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Residential Real Estate Investing with an IRA

residential real estate
4 Minute Read

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 “alternate 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 Residential Real Estate Investing with an IRA

Not all IRA providers allow for real estate investing. This is why you need a special custodian, also referred to as a passive custodian, to make alternate investments. This is where a Self-Directed IRA comes into play. Self-Directed IRA custodians generally allow you to make any type(s) of investments you choose (so long as they’re not prohibited by the IRS). Real Estate investing has become the most popular alternate investment among IRA investors.

The key to investing with a Self-Directed IRA is having “checkbook control” of your IRA funds. This means, you can use your IRA balance to purchase a property as soon as you like. There’s no waiting to get “custodial consent” to make the investment. Real Estate can be a competitive market. You might not have time to wait for permission from your custodian.

Lastly, there are two types of Self-Directed IRAs you can choose: traditional and Roth. A traditional IRA is a tax-deferred plan, where you generally get an upfront tax break. On the hand, Roth IRAs are tax-free plans. However, there is no upfront tax break, since they are funded with after-tax money. The great benefit of a Roth is that all qualified withdrawals are tax-free.

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. Always do your due diligence when deciding on a rental property. If comps show rental prices in the $1000 range, don’t expect $1850. Make sure the investment is worth the returns.

What makes rental investing tricky with a Self-Directed IRA is that the property must be maintained for several years. Again, all expenses should be paid for by the IRA. In turn, all income generated by the property will flow back into the IRA. Having a constant stream of of rental income should offset the effort that comes along with an income property.

Airbnb or VRBO

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

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.

Why Use a Self-Directed IRA?

Utilizing a Self-Directed IRA for residential real estate investing is a great way to diversify your retirement portfolio. It also affords you a way to defer taxes on any properties you invest in. Alternate asset investing allows you to take knowledge that you possess and turn it into a savings vehicle for your future. However, you must be mindful of the rules of a Self-Directed IRA.

If you have any questions about real estate investing with an IRA, please contact us @ 800.472.0646!

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