse, daughter/son-in law of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

4. Be Mindful of Using a Loan

If you will need to use a loan to close on your real estate IRA investment, only non-recourse financing may be used. A non-recourse loan is a loan that is not personally guaranteed by the IRA owner (the borrower) and whereby the lender’s only recourse is against the property and not against the borrower. However, when a Self-Directed IRA is investing in a real estate transaction involving the use of a non-recourse loan would be subject to tax pursuant to Internal Revenue Code Section 514, known as the Unrelated Business Taxable Income (UBTI). The tax rate could reach 37%.

Using a Self-Directed IRA to buy real estate has several advantages, although, it may not be for everyone. However, Self-Directed IRA investors wishing to use retirement funds to invest in real estate must be mindful of the four items outlined above and should consult with a tax professional for further guidance.

Learn More: What is Non-Recourse Financing

Work One-on-One with a Specialist

Our tax attorneys will work with you to come up with the most tax advantageous manner in which to make the foreign real estate investment. Whether that involves examining local tax rules or an income tax treaty, our tax attorneys will assist you with understanding the tax implications of making the foreign real estate investment. Whether it is a residential or commercial real estate property, a self-directed retirement plan, such as the IRA LLC or Solo 401(k) to invest in domestic or foreign real estate offers tax advantages, such as tax deferral and/or tax-free repatriation of income.

IRA Financial Group tax attorneys have significant experience in structuring foreign real estate investments that are tax efficient from a U.S. and foreign tax perspective.


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