Last Updated on February 9, 2021
A Real Estate IRA, also known as a Self-Directed IRA with “checkbook control,” is an IRS approved structure that allows you to use your IRA funds to purchase real estate and make other alternative investments.
- Real Estate IRAs are also known as Self-Directed IRAs with checkbook control
- Property managers help maintain your real estate investments
- Property managers are not completely necessary, but can help a lot
Benefits of the Real Estate IRA
By establishing a Real Estate IRA LLC, you no longer need custodian consent to make real estate investments with your IRA. There is a “passive custodian”, which offers no financial advice. As a result, you no longer have to pay excessive custodian fees for transactions.
A Real Estate IRA LLC gives you complete control over the investments you wish to make, and the funds within your IRA. Because you have a passive custodian that offers no advice, you have more responsibility. So, it’s more crucial than ever to thoroughly research investment opportunities and understand them completely before you make an investment.
Establishing a Real Estate IRA
Only certain custodians will allow you to invest in real estate. Therefore, in order to make real estate investments, the best option is to find a Self-Directed IRA custodian that can legally hold your assets, like IRA Financial Trust.
To begin the process, the IRA first establishes and owns a limited liability company (“LLC”). The IRA account owner (you) manages the LLC. A passive custodian then transfers the IRA owner’s funds to the new IRA LLC bank account. As the manager of the IRA LLC, you have the authority to make real estate investment decisions on behalf of the IRA providing the IRA owner with checkbook control over his or her IRA funds. When you find a real estate investment that you want to make with your IRA funds, simply write a check or wire the funds from your Self-Directed IRA LLC bank account.
The Self Directed IRA LLC with checkbook control allows you to eliminate the delays of an IRA custodian. This allows you to act quickly on the best investment opportunities. Checkbook control is especially important when it comes to making real estate or tax liens investments. As you may know, custodian delays can cause you to lose such an investment opportunity. Checkbook control gives you the authority to make an investment whenever one arises.
Property Manager: Necessary or Not?
A property manager can handle evictions, property inspections, lease terminations and negotiations, and the collection of rents from tenants. Property Managers also ensure that each property is in compliance with all property code, safety rules, and applicable laws. The IRS has rules about who can play the role of property manager, however, and who or what transactions can and cannot be made.
For example, you and your relatives are not permitted to provide services to the IRA, as this would be considered a prohibited transaction. However, just because you cannot interact directly with your IRA in that manner, you are permitted to make decisions for the investment, allowing you to hire a property manager (although it is not required,) hire a handyman, and other options. What you cannot do is do the work yourself.
The major drawback of hiring a property manager is the associated fees that would be paid to the person. But in the long run, if the investing in real estate is what drives you, you may be better off leaving some of the details in another person’s hands.
When utilizing a Real Estate IRA, a property manager is generally not needed. However, if you have multiple investments, or properties that are not near, one may be beneficial. It’s up to you to weigh the benefits of having one, versus the cost. Speak with a financial advisor to see if it makes sense to you.